Good morning!

I'm back to look after the SCVR for a few days.

After some musings on the FTSE, I will look at:

FTSE Index - Contrarian Trading

It may not be the most exciting financial instrument in the world, but the FTSE remains an object of fascination for me.

This instrument was trading above 6700 in mid-2007. It previously broke that level in 1999 and 2000.

Twenty years later, anyone who was waiting for some decent capital appreciation has been disappointed. Despite reaching 7900 last year and 7700 this year, it is now threatening to return back to the 7000 level. Over a very long period of time, it has made very little progress.

Now it is true that the dividends have been strong, and if you reinvested them, then your portfolio has done ok. But the capital value of the index hasn't gone anywhere.

There are several possible explanations for this, and I think "the truth" lies somewhere in the middle:

1) FTSE-100 is a poor-quality index whose companies are structurally unable to generate compound returns.

2) The FTSE-100 is currently exposed to severe macro-economic risks (e.g. Brexit, recession), which require the index to carry a large discount.

3) (related to 2) The pound sterling is temporarily undervalued. When it strengthens, the value of foreign earnings will decline in GBP terms. The FTSE needs to be discounted to prepare for this.

4) The FTSE-100 is undervalued.

Personally, I am leaning toward 4) as the primary explanation for the FTSE's current level, with a little bit of 1) and 2) and 3) as well.

Indeed, I have added to my leveraged long position in the FTSE this morning, via put options.

While I have mostly avoided leverage in the past, and remain very cautious about using it, I can't resist taking a big position in the UK index at this time. 

Even allowing for the fact that it's a low-growth index, the P/E ratios which it offers make little sense to me:


I don't currently expect interest rates to rise. And especially if they don't rise, then the…

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