The Tasgall Group

An important point, philosophy, or whatever is the fact that “the market” is not efficient.

This flies in the face of much academic theory stating that the markets are efficient, and that one assumption is the basis for much of the modern portfolio theory (MPT) and capital asset pricing model (CAPM). That one assumption is why these are both flawed theories (even nobel winners can be flawed).

The market (and in this way I refer to markets in general, not just the equity markets) is not efficient, it is instead an efficiency process. This is important, as it explains why any of us can take above average profits out of the market over the long term. (The average profits would be dictated by the growth of the economy.)

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Money Markets are looking really good right now for safe money while we wait for several markets to get over their jitteriness. SECU raised their MM rates to 4.5% (4.6% APR). ING is cruising at 4.35%, but I suspect they will raise within the next 30 days. For parking your money in “cash” in your trading accounts, consider Vanguard’s MM account (VMMXX), which is currently posting a hefty 5.08% yield.

I just drastically scaled back my REIT positions after today’s crushing news from Toll brothers, Bill Gross’ sickening chart (see link within earlier post from Jason) and the additional failure of yesterday’s REIT market peak to hold out. I moved half of my REIT position into equal portions of Money Market (VMMXX) and Total Bond Market (VBMFX).

I’m percolating a blog post regarding REITs but it will take some time to make that post worthwhile.

Jeremy Grantham’s 3Q Letter is another good read (free registration required). Here is a quote:

The May through June shock to the low risk premium caused a rapid response, not surprisingly, from the newly gigantic hedge funds. They moved quickly to reduce their leverage and the carry trade in sensitive areas. …I would hope that most of the fastest guns have shot by now, but since we have never lived in a $1.2 trillion hedge fund world before, we have to guess. A great majority of all hedge fund money has never known a world that was not dominated by Greenspan moral hazard ? heads you win and tails I?ll help you out ? and this fact has two consequences: first, they should be very slow to entirely give up speculative confidence; and second, there is an awful lot of speculative confidence to finally give up!

In addition to the recent market action, Grantham discusses the trends in risk premium, the correlation between EAFE and domestic equities, personal savings rates, reversion to the mean, An Inconenient Truth, efficient market hypothesis tyrany, and a whole lotta other stuff.

The 3 page section after the quarterly letter is titled, “Everything I Know About the Market in 15 Minutes” and does a good job of describing Grantham’s style and beliefs.

For those who don’t know, Jeremy Grantham is the front man for GMO, one of the big money managers with over US$122 billion under management. He’s not afraid to make unpopular arguments and certainly isn’t afraid to call out things like “career risk” that do affect returns.

To see the other side of the argument, check out Bill Gross’s latest Investment Outlook. He calls the end of the bond bear market and gives some good background on why he thinks so.

Recession/no recession is really a faux decision to be entertaining at bond market turning points. Any number of cyclical histories point toward bond market prices bottoming ? and the Fed peaking ? as the economy downshifts into second or first gear as opposed to breaking to a full stop. (more…)

It seems like everything I’ve read in the last couple days has focused on whether or not the Fed will raise rates or pause at Tuesday’s meeting. Will Helicopter Ben show up, or the Inflation Targeter that he more tended to portray while in academia. The rate futures have a 25% probability of a hike in August, and about 50/50 for September.

There is the added dimension of what commentary accompanies the actual interest rate. If they raise rates but say, “this is the last one” many people will be excited. If they don’t raise rates but say, “we’re definately raising rates in September” excitement will be mixed… (more…)

I came across the StockCharts.com Market Summary page and have added it to my Daily News Briefing so that I review it on a daily basis.

The market summary page lists out a lot of information on one page. The different sectiosn include the major markets, major indices, sector ETFs, industry indices, international ETFs, world markets, bonds, commodities (gold, oil, and commodity indexes), currencies, market breadth, and bullish percent indicators.

You can also see this in a “market carpet” format, but I think I prefer the summary page as the carpet doesn’t add any value by spatially organizing the different segments. The market carpet does have some nice features… being able to click and see a 2 month graph is a nice feature of the market carpet that you may find useful, and being able to see market strength across all sectors at once is nice.

While the mainstream press will attribute any and all single-day price changes in the market at large to the prevailing news that day, most of the time the news is not actually that significant in moving the markets.

And then there is the exception. Today, “oil jumped above $77 a barrel after BP began shutting down the biggest oilfield in the United States. The UK oil giant acted after discovering a damaged pipeline at Alaksa’s Prudhoe Bay.” (Reuters)

The $1.85 per barrel constitutes a 3% move before 7am… Total output from Prudhoe is just less than 1 million barrels per day, so if the entire production is shut down, that’s significant in terms of worldwide supply.

One area that I’ve always thought was under-represented was closed-end funds (CEFs). Most people know mutual funds and invest in them, primarily because they can buy mutual funds without incurring commissions (a pretty good reason when you’re investing with every paycheck). (more…)

I just read a blog post at underthecounter (which references a NY Post article) that describes a hedge fund called MotherRock blowing up and losing “almost all of $450 m” after being in business for only two years.

Wow, that’s quite a failure, and fairly foreseeable. They didn’t seem to understand managing their risk and didn’t really care about the potential to lose it all.

This reminds me of some discussion of what it takes to win trading contests… a blatant disregard for risk management, luck, and very aggressive / speculative positions. It’s like these managers thought they were playing a game instead of actually trying to manage real money. After all, who decides on a Hail Mary play when you still have real money that you could return to your investors?

The good news? Trading is a zero sum game. These guys are the other side of the equation from you and I. If they’re making such big mistakes, that means there are still opportunities for us.

It seems as though everyone is pointing to one thing or another and finding imbalances. Austrians and Keynesians fight it out as to what is right.

Schumpeter argued that economic recoveries that are largely a consequence of fiscal and monetary stimulus must ultimately fail. Schumpeter writes:

Our analysis leads us to believe that recovery is sound only if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own.

I ponder this quote when I think about how the Fed aggressively lowered rates after the 2000 Nasdaq bubble burst… and how the housing “bubble” immediately formed.

When I go down this path, my main question is, “What’s Next?” So if the Fed, in it’s bubble management role is trying to slow the housing market and create a soft-landing, what maladjustment will that market manipulation produce?