Crisis, stock market crash and risk management in 2011

Turmoil around sovereigns’ solvency and the strong market drop currently observed raise many questions and misunderstandings. Taking a short break to look back at some analysis and themes developed throughout the year seems then appropriate...

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Our review starts with an extremely delicate subject to practice: forecasting. The risky nature of this exercise requires strong convictions and we do not aim to designate here who is right or wrong, but rather to focus on the arguments used by each other at the time forecasts were made. Two articles illustrate conflicting views on the market and deserve attention and rereading in the light of recent events.

Stock markets: upcoming crash in 2011

The recent rise in stock markets is rather artificial and based on fragile factors. The structural ones remain bearish: prudential developments, systemic risk, and true inflation expectations in the long term mainly in the United(...)

Predictions for 2011 by BlackRock’s Bob Doll

According to Bob Doll, stocks will outperform bonds and cash and will record a third straight year of double digit percentage returns

_ Stock Market: Bull vs Bear

Mory Doré and Bob Doll’s views are quite strongly defined; over the same period there were also however rather moderate opinions such as David Shairp’s: Are equities really that cheap?


Beyond simple market analysis and its potential orientation, some managers also establish strategies based on their expectations. We discovered some major adjustments in particular from fund managers such as Pimco ou University of Texas Investment Management Company.

Bill Gross to clear his flagship fund of U.S debt!

The Total Return Fund said not to hold any government paper since the end of February...

The University of Texas Investment Management Co. to hold $1 billion in gold bars

The endowment, which oversees funds held by the University of Texas took delivery of almost $1 billion in gold bullion as a hedge against inflation

_ Wholesale managers' moves

Also regarding the anticipation matter, we can note that the lack of perfect coordination within the euro zone as well as the risk of a likely internal fracture were already highlighted: The euro currency area has only a one-in-five chance of surviving in its current form


Knowing the risk scenarios, how to implement then a hedging strategy to protect existing portfolios? Without simply replicate the big players’ expectations? Two articles address the issue:

Financial markets: hedging against new structural risks and stagflation

There are at least four new structural risks to consider: regulation, Middle East, euro zone’s crisis, and again the idea of a change in growth model of emerging countries.

Goldman Sachs : « Hedging by purchasing puts on bank shares !»

With the rise in the probability of extreme risks taking place, the purchase of puts on bank shares, considering the implicit volatility on the Eurostoxx 50, seems to be an attractive hedge for long term investors according to Goldman(...)

_ Hedging strategies

We end this brief overview with a question developed by Hans Stote, and that became of major importance today with the U.S rating downgrade and a likely one (at least possible) of those of some European countries including France: What is “risk free” ?

B.N August 2011

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