March 29th, 2009 at 1:31 pm
It is all just one big poker game.

“you’ve got to know when to holdem, know when to foldem, know when to walk away, know when to run”
Unquote

Yep. Too soon old, too late smart.

Told ya so again
The Market Ticker ^ | 3/30/09 | Karl Denninger
Posted on Mon Mar 30 2009 14:34:38 GMT-0500 (Central Daylight Time) by FromLori

Oops.

Under Millard’s strategy, the pension agency was directed to invest 55 percent of its funds in stocks and real estate. That included 20 percent in US stocks, 19 percent in foreign stocks, 6 percent in what the agency’s records term “emerging market” stocks, 5 percent in private real estate and 5 percent in private equity firms.

What I warned of was the potential loss of your private pensions a few months back, if you remember.

Here’s the formula for your impending doom, if you forgot:

The S&P 500 goes to 300 as the “bailouts” and “handouts” collapse the economy. The PGGC’s equity investments are worth 20 cents on the dollar, the private equity and REITs are zeros. This puts the fund 40% underwater across-the-board. It is unable to pay and goes to Congress. Congress can’t fund additional borrowing because the bond market has dislocated. You get 10 cents on the dollar for your supposedly ‘guaranteed’ pension.

(Excerpt) Read more at market-ticker.org …

http://market-ticker.org/archives/2009/03/30.html

And..

Was This An Outright Scam? (AIG – Again)
Hattip all over, including the forum and Zerohedge:

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent – these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades – ever”.

…..

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

Was it deemed “critically important” by Treasury that these employees remain under employment agreements – including perhaps confidentiality, one wonders, therefore necessitating huge “retention bonuses”, lest they leave and sing?

Now the alleged mechanism for the conduit to shuffle AIG bailout money through to the banks, including banks not in the United States, comes out.

All to “save the financial system” eh?

There was no need for “new authority” was there Tim? All you had to do, if this account is correct, is tell AIG to stick it where the sun doesn’t shine (and send in a few cops) for making trades that were intentional money-losers and designed to stick the taxpayer with a monstrous (to the tune of $170 billion thus far) bill.

Where are the cops?

Oh wait – I know – they’re in New York!

Paging Mr. Cuomo. Mr. Cuomo you have a call on Line 1!

http://market-ticker.org/archives/2009/03/29.html

When the S&P goes up, you will go up as well, but probably not as much. When the S&P goes down, your portfolio will go down, but not as much because you have bonds which act as shock absorbers. The key here is that over time, because you didn’t go down as far as the S&P did or as high as the S&P did, you’ll end up with a return just below the S&P 500. But, in doing so, you’ve minimized your losses in the down years and took advantage of the upsides in good years. The long-term trend is where diversification pays off.

These graphs are innacurate in that if you created a portfolio that was weighted accordingly by MPT (with some bonds and then different asset classes of stocks), the portfolio would still be doing ok. You cannot diversify away all risk, the current downturn is associated with systematic risk. Diversification seeks to eliminate non-systematic risk of a single company. Using MPT can successfully achieve this result. So, while you may be asking yourself why you pay a broker for losing money, you need to ask yourself, over the long-term, am I eliminating non-systematic risk and am I losing as much as the S&P?

The answer is yes and no. You’ve eliminated or reduced non-systematic risk which only leaves systematic risk. That’s what we’re dealing with now, so when your portfolio is down, don’t blame diversification. Diversification did its job, you aren’t down 70-80% because you invested all in C. No, you’re maybe down as much as the market or a little less than the market. That’s because diversification eliminated the non-systematic risk but you still have to deal with systematic risk.

I think people think that diversification will always guarantee you a portfolio that performs in down years and outperforms in up years. It does not. It provides you with protection from non-systematic risk, that’s all. There is no good way to eliminate systematic risk and still get the returns of a diversified portfolio.

I am with you Eric- you are making BR’s point however.

What Does Asset Class Mean?
A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).

So… you compare the same asset class against the same asset class, and strangely the same asset class is correlated to the same asset class…. that is WEIRD!!!

but by reducing risk with inverse ETF’s in a stock portfolio you minimize potential returns- the objective is to finesse your portfolio in anticipation of your expectations of the market- that is where the money is made (or lost)- unless your objective, in a market where you are unsure of direction, is to minimize losses- best way to do that of course is cash.

The RISKS:

Company/Stock specific risk, industry, sector risk, currency risk, geopolitical risk, liquidity risk and the market (bond and Stocks-domestic, developed, emerging etc), Black swan, Terrorism and Minsky moment kind of risk.

Diversification with strategy allocation (?percent) of uncorrelated assets will reduce but not eliminate it. Market risk can be reduced ONLY by betting against it. Again the need and lack of appreciation of inverse ETFs and Bear MFunds in a portfolio is the biggest blind spot and the reason majority money managers incl MFunds lost big in 2008.

The biggest unknown is the correct anticipation of SECULAR ,Bull vs Bear Mkt, ahead. This is my 2 cents!