The Tasgall Group

If you really want to aggressively bet on a singularity approaching, you could do some pretty reckless things with the latest thing from Wall Street: life settlement backed securities.

From Business Week: Profiting From Mortality

Death bond is shorthand for a gentler term the industry prefers: life settlement-backed security. Whatever the name, it’s as macabre an investing concept as Wall Street has ever cooked up. Some 90 million Americans own life insurance, but many of them find the premiums too expensive; others would simply prefer to cash in early. “Life settlements” are arrangements that offer people the chance to sell their policies to investors, who keep paying the premiums until the sellers die and then collect the payout. For the investors it’s a ghoulish actuarial gamble: The quicker the death, the more profit is reaped.

I just finished reading Why Stock Markets Crash, a book that has been on my radar a while and I finally found it at the library of all places. Have you ever heard of this place? They have tons of books you can read for free! Anyway, the basic thesis of the book says that markets, while normally holding to effcient market theory, become highly predictable when herding behavior creates bubbles. These bubbles often take a shape that can be fit to a non-linear model of log-periodic oscillations that results in a critcal point in time or singularity. Ah, there’s that crazy, kooky word again!

Ever since I was?at university (that’s?Euro-trash for “in college”), I’ve been reading and pondering this concept of the singularity. I first heard of the idea in The Physics Of Immortality and later in The Singularity Is Near. If you’ve read any of these books, then you know what I mean by the Singularity and, if not, then basically it is a point at which greater-than-exponential growth leads to nearly vertical growth and a paradigm shift occurs that alters the system beyond recognition. (more…)

I don’t want to have every post I write be about the subprime fallout and real estate…? fascinating though it may be.? So, in the interests of changing subjects, here is an old joke…

A guy who goes to his financial planner and says, “I want the best possible returns and I’m willing to take whatever risks are necessary.”

The financial planner says, “Great! I have just the ticket for you if you have the risk tolerance. The risks are high that you could lose everything, but it has the best possible return of anything you could put your money into. If it pays off, you would have a 3 billion percent return on the initial investment on average.? In some cases the numbers are much higher. ? This investment is the only place you’ll be able to find a 3 billion percent return with a holding period of less than a day…”

The customer is salivating at the mouth, waiting to hear the answer…

The answer: Take all your savings and buy lottery tickets for the next big jackpot drawing!? If you really don’t care about the risks (of losing 100% of the money “invested”), it does provide the best possible return compared to the $1 you pay for the winning ticket!

There’s an excellent article titled “How professionals dump their toxic waste on you” by Paul Tustain that is worth reading. He starts with much of the current situation in subprime loans that we’ve talked about before… but then goes on to some additional interesting topics… below are some highlights.

Many investment funds (pension funds, bond funds, etc.) are holding CDS (credit default swap) portfolios as income generating bond-equivalent securities. The catch is that many of the CDSs are not actually insuring against default, but the other side of a speculative position that a risky borrower would default. The example cited was Delphi Corp’s recent fall from grace — when their debt was defaulted on, an astounding 10 times the amount of the debt was executed in the form of CDSs on their debt.

So these pension funds, hungry for bond-like returns, basically took the other side of a bet that Delphi would collapse. Not exactly investment grade, but thanks to financial alchemy, a pool of these CDSs were highly rated, and most likely offered to the buyers with leverage. (more…)

A few days ago I was asked how real estate was doing in Las Vegas…

Here’s the a chart from the government’s official house price appreciation (compared to Durham for kicks and giggles):

Within the metropolitan area of Las Vegas, there are approximately:

• 7,132 pre-foreclosure properties
• 2,457 properties up for auction
• 5,365 bank owned properties (e.g., the foreclosure occurred and now the bank owns the house/property)

Here are the same numbers for Raleigh. For comparison, Raleigh is about half the size of Las Vegas:

• 557 pre-foreclosure (15% as much as Las Vegas, adjusted for population)
• 7 auction (0.5%, adjusted for population)
• 562 bank owned (20%, adjusted for population)

And to add insult to injury, the average price of pre-foreclosure houses listed on RealtyTrac (where I looked this up) was approximately 2x or more in Las Vegas, despite only have a 20% higher cost of living…

There’s also an interesting ecological / health issue with pools attached to abandoned or underfunded properties… the stagnant standing water (if not property treated with chemicals) are a hotbed for mosquitoes and mosquito related program activities.

The Southern Nevada Health District, which includes pool-packed Las Vegas, relies on neighbors’ complaints to identify pools green with algae. By June 25, the district’s “green pool” count outpaced last year’s numbers by more than a fourth. Many involved vacant homes in the process of foreclosure, environmental health supervisor Mark Bergtholdt says.

(The pool/mosquito problem is also present in Southern California and Arizona where pools are common and foreclosures are unfortunately increasing.)

Ok, so here’s another attempt at a discussion…? feel free to comment below or do your own post as a trackback to this one.

Almost all financial plans promote the concept of building a pool of “safe money” to cover emergencies and unexpected expenses.? This is certainly a good idea, though to think about it critically, we need to look at the real requirement behind the idea.? The idea isn’t just to have cash in a bank account, the point is to have immediate access to funds if/when you have unexpected situations crop up.

The traditional place for safe money would be a savings account or money market account.? Keeping this pool of money in such a safe place gives you many benefits — almost instant access, near zero chance of loss, etc.? You also have the benefit of knowing exactly how much you have available — maybe enough to cover expenses for 3 or 6 months were you to lose your job/income.

In many respects, you can consider your lines of credit (credit cards, home equity loans, etc.)? as part of your cash reserve.? You have nearly instant access to it — in some cases even quicker than getting money out of a money market account.? You have a near zero chance of losing the credit line — unless you sell your house (for HEL) or close your credit card account.? You also know how much you have available in the form of your credit limit (and your credit score can actually benefit from having a lot of unused credit available).? You can also potentially build a larger pool of safe money if you have good credit — in effect having a credit line that exceeds the same amount you can/would keep in cash.

So, allow me to posit a question — is there a real difference in keeping safe money in cash versus keeping the same amount in available credit?? (more…)

I’ve read plenty of vitrol about the Sharpe Ratio (return divided by volatility) and how dangerous is can be and how insufficient it is as a measure of risk, but I’ve never been one to go all black & white about any piece of information. I find it hard to believe that something valuable can’t be gleaned from what it is saying to an investor, at least on a relative scale. My current experience with UP (Uberman’s Portfolio)?has brought it to my attention just how much of an uphill battle we often create for ourselves when we invest. Part of why UP has done well in recent times is that it’s a rare blend of high yields on reasonable volatility with very dynamic risk control capabilities such as low costs and small incremental lot size. In other words, the Sharpe Ratios in the forex world are historically high. The volatility of the markets, especially when diversified, is not a large multiple of the yields. (more…)

Mike Shedlock (a.k.a. Mish) tends to have a bearish bent, but does good analysis of the macro scene.? He’s got some very good articles about the Bear Sterns hedge fund situation, and what is happening behind the headlines…

• The Redemption Trap & the Merrill Lynch Cover-Up
• Who’s Holding the Bag?

Here are some of the high-points:

Losses at hedge funds are being masked by “mark to model” pricing.? That means that their illiquid holdings are worth what the hedge funds say they’re worth, not what they can actually be sold for.? This is important for many reasons, one is that it goes into the monthly balance sheet, which determines bonuses for the hedge fund managers.? Think there’s an incentive to avoid realistic pricing?

State pensions are currently holding large amounts of sub-prime related securities, and will likely see losses in those investments if subprime loans continue to fail.

Normal markets can become illiquid in rare cases (e.g., the 87 stock market crash), illiquid markets have the same problem, but start further down the spectrum of problems.

“The derivatives business is like hell — easy to enter and almost impossible to exit.”

News hit last Friday that Western Digital was going to buy Komag Inc., a maker of hard drive parts. The impressive thing is that the premium paid is small to the price before the news (8%), and is lower than the average price of the last year (the average price can simply be the 200 day moving average: chart).? What a bargain for Western Digital.

I owned some Komag shares a while back as a value-based trade, but the grinding downtrend and my trailing stop loss trigger knocked me out well before it could damage my account capital. ? Ironically, I bought above the $32.25 price that WD is offering for shares, so even had I done the buy-and-hold thing (it was a value play for me, after all) I would still be taking a loss despite being right on the underlying value.

And, of course, someone knew about the deal before the news broke and (illegally) bought a lot of calls…? which doesn’t make sense to me.? The risk of getting caught seems too high relative to the returns…? but one thing I’ve learned is that we can always rely on some speculators not understanding the risks they are taking.

What the hell is my problem?

I can’t find time to write a simple entry in this blog for 8 months while taking on a new job, getting married, going on a honeymoon and moving from the East to West coast? Gosh!

Well, that’s about to change. [incredulous looks…] (more…)