The Tasgall Group

Here’s a good point from Mish:

The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130 billion) to assuage a credit crunch.

…? The ECB said today it provided the largest amount ever in a single so-called “fine-tuning” operation, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.

The rest of the article is worth reading and has some good points about what is/may be happening in the big banks and brokerages.? The reaction by the ECB is what one would expect in an emergency, so you can either think that the ECB is panicking out of order, or there is a real emergency somewhere.

This may be a dumb question, but any idea why the market is often surging in one direction or the other primarily starting at 3:30? It’s been more common than not lately, and is strong late market action in-and-of-itself an indicator of some sort?

The equity markets right now are extremely volatile. The VIX has more than doubled just in the past few months, and this presents some opportunity if you’re willing to buy during the dips. Before I go further, let me be clear that I’m only considering buying broad market indexes when buying dips – not individual stocks or niche ETFs or mutual funds. I feel buying into dips is only advisable when considering a broad basket of equities. So, to simplify the discussion below, assume that we’re talking about the S&P500 only (although this should apply to any index funds, ETFs and mutual funds that focus on a large basket of equities) and that we’re discussing using market dips to augment long-term holdings only.

The 3-part question I’ve been grappling with is: (1) what constitutes an actionable dip, (2) when to exploit this dip, and (3) how much to invest in the dip. Volatility helps create really nice dip opportunities, but it requires some speed, available funds, and some previously determined strategy to effectively capitalize on volatility. (more…)

Quite a while ago, we discussed drawdown analysis for mutual funds, and how understanding drawdowns can help in setting properly positioned stop losses… With two of my mutual funds dropping down against their stop loss levels, it’s time to revisit the analysis.

We’re looking at OAKMX and OAKIX, both long term value oriented mutual funds run by Oakmark Funds. OAKMX focuses on large cap value; OAKIX focuses on large cap international value. Here are the 3 year performance charts of the two mutual funds:

Wow, good runs on both funds. (more…)

You can’t click on a link on the net today, it seems, without coming across someone talking about the unraveling of the carry trade. Will the Japanese raise rates and end the party? Everyone knows that the ZIRP (zero-interest rate policy) of Japan is a major spark for carry trades since to have a carry you need one higher interest rate and one lower one to make it work. And zero is pretty low.

Everytime I hear?about it, I want to throw something. First of all, it’s a matter of principle. (more…)

Here’s an interesting trick, in a roundabout explanation thanks to the latest GMO Quarterly Letter – investing without margin calls.

Imagine this, you’re a wealthy investor and have confidence in the long term growth of the economy and the markets. You want to get leveraged long as much as possible to benefit from this long term growth, but know that the inevitable dips and swoons are a threat to using too much margin.

Enter the concept of investing without margin calls. Think it’s not possible? Think again — it’s been happening at a record pace in the last year in the form of Leveraged Buy Outs (LBOs). The long-term investors who buy these companies are sometimes able to lever up as much as 10 to 1, so they might put up $100 million to buy a $1 billion company. They sell bonds (backed by the company’s assets and earning power) to cover the rest of the $900 million difference, and are able to get much more leverage than if they were simply getting 50% margin (2 to 1 leverage) from their stock broker.

But there are plenty of risks, such as the cost of? servicing all that debt, getting the company to grow as much as it would have under public ownership, etc.

It’s an interesting trick if you have enough money to pull it off.? It’s effectively a risk-reversal where the risk of a margin call is shifted from the equity owner to the debt buyer.

Jim Cramer is nothing, if not attention getting. Here are two different videos from Jim on the subprime situation that are quite interesting… I have presented them in chronological order for effect. (more…)

I wanted to highlight a specific trade that I’ve been in, as well as some commentary to go along with it.

There has been much hullabaloo in the market press lately about the subrpime fallout. We’ve seen credit markets contract, lending standards shoot up, mortgage rates climb, etc. One of the principle instruments of this trend are the CDSs (Credit Default Swaps) and similarly abbreviated CDOs, CDLs, etc.

A while ago, I found a mutual fund that invests in the opposite side of the CDS market, and benefits if defaults or perception of default start to rise.

It trades under the symbol AFBIX with the long name, Access Flex Bear High Yield Fund. Here is a chart of the mutual fund’s price: (more…)

Here are the numbers for this week:

• Dow Industrials – down 4.2%
• S&P 500 down 4.9%
• Russell 2000 down 7%, now in the red for the year
• REITs down 8.8%

The two day rout on Thursday and Friday were quite dramatic, but the declines are still in single-digits across the broad indexes. The panic and consternation are certainly overdone. Several headlines and commentary are acting like we just went through a full bear market, claiming that “stocks are so cheap now” or “where was the plunge protection team — surely we needed it this week!” I’m sorry, but if a 5% price dip makes a stock “cheap”, you don’t understand what the word cheap means and you have no sense of scale. (more…)

Given that the big news is the big market down day (and, as I write, the aftershock), I figured it was the perfect time to try some of the concepts I learned in Why?Stock Markets Crash. Sornette provides a non-linear model formula that he attempts to fit to markets and notes that when this model finds a good fit, it often does so right before major crashes. This concept relates directly to talks of singularities. Basically, exponential growth, peppered with log-periodic (equally spaced on a log chart but closer and closer together on a standard chart)?waves, results in a singularity or critical time where a crash is highly likely.

There are several parameters that need to be optimized and, since it’s non-linear, it requires some major computation power. All those parameters make it more difficult because, during fitting, you happen upon local minima that?aren’t the real best minimum. So you have to run the optimization several times with different starting seed values and hopefully converge on the answer.

So enter Java. I wrote a program that would read in market data (S&P 500 since the ’03 bottom) and try to perform a fit to the model. (more…)