The portfolio as a whole is definitely leveraged to economic growth and is underweight non-cyclicals. The trouble is, those companies tend to be stodgy and don’t excite a group of college students, who tend to be more interested in small-caps in a hot sector. Pitching hedging is a definite balancing act…

As far as hedging goes, you’re right about the correlation of the short/financials/long/oil trade, and looking back on that, it makes sense. But it seems counterintuitive, because you’d think in a weak environment for financials, generally a weak economy, commodity prices would be going down; instead, they went up, and increased the stress on the economy and financials.

Maybe try looking at your underlying assumptions in why you own what you own in your investment portfolio: you have best of breed companies, but one hidden premise in your investment thesis is that the economy will recover, because those names obviously benefit from a strong economy. So, a hedge would seem to be the opposite thesis, right? That the economy won’t recover. To hedge that you’d probably want to be in something like health care, biotech, or some other area (defense?) that won’t be hit by a slow economy.

As for shorting, it’s not something I’ve ever been that comfortable with; I like at least the illusion that I’m buying something, so I tended to use stop orders that always seemed to get hit at the worst time.

Two more observations concerning this topic deal with the reaction with other components of the energy sector. Coal stocks have performed even worse than oil stocks over the past few sessions. The KOL ETF has fallen about 15% since Friday’s close; some components, like Arch Coal (ACI) have even done worse, as ACI was down about 20% from it’s closing price last week during the middle of the session, before recovering.

In the alternative energy field, First Solar (FSLR) has gotten crushed this week; after closing at $276 Friday, it ended today at $247. As some regular readers may know, I have been short FSLR for a while and actually added more around $275 last week (for a grand total of 11 shorted shares). Unfortunately, I sold FSLR Sept. $230 puts that I had purchased Thursday for $1.80 yesterday; today, they were worth over $5.

I also hold DUG shares (sold about half of the initial position around $37 in the middle of August).

This may be counter-intuitive, but if there is a complete lack of leadership, that usually signals we’re getting near a bottom. It’s the point of ultimate pessimism that usually marks the bottom, and there’s nothing more demoralizing than having no strong sectors to park your money. So, there’s likely some near-term pain, but I’d guess that when things clear out this time, we will be at the bottom (as to where that is, I don’t know). And, we’re nearing the time of year when the market does tend to bottom.

Of course, the prez election could screw things (i.e., if it looks like we’re really going to suddenly become a socialist paradise)…

This is a little more realistic than the way James quoted it (eg 130x historical rates - but that is cause he was quoting the overall off the very low numbers in the higher IG areas) so I feel comfortable, although I haven’t gone back to take a look at the PEAK default rates during a recession - if those are significantly higher then my “stress” might not be 4x but less.

The key is the BB, B areas and how much exposure they have there vs those default rates which are historically quite high. Still, this assumes we have 3 years straight of 4-5x historical defaults.

I havent looked in depth but it would appear that just one bad year, or some unfortunately placed hits on some of their bigger exposures, could really screw these guys up with the rating agencies as it would quickly knock their equity cushion down, which would then mean they are out of bounds on various diversity and holdings limits, forcing them to either increase capital or somehow close out positions (although that might require them further payouts to do so). So while our stress models show value, it would really be in runoff mode if anything close to these sorts of stresses hit as they would likely no longer be AAA company, and I cant imagine anyone doing new business with them at that point.

But the cup and handle, reverse triple lindy head and shoulders charting stuff…don’t believe in it. I’m not ignorant either, I’m a former level II CMT. But take it from me, the groundhog seeing his shadow is a better indicator than technical analysis.