Mauldin Economics

Dear Reader,

Lots of people posted questions about Bull or Bust: Navigating the High-Speed Train Wreck.

In fact, there were more people than our editors could reply to in the short time the presentations and special reports were available for public view.

Today, I want to share some of their answers with you—because while the editors might be replying to individual people, the concerns outlined by posters are common.

We appreciate you taking the time to post questions, so let’s get started with some answers…

Jared Dillian from Street Freak, ETF 20/20, and The Daily Dirtnap…

Q: “What about inverse ETFs as portfolio insurance?”

Regarding preparing for the inevitable downturn (or return to normal values) in equities that is in our future, what are your thoughts on portfolio insurance such as the likes of "Inverse ETFs"; e.g. SH or SDS (for the S&P 500), QID (for the NASDAQ)?

Jared says…

All leveraged ETFs are unsuitable as hedges because of how they are constructed and the losses they experience from daily rebalancing. I have found it is better to either be short as a hedge or to buy puts.

Next up, Robert Ross from In the Money and Yield Shark…

Q: “Is the risk of serious loss too great?”

The risk of a serious loss if the puts are exercised is too much for me. In the example given of selling 96.50 on a stock currently at 100, a normal market correction of 10% taking the stock to 90 leaves a serious hole in the pocket. If the stock is so good that I truly want to buy it, I would rather just go ahead and buy the stock.

Robert answers…

I understand your apprehension. But the main idea behind selling put options is to acquire a stock you would like to own at a better price than the current trading range and earn income as a byproduct.

If in the unlikely event that shares of [Dollar General] fell by 10%, that would render the company's shares well below their fair value. Frankly, if that scenario were to play out, I would consider buying even more shares.

And, if the option expires worthless—which happens ~95% of the time—you get to keep the option income.

Again, I understand your concern. But when this strategy is used correctly, it can reduce portfolio risk, allow you to acquire companies you'd like to own at a better price, and earn income as a byproduct.

Now we go to Kevin Brekke from Rational Bear…

Q1: “Why do I care about put options or portfolio insurance?”

I am 67 and not yet retired. Probably in a couple of years. Why do I care about Put options or portfolio "insurance"? I am invested completely in class A dividend paying investments with a long uninterrupted history of paying and increasing dividends. I have no intention of ever selling these investments, and will take the dividends in retirement.

Kevin answers…

It sounds like you've been a disciplined investor over the years and are now ready for the reward. I congratulate you on the achievement.

The problem, of course, is that the future is hard to predict. In today's "age of disruption" there will be winners and losers. And many of tomorrow's losers will be yesterday's bullet-proof companies.

Just look at GE. Yesterday, the bluest of blue chips. Today, kicked out of the Dow and the dividend was cut 50%.

If the US economy is hit with a protracted recession, there will be consequences. Corporate cash flows and profits could disappear. Dividend cuts would be a forced response.

Social, political, economic, and market conditions are not static. Change is absolutely certain. Predicting how things will change is absolutely uncertain.

Having wealth insurance is one tool that helps mitigate uncertainty.

And finally, Patrick Cox from Transformational Technology Alert…

Q: “How will small biotech stocks perform in a market crash?”

How do you think Chromadex and other similar small Bio drug stocks (APTO, CWBR, BLPH, etc) will hold up in the coming correction/crash?

Patrick says…

It depends on how the correction/crash happens, which is why I try to include companies in the Transformational Technology Alert portfolio that will do well in a range of scenarios. There are a surprising number of therapies in labs now that will each provide marginal but significant increases in healthspans. They will most benefit, I think, from a slow meltdown.

If, however, the correction occurs suddenly and dramatically, I think the more radical age-reversal therapies in development would benefit most. Japan could play a big role in that scenario because its demographic problems are even worse than ours AND it has already radically deregulated the approval pathway for anti-aging therapeutics.

I've written a lot about AgeX, for example. Given the talent and histories of the scientists involved, I take them seriously when they say they believe they can permanently reverse biological aging. They're not the only company working on the gene pathways that do this in certain animal species, but they're the only group that has published data at this point.

So the big question, which I'm focused on most of the time, is how these diverse emergent technologies are going to come together. We see through a glass darkly, of course, so my personal goal is to utilize the marginal anti-aging therapies to survive until age reversal happens, which I believe is the real singularity.

I hope this email has answered some of your questions. Thank you once more for participating in Bull or Bust. We’re all proud of what our editors achieved as a team and believe that it is a valuable tool as we all navigate this high-speed train wreck together.

Sincerely,

Ed D’Agostino
Publisher & COO

P.S. I should point out that new VIP members get permanent access to every special report and presentation from Bull or Bust. So if you missed out (or want to view them more carefully), I encourage you to consider your VIP invitation today.