As a retail investor, if you wanted to play Brazil in currency form, you could try something like long EWZ, and then short an ETF like Australia (or a basket of ETFs), which should have a high correlation with EWZ to remove the equity market risk. You could then go long the Aussie dollar ETF to hedge your implied short A$ risk. A bit of a hassle, but I think you’d end up with a reasonable approximation for the real.

I agree with your view on the bond market, hence my short position.

Steve
long TBT

Thanks, David. As I wrote when I first mentioned those stocks here on 9/4, they would probably be too small for you but perhaps not for some of your readers. IMO, going small is an advantage that too few individual investors take advantage of.

SamB

Steve, I think once the Fed steps away, yields will rise a little, and if they dare liquidate, they will rise a lot. I am not constructive on any of the US bond market at present. I prefer shorter to longer, less volatility to more, less credit risk, and more currency risk. I particularly like currencies that have and/or might tighten policy, such as Australia, and uh, hmmm… maybe Brazil, but I can’t find that in a retail form.

But aside from foreign currencies, I am flying the Jolly Roger here, and saying that yield = poison. This is a time to preserve capital, not make great gains.

I’m not a fan of DCF either; I prefer to try and estimate a free-cash flow yield. With respect to Kieran’s points that you addressed: DCF works best with a stable business model. Otherwise, the cash flow input is very difficult to estimate accurately. Or, you end up with a very high discount rate to compensate for the unpredictability of the model. In any case, I’m not a fan. Thoughtful post though, thanks.

As a separate topic, what’s your view of the Treasury market now? Yield curve slope? Recent increase in TIPS yield? I’m very interested to see what happens as the Fed steps away from the market; the November refunding should be very, very interesting. I enjoy reading John Jansen, but I know you’ll have an informed opinion, as an ex-bond man…

Steve
long TBT

This reminded me of a due diligence visit at a research firm. In a one-on-one with an analyst, I asked him about his valuation methods, and he said that he relied on multiples.

Noting his resume, I asked, “Didn’t they teach you DCF at (major university)?”

He said they did, but that he didn’t like it because there were “too many assumptions.”

The nice thing about doing a DCF is that if it’s done well you force yourself to lay your assumptions out. It’s also easier to use probabilities if you want. Multiples are very useful, but too many assumptions get buried; real rigor comes from taking the next step.

In all cases, whatever the method, the most important thing is to remember that there are no “answers” to be had; the exploration and consideration are the keys to insight.

Which is why, by the way, you are the best investment blogger around. You explore and consider and let us in on your thoughts.