The Tasgall Group

Here are some books that I consider pivotal in my financial education:

• Fooled by Randomness by Nassim Nicholas Taleb – I’m also currently reading his new book, The Black Swan, that is somewhat a sequal to FbR and promises to be just as good.
• Education of?A Speculator & Practical Speculation by Victor?Niederhoffer -?Not all teachers need to be successes.
• Option Volatility & Pricing?by Sheldon Natenburg – The ultimate reference for options. It saddens me that his recent release is such crap fluff.
• The Trading Game by Ryan Jones – While I finally concluded that the exact method of?position sizing?taught in this book is often not the best, it brought my attention to the importance and?complexities of position?sizing.?
• The?Options Edge?by William Gallacher?- Forever changed the way I thought about options and helped me to think outside the box. Sends all the “greeks” home on the slow boat to Greece.
• Evidence-Based Technical Analysis by David R. Aronson – A cold, slap in the face. Teaches you to apply the scientific method to any trading ideas you may have.
• Running Money by Andrew Kessler – Reads like a novel and opens the mind. Worth it just for the thesis on the modern economy alone.
• When Genius Failed by Roger Lowenstein – I can only hope and try not to repeat these mistakes. Are we doomed to?
• All Your Worth by Elizabeth Warren & Amelia Warren Tyagi – You can’t forget personal finance. This is the clearest, most original & effective approach to personal finance and budgeting that I’ve come across. It does away with line-item budgets and instead focuses you on balancing your money. This way you always live well and live well within your means.
• The 4-Hour Workweek by Timothy Ferriss – Work less, earn more and live anywhere. Yeah right! Live it, if you dare.
• The rest of my influence comes from the world of academic journals. There are too many to mention but I generally recommend that you make a regular habit of scooping as many free research articles about finance off the web as you can.

From this list, you might think I’m an options trader but I’m not really. It just seems that some of the strongest writing and thinking about markets has come from options traders. And I know it’s a short list, but there is so much trash in financial writing that it makes sense to me that, at the end of the day, only a few gems would shine.

What an odd turn of events when your last ditch effort at branding means changing your ticker symbol on the stock exchanges…

When I first saw this in a news headline, I thought it was a joke or a hoax…? but no, Sun is in so much trouble that it needs every last attempt possible.

On a different note, did anyone else notice that Gateway got bought-out for a price well below it’s average price for the last year?? Looks like another cheap buy-out for the tech sector.

It seems like the rest of the (LBO) world might learn something about buying assets on the cheap rather than at new high prices…

There is an impressive piece over at Mish’s blog that helps to explain a few things.

When Citigroup, JP Morgan Chase, Bank of America,? and Wachovia all borrowed $500 million each ($2b in total) from the discount window, I was certainly scratching my head as to the real motivation for such a move.? Public relations on behalf of the Fed?? Maybe the Fed pushing the banks to go into the commercial paper markets to loosen the screws a bit on reasonably good businesses?

No… as Mish tells it, the banks were all motivated by an important rule change.? Mish quotes an article in the WSJ:

The Fed, in a letter sent to Citigroup Monday, exempted it from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets. In the letter, the Fed said it would permit Citibank to lend up to $25 billion to ?market participants in need of short term liquidity to finance their holdings of certain mortgage loans and related assets,? and it could channel the transactions through Citigroup Global Markets in the form of offsetting repurchase agreements, which are short-term loans secured by financial assets.

In the interests of keeping things in the US out of harms way, whether it’s the home owner or the public companies that require a functioning financial system, the Fed is doing the right thing.? But, in the process, it is certainly treading on moral hazard in the worst possible way.

Just like the Mortgage Fund Implode-O-Meter (which we previously mentioned), we now have the Hedge Fund Implode-O-Meter to keep us abreast of all that is going wrong in the world of finance.

Today’s # of failed mortgage funds: 129

Today’s # of failed hedge funds: 13

I just came across this nice quote from Bill Miller, Chairman and CEO of Legg Mason Capital Management: “The NYSE financial index is probably the best barometer of what’s to come. The financials tend to be a very good indicator of where the market’s going. They tend to lead the market because they’re the lubrication for the economy. So I think the financial index will tell you if this thing is over, and so far it’s telling you it’s not over. It’s still falling. But just as financials lead on the downside, they will lead on the upside.”

Know of any other good indicators for when this correction might be near an end?

To lighten things up a bit… you probably saw this video of Jim Cramer from 2 weeks ago (August 3):

Here’s the Minyanville response:

Also entertaining is Mr. T on MvTv… rebuking the Mr. T and Gold indicator.

So, we all know about the Fed’s change in interest rates this morning, and how they lowered the discount window rate for banks but not the more widely tracked Fed Funds Discount Rate…? and they’ll most likely start lowering the Fed Funds rate soon.

The Fed clearly pulled out as many tricks as possible with this one. They released the news pre-open for the markets on an option expiration Friday. Only yesterday Bill Poole was quoted as saying there was no need for a rate cut, and it would only be done in an emergency, or something like that.

There was an insightful a late Thursday night comment at the Big Picture that is worth sharing:

What I wonder is whether Frank Poole may be setting things up for what we’ll call the 1998 Bob Rubin Special. If you’ll remember, Rubin came out in the thick of the 1998 currency crisis and said “there’s no way we’re cutting rates”. The shorts piled into every kind of currency trade, having been given the green light by Rubin. Then, the next day — a 100-basis-point cut! The shorts were blown to shreds and forced to cover, putting a floor under the market. Bob Rubin, Secretary of the Treasury, flat-out *lied* to the markets, but it was brilliant — the rate cut had even greater effect with a ferocious short squeeze behind it.

So, what was the effect of the Fed tricks?? A 233 point rally in the Dow.? Not bad, certainly a relief after the jarring selling that the market has gone through over the last few weeks.

But 233 points is not that big…? it’s 1.8% – yes, a healthy one day move.? But before the market opened, we had several commentators extremely excited…? Cramer supposedly offered “this will be the biggest one day move in history” (the biggest move would have been over 500 points on the Dow).? Bill Cara opined “Today will be a moonshot in US capital markets. Color it golden.”? Both comments were made pre-open.

Like I said yesterday, we were set up for some bullish action.? And that was before the Fed did their magic trick and hand waving this morning.? Without the Fed, I would have put a 233 point move in the category of a “decent” bounce, and likely to lead to at least a few more days of strength.? Only if we consider Thursday and Friday’s moves together do we see a ~500 point rally…

To sum up, we should have seen a moonshot.? The Fed doesn’t come out and do its dance very often, nor do they usually pander to Wall Street or market moves.? I’m not convinced that the bull is back, or that we’re not in for more turmoil in the near future.

I guess the big thing to watch is how markets behave on Monday when it’s not option expiration and not an impromptu Fed day.

What to make of the strong finish in today’s market…? The Dow reversed a full 300 points to finish down only 16 points for the day…? that’s a whopping 3% drop, followed by a 3% rally all in the span of a single trading day.? That kind of action usually signals a short-term bottom, but I’d be careful making that assumption…

We had a similar big one-day reversal as recently as Friday, August 10… the dow hit a low of 12,958 before closing back at 13,239 — a 281 point recovery. What happened next? Bad news on Monday caused this week’s price action, and all of the liquidity injections from the central banks could not get stocks in the black for even a single day (so far).

Interestingly, the Dow and the NDX closed spot on their 200 day moving average. The S&P 500, nasdaq composite, and Russell 2k are all well below their 200 dma. Medium term (1 year+) trend lines have already broken on most of the major indexes.

After today’s strength, tomorrow is set up for a bullish day. If there isn’t strength, then most likely we’re going to have some additional jarring drops. If there is strength, then the question of the day will be, how long with the strength last?

Also worthy of note is the yield spread… the 30 year / 3 month has shot up like a bat out of hell. Looking at a longer term view, there’s still a long way to go… And the contraction is happening even while the FOMC has pushed the overnight rate down to 4.9% despite the lip service about not lowering rate targets.

Here’s a quote from Mish:

Yes, already. David Greenlaw at Morgan Stanley noted that although the Fed Fund rate is officially 5.25%, as a result of various Fed open market operations “the funds rate averaged 4.51% yesterday [2007-08-14], and then opened at 4.75% this morning [2007-08-15]. Indeed, the cumulative average for the 2-week maintenance period that ends today is 5.04% — well below the official 5.25% target.” Greenlaw went on to call this a ?temporary? easing of policy on the part of the Fed.

I’ve personally moved to a hedged position — puts offsetting the longs that haven’t hit trailing stops or that I don’t want to sell (yet) for tax reasons…? There might be a sizable bounce over the next few days/weeks, but I’m in capital preservation mode and don’t feel like risking more than is appropriate given the recent price action.

Wow. The VIX index has doubled in about a month. I’m thinking this is not a good indicator that the worst of this “market correction” is over.

Since gold and bonds are kind of flat during this correction (not that flat is bad – it beats 10-15% drops within 1 month), I’m wondering if a well balanced portfolio that can weather any storm would be best served with a sprinkle (maybe 2%) of VIX added to soften the blow.

With the current and ongoing national and international market volatility, a declining US dollar and rising uncertainty on many fronts, is now a great time to shift some additional resources into gold? Are other commodities even better suited?