Taleb's Fund Raking It In As Black Swans Appear

By David Enke | November 03, 2008 | 3:55 PM | 2 Comments

Nassim Nicholas Taleb, author of the Black Swan, is using the impact of extreme events mentioned in the Black Swan to help the hedge fund he advises, Universa Investments L.P., benefit in October (see WSJ article). Separate funds in the Universa's Black Swan Protection Protocol were up between 65 percent to 115 percent in October alone. The fund has a strategy of buying far-out-of-the-money put options on stocks and stock indexes. Most of the time the fund will take small loses when nothing unusual happens, but occasionally a black swan even occurs (such as the recent 20% market decline in one month), causing the gains to be extraordinary. In addition to using deep out-of-the-money puts, the fund has a strategy of keeping more than 90% of its assets in cash or cash equivalents, and is believed to break even or only incur small losses while waiting for the next black swan event. The fund recently made huge profits buying cheap puts on the S&P 500 and AIG, with the S&P puts increasing in value over 50-fold. While profitable during times of extreme volatility changes, one has to wonder how often such changes and moves will occur. Even a previous fund that Taleb was involved with had to shut down in 2004 after lower volatility caused returns to suffer and investors to flee. But then again, a 50-fold increase in a few trades gives you time to wait for the next event. You just need to be patient, and of course, know where to look as you wait for the worst to happen. Easier said than done.

Distortions and Market Efficiency

By Roger Nusbaum | October 30, 2008 | 2:48 PM | 0 Comments

Temporary distortions happen in the market every now and then. They don't necessarily make sense and they are almost always fleeting. The most recent distortion came this week from Volkswagen (VOW in Germany and VLKAY for the ADRs) when for a few minutes it had the largest market cap of any stock in the world. The short version of the story is that Porsche owns most of the shares but there are many shares short and Porsche affected a short squeeze that sent the shares skyrocketing. Since Tuesday the shares have plummeted and are no longer the biggest company.

Wednesday's Breakouts & Breakdowns (10-29-08)

By John C. Lee | October 30, 2008 | 7:55 AM | 0 Comments

We continued the rally strong and what’s amazing is that breadth for the new highs-new lows has significantly improved. We hit 6 new highs and “only” 259 new lows. This was the improvement that I needed to see. It’s a start in the right direction but I can’t say that this is a permanent bottom. The important thing to know about permanent bottoms is that NO ONE knows where it’ll be. That’s a fact. People have been calling permanent bottoms since March. However, a tradable bottom is a different story. I would still wait for the rally to penetrate the confirmation line (nearest support or double bottom neckline) then wait for a healthy pullback to load up on longs. That would be least risky move. The key MA to watch is the 20-day MA.

 I see a lot more breakouts and fewer breakouts now and it looks very positive. The majority of breakouts are created by a breakaway gap. These gaps end a trend and start a new trend immediately, all on one day. They are one of the most reliable reversal signals available. I would still wait for a healthy pullback on most of these because if the stock breaks down, then there’s no buffer against major loss. What I don’t want to see are more parabolic spikes because they become unsustainable. The shape of this rally will give you an idea if it will last for days or for weeks.

 

 

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Confidence is the New Buzzword

By Jim Farrish | October 29, 2008 | 3:39 PM | 0 Comments

Plenty of talk today around the concept of confidence stepping up. That may be true, but I am not buying into the confidence measurement of the media. One big up day doesn't cancel all the negative sentiment and skepticism we have experienced over the last eight weeks. Crude prices rise on... confidence. Yen rises on rumored rate cuts in Japan sparking... confidence. Libor rates fall below 3.5% on... confidence. Fed rate cuts inspire... confidence.

Tuesday's Breakouts & Breakdowns (10-28-08)

By John C. Lee | October 29, 2008 | 1:09 AM | 0 Comments

Today was an impressive day, but volume remained unimpressive.  Volume hasn’t really exploded in comparison to the other days in a 2-week period on both the NYSE and the NASDAQ. Remember Oct 10’s volume? That’s what I would like to see, another surge and more participation. I do wonder, “Where is the money flow coming from, especially when hedge funds, retail investors and everyone else in between has lost so much investment capital?” The rest of this week will serve as confirmation days if, in fact, this is a genuine power rally.

Monday’s Breakdowns (No Breakouts, Sorry! 10-27-08)

By John C. Lee | October 27, 2008 | 8:23 PM | 0 Comments

Well, all I can say for the market is, “Not Good”. Technically, the overall market already broke down if we don’t count the low achieved on October 12. This low that occurred on Friday on high volume was the absolute last level remaining before the market threatens to go into free fall again. Right now, the chances of a major rally to the upside are slim. After all, you need fresh buying power, a.k.a. Money, to fuel a rally, but people lost most of it, so who’s going to start and sustain a rally?

Why EWJ May Make My Christmas Wish List

By Gary Gordon | October 27, 2008 | 3:50 PM | 0 Comments

Bears "swear" that the stock market's crash in 2008 was inevitable, even predictable. However, recessions don't typically push major indexes down 45% in 10 months. Neither do bank crises or hedge-fund collapses. Bulls "swear" that the worst is behind us, though they've been saying that since March. How many times have we heard the fundamental believers talk about cheap valuations? (Even with the right facts, they fail to account for the greed-fear dance.)

Brrrrace Yourself For More Whipsaws

By Roger Nusbaum | October 27, 2008 | 2:04 PM | 1 Comment

That title is the punch line to a dirty joke. I think market participants need to brace themselves for some serious whipsaw to come. As the crash has unfolded it has been clear that fundamentals became far less important as prices cascaded lower. Panics have happened before of course (and will happen again) and part of the process is some sort of violent, corrective rally. Just as the selling had little to do with fundamentals, so too would a corrective rally.

CDS Traders Asked To Reduce Risk: If It Was Only That Easy!

By David Enke | October 24, 2008 | 12:06 PM | 0 Comments

According to a Financial Times article, a European commission examining the credit derivatives industry is asking CDS traders to reduce risk. Ah, if it was only that easy. Kind of like asking someone running a garage sale in the 1980s to sell their old eight-track player for what they paid for it. For one, you are not going to get your original value back, and two, very few people are interested in buying something that may be worthless tomorrow. It is also kind of ironic how we need to reduce risk on the very item we were using to reduce risk in the first place. At some point you cannot just keep passing risk along. Someone has to bear it - which is unfortunately where the government steps in when such exposure is contagious. Fortunately, besides asking for the obvious (and possibly impossible), the commission is forcing its hand a little, stressing how they want a clearinghouse for credit derivatives - otherwise legislation could be introduced. If that is not enough to put the fear in the industry, I am not sure what else is.

Get Ready For Further Drops

By Jerry Slusiewicz | October 24, 2008 | 10:37 AM | 0 Comments

This will be another of my short but not so sweet dire predictions.  The fact that the market futures were lock limit down this morning before today's open and that it is a Friday in October does not bode well for market participants that are long (holding stock positions).  We could see a huge drop in the last hour of trading today.  This would be followed by a much lower open Monday and my previous prediction of a significant drop from our Flag Pole with a Pennant formation could come true.

There is still too much complacency from investors that the bottom from two weeks ago will hold.  If and when it does fail, the masses will be devastated and the selling will happen in earnest setting up a great buying opportunity.  Those folks down 30 -50% this year will lose what little faith they have left that the markets will ever work again, perhaps as soon as today and Monday.  If we take out the lows for the year look out below!