The Tasgall Group

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?

I commented a while back on the fact that we need more asset classes when defining our asset allocations. A lot of people think that it’s enough just to divide your investments between stocks and bonds. I think the world has come a long way since the original research was done when those were the only two classes of investment.

I’d include the following asset classes in my allocation strategies:

• US Stocks
• US Bonds
• International Stocks
• Inetrnational Bonds
• Real Estate or REITs
• Commodities
• Gold and Precious Metals
• Timber
• Cash

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In case you guys haven’t heard about them, Everbank has some interesting CDs available under the names MarketSafe, MetalsSelect, and WorldCurrency.

The theory is that you buy their special CDs and Everbank, and you get a 3 year CD that is tied to the performance of an index. If the index ends the 3 years below a pre-set threshhold, you get your principal back. If the index ends above the threshhold, you get your principal back plus some percentage return based on how much the index was over the threshhold.

The CDs includes indexes based on the price of Gold, Commodities, Oil, currencies (Euro, India, Iceland, Hong Kong, etc.). I think the offering for several of the CDs expires August 22, so if you’re interested do your homework quickly. (more…)

For those who enjoy learning tips about squeezing every last drop out of your net worth growth, this blog, My 1st Million At?33,?is dedicated to that very goal.? Lots of excellent tips and argument/counter-argument dicussions about matters that affect the bottom line.? I like the analytical approach to “gaming” the system of personal finance.? It just so happens that he just posted a summary of his site for newcomers.? Of particular interest was the link on housing but it’s all good stuff.

You’ve probably heard something like this floating around before,

Fed Funds Futures are currently pricing in about a 36% chance for a 25 basis point Fed Funds rate hike next week to 5.5%.

Ever wondered what they mean by that and how they get that number?? Well here is an explanation by the Fed themselves.

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I’ve devised a new test for traders to weed out the losers before even seeing an account statement.? It’s kind of a taste test, so to speak.? Show them two equity curves for a couple of trading systems and have them pick the one they want to trade.? One has a steep upward slope and the other a milder, upward slope.? Otherwise they look the same with about equal volatility etc.? It’s a simple choice between more profit and less.? The secret is that the system with more profit is actually the result of a random buy-sell rule that was selected for its pretty chart.? The other, less fruitful?curve?is the result of a planned system that attempts to index to a benchmark and was successful in doing so.? In other words, one curve was most certainly luck and the other was most likely not.

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Here is one of the best breakdowns of our current situation that I’ve read.? It is very “Kessler” in style, linking seemingly separate areas of the?world in a tangled web.? I’m particularly struck by the mention of buybacks (time to dust off that research again) and the possible leading strength of multinationals who can gain profits from a weak dollar.? Hmmm.? How to get a list of those companies?

It seems that the picture both of his models paint is one of swift movements both down and back up in a relatively short period of time.? I see the scenario of both playing out in sequence as being perfectly plausible given the sense of spring-loading that I get from the markets now.? It’s getting tighter and tighter.? I wouldn’t be surprised if the net outcome for the next two years is breakeven for “buy and hold”-ers of equities.? But with some timing, there could be great inflection points for positioning a portfolio.

I didn’t realize it, but just found out that Rydex actually has an equally weighted S&P 500 ETF — the ticker symbol is RSP (complete with options, though they don’t seem very popular).

In case you’re wondering about the releative performance, take a look at the 3 year comparison of prices: RSP:SPY. ? When the market was going up, RSP handily outperformed the SPY…? but when the market turned down in May, the equal weighting index underperformed, giving up its relative gains for the last 12 months.

So, it looks like RSP is a good choice during market strength, but might give up a lot of it’s leadership when the market becomes choppy…

I’m wondering if the under/over performance of RSP can act as any sort of indicator, like the NYSE Advance/Decline Ratio, or the NDX:DJX ratio…

Investing or Trading are interesting activities in that just about everything you do or don’t do can be looked at in concrete terms as some type of “failure”.

If I bought AAPL stock last month, I might have made money… but I was wrong because I didn’t wait to buy as the price went lower before finally perking up 2 weeks ago.

If I sold XOM in May, I may have avoided a 10% drop in the price that quickly followed… but I was wrong because I would not have owned it as the price is above the high set in May. (more…)