THE POWER OF HEDGING: WHAT IT IS AND WHY YOU NEED IT | December 17th, 2022 | $KBE $CSCO $DEN $LIT $QCOM $BRK.B $SIG $TSM $NUE $HZNP $AMGN $PLUG $TELL $DIS $THO $MP $KSS $GL $WMT $TGT $GILD $AIG $ORI $USB $CNC $SH $GLD $SLV $SON $NEM $HLT $NXPI $DEN $GPS $JPM $CMG $MSFT

Weekly summary in a paragraph

Second week of decline for global stock markets as cooler inflation data published in the US was not enough to offset the impact of hawkish central banks. While the rate hikes confirmed by the FED and the ECB were in line with estimates, in the press conference Jay Powell kept pushing back against pivoting.

Meanwhile in China reports of more infections, increasing deaths as well as political speculation about propping the housing sector dominated the news cycle and resulted in further weakness.

The pressure is mounting on earnings estimates as the risk of further downside is materialising and spreading amongst analysts. Perhaps the only playable narrative for the bulls is the expected seasonal tailwind (aka the “Santa rally”).

Asset classes weekly performance

This week the Dow lost -1.7% (-8.63% YTD) while the S&P500 fell -2.1% (-19.17% YTD, we are 1x short), the Nasdaq retraced -2.8% (-30.90% YTD, we have a 3x inverse position) and the Russell 2000 gave up -2.4% (-21.03% YTD, we are 1x short). $Gold finished marginally lower -0.2% (-3.28% YTD) and silver lost -0.8% (-1.26% YTD). $Oil showed its strength with a +4.0% gain and is now back in positive territory for this year (+1.20% YTD). The 20-y gained +0.8% this week (-26.90% YTD). The European stock finished -2.3% lower (-16.16% YTD). The Euro recovered +0.6% over the USD (-5.73% YTD).

Weekly pitch

This week’s market behaviour should serve as a reminder that nobody knows what happens next, even when estimates or predictions are met. Investors should follow a risk-based approach and hedge. Simply put, hedging means investing on the opposite side of your main portfolio, though for a smaller proportion, in order to limit losses if the market turns against you. While this reduces your profits when you have the wind in your back, it does offer a parachute when the opposite occurs. Many of those who are beating the market in 2022, like us (see below), have hedged and are either in the black or simply less in the red.

Weekly Portfolio Update

Here are this week’s movements: we benefitted from $HZNP being bought out by $AMGN (+14% average gain); we started a short position on $CSCO as well as long positions on $LIT, $KBE, $QCOM and $BRK.B; we sold our short position on $TSM, perhaps prematurely. Cash, precious metals, hedges and short stock positions amount to 40% in our portfolio (reduced compared to last week).

Top 5 Weekly Portfolio Performers

$HZNP +16.02% (Pharma)

$TELL +13.08% (Oil)

$SQQQ +8.07% (3x inverse Nasdaq)

$DEN +6.70% (Oil)

$PLUG +4.94% (Alternative Energy-Fuel Cell)

Portfolio Asset Allocation

– Long stock positions 60% (increased)

– Short stock position 3% (increased)

– Hedges 7%, though equal to 9% considering leveraged ETFs (reduced)

– Silver & Gold 4% (unchanged)

– Cash 26% (reduced)

YTD Portfolio Performance

Our currency-adjusted YTD portfolio performance is -8.97% (excl. dividends) vs the European market loss of -10.43% (+1.5% European market beat, expressed in €) and the S&P500 loss of -19.2% (+4.5% US market beat, expressed in $).

Invest responsibly!!!

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