Recipe for Disaster: The Formula That Killed Wall Street

This article goes along with one of our previous posts about the lovely Ms. Hot Heidi barteder. This is the more technical version of the story.

It pretty can be summed up by this warren buffet quote, which if you have been doing your reading, you would be familiar with.

"Beware of geeks bearing formulas."- Warren E. Buffet

David X.Li is that geek and the Gaussian copula function is his formula.


Now for the story.

Read it. Then come back to me. Don't keep me waiting.

Recipe for Disaster: The Formula That Killed Wall Street






Thanks
WSC- yerd me

How Credit Default Swaps work in Lamens Terms

"Heidi is the proprietor of a bar in Berlin . In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Heidi's bar. Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively. A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items. One day, although the prices are still climbing, a risk manager (subsequently of course fired, due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar. However they cannot pay back the debts. Heidi cannot fulfill her loan obligations and claims bankruptcy. DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties. The funds required for this purpose are obtained by a tax levied on the non-drinkers."

-WSJ




If you want a more technical version read this article.


And I pictured Heidi to look like this, obviously.

I hate being right, and now I am depressed.

So actually I lied I was wrong. I was calling for a push down to 7500..... Currently we are at 6500 on the Dow. GRRRRRRRRRREEEEEEEEEAAAAAAAAAATTTTTTTTTTTT.

Sorry, I have been slacking on the writing, I just can't muster up the energy with the market in its current state. Tear.


After reading this article I am even slightly more depressed. Here are few points I took away from the article.

"In the end, the timing of the bear's retreat will likely hinge on that great market imponderable: psychology. How investors feel has a lot to do with whether they start seeing mixed signals as proof of a glass half-full. "The [market] stress causes the analytical part of our brains to shut down, and that makes us hyperreactive to bad news," says Michael A. Ervolini, CEO of Cabot Research, a consultancy catering to institutional investors. People become convinced conditions are worse than rock-bottom bad, he says. Only after they see that they've overreacted can things improve: "We look for the market to start [saying] tomorrow will be brighter." - Business Week

I whole heartedly believe this is true, partly because it feel like it has happened to me and most of the people I associate with. I mean lets be honest watching the market go down a couple hundred points everyday really make you just want to take the ole mini van out for a spin the wrong way down 95 and hope for the best.

As much is this does hurt right now, one can only think that it has to be one of the greatest opportunities for people in the age bracket of 20-30 with money to put into the market. If you decided today to put 10k into the market (I don't condone such balls of steel) the market would only ( I say only like its just so easy) have to get back to 8125 for a 25% return on their money. Now based on that article it is going to take around 6-8 years for the Dow to get back to 14,000 level, but hell that would be a 115% return in 6 years. Not bad right? Well not unless you started investing 10k on the day it notched over 14,000.... Then you are just back to even, given you never invested a cent after that, which would just be dumb.




So people, for the time being, lets just try to gather those happy thoughts and turn the market back around. Throw on Mr. Jones by the Counting Crows and just stare at this picture, clearly it will solve all the problems you have.


Thanks
WSC

Obama-rama

So Im reading about the Obama budget and like I expected we are going to be taxed through the roof for the next four years. But what really surprized me was that he is taking out LIFO! haha so I guess those accounting professors are going to have to skip that chapter this semester. We will see what President Obama can do soon enough. Lets hope he pulls through or we are all in trouble.

Rick Santelli, The man of the people

So its been a few days since I posted last and thats only so you my last post could really sink in. I look like pure genius. Read and then tell me I'm not.

Thank You.

Now my buddy Rick Santelli from CNBC has also decided that the Government does not know what they are doing and once again THE MARKETS DON'T LIE.

Watch the video!!!!!! HERE

Rick's idea of having a website setup where people vote is a great idea and I think it should be implemented yesterday. I really hope Obama watches CNBC religiously, it should be streaming in the whitehouse everyday. Now I know he didn't create the current crisis, but I am not sure if what he is doing is really fixing it. Only time will tell.


Anyway, in 2012 I'm writing Rick Santelli on my presidential ballot, instead of the usual Mickey Mouse.


I mean he looks like a president.......

Short the market. Seems you can't lose

"Most investors by nature will "go long" when they buy stocks. Few investors naturally will short stocks (or bet on their decline) because they really don't know what to look for. Some investors see the shorting process as somewhat counter-intuitive to the traditional investing process since many stocks do appreciate over time. That said, there is a lot of money to be made by shorting, and in this article, we'll give you a list of signs that show when a stock might be ripe for a fall."- Investopedia.com

This is what you get when you type "to short" into Google. It is the first thing that shows up and that is what scares me. Is Google that smart? or is that market just that bad?

If you shorted the market 10 years ago and never looked at it again until today you would be up around 30%. That is terrible and bucks every trend instilled in many of us investors today.
This crap makes me sick, I mean to the point where i feel like I am being overcome with Black Death. You guys know that one, where you are up all night praying to the porcelain god from both ends. Ya that one.

Now pardon me if you can't read that graph, but don't worry it pretty much just says that if you put money in them market over the last 10 years you have less now than you did then. If you are a buy and hold investor that is, which I think encompasses the majority of us.



I really have no idea where I am going with this post here. I still think the market is going further down. 7500?? Pretty much I am just sick of the market acting the way it is, and the Obama team hasn't proven anything to me yet, except that they talk a good game.


Buy a shirt, my kids need food, we are in a recession.

Dr. Marc Faber Tells it How it is

Dr. Marc Faber, the investment guru, concluded his monthly bulletin (June 2008) with the following comments:

"The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer, it will go to India. If we purchase fruits and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car, it will go to Germany. If we purchase useless crap, it will go to Taiwan and none of it will help the American economy.The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in the US.I've been doing my part....."

I’m not sure who Dr. Faber is and I didn’t really want to take the time to research it but this is one of the funniest things I’ve read about the economy in a while. Usually i dont trust any dude with a pony tail but homeboy is not sugar coating anything he really does tell it how it is.