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Dynamic Duo: Super Mario and Helicopter Ben!

It has been a while since I wrote my blog since I was just coming out of summer vacation/travel and some other personal things on family side. So many things have happened on economic front and stock markets which I wanted to write. But nothing was as important as events in last two weeks centered around two most important men in economic world: "Super"Mario Draghi and "Helicopter" Ben Bernanke. Both of them stay true to their promises of "Saving Euro at any cost" and "Printing dollars to address US high unemployment"! The markets liked what they saw and has jumped to their highest in nearly 5 years. Only time would tell us if this is "irrational exuberance" or start of a new bull market as seen during 1990's.
There are so many uncertainties still around. Few of them are:

  • US presidential elections - Obama campaign is definitely on right track and unless anything drastic happens, Obama would win second term as President of USA. He deserves it!
  • US fiscal cliff - increasing taxes and significant reduction in government spending. There are just too many cooks (read congressmen and senators) to predict outcome of this. Hopefully all parties would come to their senses and come to a reasonable solution to avoid this fiscal cliff. One of the reason Bernanke started QE3 (or QE infinity) because of potential of economy going into recession due to fiscal cliff
  • Lack of aggressive action by European politicians to match ECB bond-buying plans
  • Unrest in Arab world creating geo-political uncertainties
  • Significant slowing down of economies of China and India
  • And most dangerous of all would be Israel uni0laterally attacking Iran to prevent it from getting nuclear weapon. This could be a "black swan" event for markets
Given all these could happen, one need to be careful with their investments especially when markets are at 5 year high. I would recommend few steps:
  • Start taking some profits out by selling winners at regular intervals as markets go higher
  • If you want to keep your winners for long-term, consider selling "in-money" call options for Oct/Nov/Dec expiry
  • Buy some downside protection by buying "puts"
  • But some downside protection by buying VXX at around $8-9. Volatility is close to all time low. If any of above events happen and markets go down, volatility would spike up and can provide some protection to your portfolio
Overall Sept 2012 is turning out to be quite different Sept than usual. Today is 5th anniversary of Lehman bankruptcy which started latest economic crisis and markets are already at 5 year high. This would definitely help Obama to win this presidential election!
Cheers!
/Shyam

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