HDGE: 4th Quarter 2022 Portfolio Review
Performance
Markets Review
It is helpful to look back to a comparable period during the dot-com bust. Over the course of that market decline, the Nasdaq fell 78.4% from peak to trough. However, there were eight bear market rallies during the bloodbath from 2000-2002. Some of these rallies were substantial. There were:
- a 28.45% rally in four weeks,
- a 43.74% gains in seven weeks,
- a 51.32% gains in 16 weeks, and a
- a 40.96% gains in eight weeks.
The backdrop for the current market contraction is the reversal of the near-zero interest rate environment that has prevailed since the global financial crisis of 2007/8. Suppressed interest rates translated into risk asset outperformance that pushed the yield on equities to unsustainably low levels.
Dividends have been a key driver of stock performance for decades. Companies that grow and initiative dividends vastly out-perform those with any other policy. Dividend cutters are ground to dust.
The following chart offers a compelling ranking of performance by dividend policy.
Recently, interest rates have been creeping up to become competitive with dividends on equities. The dividend yield on the S&P 500 relative to the 10-Year yield has imploded to levels that precede poor stock returns. That’s bad news for the stock market.
We believe the market is vulnerable for a downward move until the yield on the S&P starts to become modestly attractive again. With competition for yield from other areas of the market, the S&P 500 will need to correct. When that happens there will be a wonderful opportunity to scoop up stock in companies with strong dividend policies.
How low could we go? The long-term average dividend yield on the S&P500 has been approximately 4.3%. To reach a dividend yield of 2%, the S&P would need to drop below 3000. To reach 2.5%, the S&P would need to retreat below 2,800. A level of 2,400-2,500 is not out of the question. Markets often overshoot to the downside after an overshoot to the upside.
Another favorite long-term indicator is the level of margin debt. Investors use margin debt to amplify returns in bull markets. Yet, when markets turn down, that same margin debt provides downside acceleration as margin calls and forced liquidation of margin debt lead to panic selling. History tells us that bear markets tend to end once margin debt has been fully or nearly liquidated. Once again, current levels, despite some recent improvement, show that the market could fall a long way.
In addition, the market is near-term overbought. The rally in equities appears to have been a low-quality rally driven by a surge in risk appetites. The performance of highly shorted equities since the turn of the year has been remarkable, as this chart from Two Rivers Analytics shows.
This performance was achieved on the back of a ‘risk-on’ attitude that manifest itself via the embrace of the riskiest attributes: small caps, aggressive industries, lack of profitability, leverage, etc… as well as short covering. See below.
All together, investors are ignoring the group of attributes that hurt stocks in the intermediate term. This has pushed TRA’s risk models to high levels. We’re betting this begets a reversal over the coming weeks and months.
In our opinion, now is not the time to be complacent — now is the time to be extremely focused and to add hedges.
Top Holdings
| Ticker | Security Description | Portfolio Weight % |
| KMX | CARMAX INC | -4.10% |
| CMA | COMERICA INC | -2.66% |
| CACC | CREDIT ACCEPTANCE CORP | -2.61% |
| MCO | MOODY’S CORP | -2.56% |
| OMF | ONEMAIN HOLDINGS INC | -2.55% |
| DLR | DIGITAL REALTY TRUST INC | -2.45% |
| COIN | COINBASE GLOBAL INC -CLASS A | -2.38% |
| C | CITIGROUP INC | -2.08% |
| HOOD | ROBINHOOD MARKETS INC – A | -1.99% |
| TDS | TELEPHONE AND DATA SYSTEMS | -1.93% |
As of 12.31.20202. Cash not included. Subject to change.
Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager
The S&P 500 Index is a free-float capitalization-weighted index based on the common stock prices of 500 American companies. It is one of the most commonly followed equity indices and many consider it the best representation of the market and a bellwether for the U.S. economy.
A Bear Market (Bearish) is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
A Bull Market (Bullish) is a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.
A short position is the sale of a borrowed investment with the expectation that it will decline in value.
Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
Implied Volatility is the estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.
The Volatility Index (VIX) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant
to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.
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