Mike Norman: Hey everyone, welcome back to HardAssetsInvestor.com. I’m Mike Norman, your host, here with the second part of my interview with Philip Silverman, managing partner at Kingsview Management. So, you’re a trader; you’re out there making the bets in the market. If somebody were going to come to you now, sort of a novice or someone, saying they want to get involved in commodities, what would you tell them? How would you tell them to go about it?
Philip Silverman, managing partner, Kingsview Management (Silverman): Well, if someone wanted to get involved, I would recommend that they invest with a commodity trading adviser, CTA, a professional who does this, and have the CTA manage their money in a separate pattern of funds.
Norman: What about ETFs? Do you follow any ETFs, exchange-traded funds?
Silverman: I follow the ETFs, the Gold ETF (NYSE:GLD), the silver one (NYSE:SLV), some different currency ones. But, I find that it’s better to invest straight in the commodity markets, either through the futures or the options, because you get a better correlation. Sometimes with these ETFs, the way that they’re constructed, they don’t act exactly as you think they might.
And especially if you’re moving towards some of those levered ones, they tend not to perform as you would think. They break down a little bit in how they’re performing, like the natural gas one has had tremendous problems over the year. So I would recommend educating yourself and getting into the commodities market because it’s a tremendously liquid market. And there’s a lot of great opportunity.
And for us, we focus a lot on the S&P 500 futures, for which the transactions costs are very attractive. The liquidity is high. And it’s been a very good market to be in, because of those things.
Norman: So you just do straight futures? You’re also a big options trader.
Silverman: More so options than futures. Typically, futures are more to hedge our options unless we have some short-term quantitative trading strategies. And we’re seeing some really interesting things in the options right now, with the S&P.
Norman: Volatility … well not in the S&P, but in the commodity options, volatility must be at an extreme right now.
Silverman: Oh yes. It’s good. Well, in the S&P, it’s more very low because of …
Norman: So, are you selling vol.? Or buying vol.?
Silverman: Well typically, we have a short vol. bent to our strategy because we’re looking to, a lot of times, profit in the options. But we don’t take outright naked bets on volatility, because that leaves you vulnerable to volatility expansions if the market were to have a black-swan-type event. We stay away. I recommend that investors certainly do not try to go out and short naked options, leaving yourself exposed to those rare events. And so, we take a short bent on volatility, but we always hedge our positions in some sort of a spread, or depending on the market direction, whether we’re shorting call volatility or put volatility.
But an interesting thing that we’re seeing, that we’re recommending to some people, is that if you’re owning stocks, or commodities right now, and you’re going along for the ride, volatility is fairly cheap, in that you can buy put protection at a pretty good price, given this rally. We’re bumping up towards highs on the year in the stock market. Many people follow the VIX, the volatility index; that’s getting pretty low compared to where it’s been recently. Historically I wouldn’t say it’s low, but where it’s been for the last couple years.
Norman: VIX typically is high when the market is going down, right?
Norman: And we’ve been in a nice rally.
Silverman: Oh yes.
Norman: For a while now.
Silverman: So the VIX has come down, so those put options are fairly inexpensive. So, if you expect that there may be some volatility between here and the end of the year, or if you have this continued performance anxiety chasing the market − like that in past years, sometimes it’ll roll over into January − now is a good time to have a little bit of protection and spend some money.
Norman: I guess you don’t buy into this commodities super cycle thing of 20 years, because you said before, we’re closer to the peak. And you’re actually looking for the stock market to start to take leadership and outperform.
Silverman: Well, I would be looking for the stock market in a couple of years from now. I think right now the stock market is still in a pattern where it’s not ready to get into any sort of a secular bull market. I think we’re going to be seeing some cyclical bull and bears like we’ve been seeing now, until we get value. We need to get earnings growing a little bit better. We need to get companies investing, using up some of the excess capacity, spending their cash. So I see that coming down the road, maybe in the mid-decade.
And the interesting thing is that, as commodities start to go down and come out of their super cycle, companies’ inputs will be less expensive, and they’ll be able to increase their margins.
So it’ll be an interesting correlation. And I do believe that, at that point, interest rates are going to need to start going up, and we’ll see some inflation. But I’m not worried about that.
Norman: So far, no sign of that, really.
Silverman: Like I said, I think you’re talking 2015, where this kind of stuff is going to start to …
Norman: It’s still quite a bit away.
Silverman: Yes. So we’re looking very much into the fourth quarter of this year, first half of next year. And right now, the big forces that we’re seeing are the Fed printing money and managers chasing the market. And so you need to be prepared for the managers that are chasing to start going the other way.
So, we are looking to buy some out-of-the-money put volatility, so that if that happens quickly … say you get a 50-100-point drop in the S&P, which isn’t huge. But it could happen very, very rapidly, given the amount of money that’s poured into the market.
Norman: Well, we certainly saw it happen in May, right, with the flash crash.
Silverman: That’s true.
Norman: That’d be a nice score right there. All right. Phil Silverman, thanks very much. That’s it for now, folks. See you next time. This is Mike Norman. Take care. Bye-bye.
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