In Search of the Perfect Investment

401(k) withdrawals, a sense of malaise and a tanking economy… Not happy events for an ebullient stockmarket.

When in doubt, stay out. When in doubt and in, sell covered calls.

Cash is king, though its benefit is not yield, but retention of capital.

Bonds still make sense — but not long duration. I’m selling some of my longer bonds. Some have a 15% return on them for the last year.

I like a little gamble on an upcoming disaster…

A black swan event soon? from today’s Bloomberg:

Titan Capital Joins Black Swan’s Taleb in Raising Bets on Crash

Titan Capital Group LLC, whose flagship volatility fund rose 21.6 percent as stocks tumbled in May, has raised bets on extreme market moves because investors’ views on the economic outlook have polarized.

The New York-based hedge fund, which manages about $400 million, has added “a lot more” cheap, out-of-the-money options, betting the market is underestimating the likelihood of a crash, founder Russell Abrams said in a phone interview. Treasuries, German government bonds and Japan’s yen are pricing in economic outcomes that are bleaker than the stock market expects, said the former co-head of U.S. equity derivative trading and convertible arbitrage at Merrill Lynch & Co.

“They are pointing to a much more dangerous environment than what equity investors believe,” he said in an interview Aug. 27. “Either you’re going to see the bond market make the the big move or the equity market make the big move; the current situation is not in equilibrium.”

Nassim Nicholas Taleb, whose book “The Black Swan” is about how unforeseen events can roil markets, said Aug. 11 he is “betting on the collapse of government bonds” and that investors should avoid stocks. Government bonds around the world have rallied on growing signs the global economic recovery is faltering, driving yields on two-year Treasury notes as well as German 30-year and 10-year bonds to record lows last week.

The yen reached a 15-year high of 83.60 per dollar Aug. 24. The Standard & Poor’s 500 Index gained 9.4 percent from July 1 until Aug. 10, when the Federal Reserve said that growth probably will be “more modest.”

“When you have assets so highly correlated, that makes the risks far, far greater,” said Abrams, who worked with the late Fischer Black researching derivative strategies at Goldman Sachs Group Inc. from 1992 to 1993. Black and Myron Scholes developed the Black-Scholes model of pricing options.

Out-of-the-money options are puts and calls whose strike price is either lower or higher than the market price of the underlying security. An agreement to sell is a put option; an agreement to buy is a call option.

Funds such as Titan Capital tend to outperform when markets are falling because they trade on volatility, which increases when prices decline. Volatility, as measured by the Chicago Board Options Exchange Volatility Index, was at a 14-month high in late May as the sovereign debt crisis swept through Europe.

The Titan Global Return Fund gained 21.6 percent in May, according to a letter to investors. Hedge funds globally lost 2.7 percent during the stock market rout that month, their worst monthly drop since October 2008, according to Eurekahedge Pte. The fund gained 13.2 percent in the first six months of the year, according to the investor letter.

The Chicago Board Options Exchange Volatility Index rose as high as 45.79 on May 20 as the S&P 500 lost 8.4 percent. The VIX, a measure of investor expectations for stock swings known as implied volatility, decreased to 27.37 Aug. 26.

The financial system is riskier than it was before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression, said Taleb, a professor at New York University who advises Santa Monica, California-based Universa Investments LP, a fund that bets on extreme market moves.

Any relapse in the U.S. economy would be “far worse” than the previous recession, Abrams said.

“The risk is that the government can’t keep spending money to keep the economy afloat,” he said. “The government’s thrown everything and if they fail, the confidence will plunge much faster.”

U.S. President Barack Obama’s American Recovery and Reinvestment Act spent $814 billion trying to spur growth. The U.S. government’s total outstanding debt is $13.4 trillion, according to Treasury figures.

As investors tend to become more risk averse later in the year, “any market downturn might lead to much higher volatility,” Abrams said.

Titan Capital, which managed almost $1 billion at the end of 2008 before the global financial crisis led to investor withdrawals, has opened an office in Hong Kong. Kyle Chuang, portfolio manager for Titan Asia Volatility Fund, relocated to Hong Kong from New York. Abrams founded Titan Capital in 2001.

The fund is set to trade more Chinese securities as the nation “becomes a more mature market,” Abrams said. It currently trades Chinese securities that are listed overseas.

The nation is on the cusp of a “big bang” of reforms that will give foreign investors greater access to capital markets, Nomura Holdings Inc. analysts led by Hong Kong-based Sean Darby wrote in a report Aug. 18.

The global fund allocates between 10 percent and 25 percent of its money to Asia and the remainder to the U.S., Abrams said.

Assessing new ventures. The good news: More ventures are popping up and ware wending my way. The bad news; Most of the entrepreneurs still think it’s the 1990s. They make ridiculous projections, take too much for themselves in management fees  and provide skimpy information to potential investors.

Big Banks Loosen Lending Standards. According to the Wall Street Journal, big banks in recent months eased standards on small-business lending for the first time since late 2006, a Fed survey found, but customers of all sizes showed little appetite for loans with the economy slowing.

New trend I’m seeing: Big real estate companies are forming money market-like funds to borrow money from private investors. They’re paying the same rate they pay the banks. Advantage for the borrower: More assured money. Despite the Journal’s story, banks have been slicing credit lines. Advantage for the lender: Higher interest than they can get elsewhere — with a bank CD or in traditional money market fund.

The history of Zippy’s townhouse. It’s two bedrooms with garage, about 1,200 square feet in a retirement community in Lakewood, a remote part of New Jersey. The previous owners bought it for $157K  in 2005. Zippy bought it for $130K in September 2007.  It’s now worth around $53K. He stopped paying his mortgage in March, 2010. He owes about $120K on the mortgage. He’s presently “negotiating” with Citigroup, whatever that means. He’s still living in the place. He’s talented, but unemployed and running fast through his savings and using up his 401(k).  He’s not untypical.

The U.S. Tennis Open is into its second day. The New York Times Magazine did a cover story with photos on Power Games — Women Who Hit Very hard.

The best part was several the amazing slow motion videos  on The Beauty of the Power Game. Please watch them.

You can watch the tennis 24/7 on the Tennis Channel, ESPN2 or CBS.  Make sure you’re watching in high-def. The  TV Schedule is here.

Rebooting the iPhone gets you better service. When you travel,  turn it fully off. Hold this button down for 15 seconds …

until you see a slide on the screen that says Power off. Turn it off, wait 2o seconds, then turn it on. the phone will then latch onto a nearby AT&T cell phone tower. Bingo, you have a stronger signal.I wrote about this trick yesterday as a way to get any service when you fly to a new city. But it also works around town — say between your home and your office.

Out of Iraq. Not. Our “combat” troops are out of Iraq. But we still have 50,000 “support” troops , plus innumerable outsourced, expensive hangers-on. Not my idea of a pull-out. We’ll hear more tonight from Obama. Yipee.

Ah, the joys of travel. Seen somewhere. Nice kid. Great t-shirt.

Taken with my new iPhone 4.

Sick old joke:

A senior citizen asked his eighty-year old buddy:
‘So I hear you’re getting married?’
‘Yep!’
‘Do I know her?’
‘Nope!’
‘This woman, is she good looking?’
‘Not really.’
‘Is she a good cook?’
‘Naw, she can’t cook too well.’
‘Does she have lots of money?’
‘Nope! Poor as a church mouse.’
‘Well, then, is she good in bed?’
‘I don’t know.’
‘Why in the world do you want to marry her then?’
‘Because she can still drive!’

Harry Newton,  who has finally learned the futility of advice-giving. Never was the old adage more true: You can lead a horse to water. But you can’t make it drink (i.e. listen). That goes for entrepreneurs and people who work in low positions for big corporations. Are you listening Michael Leddy?