In terms of "real assets", I added more earlier today to the Salient MLP Energy and Infra fund (SMF), a closed-end MLP fund that can actually hedge.
From the prospectus:
"HEDGING AND OTHER STRATEGIES
We currently expect to utilize hedging techniques such as interest rate swaps to mitigate potential
interest rate risk on a portion of our Financial Leverage. Such interest rate swaps would principally be
used to protect us against higher costs on our Financial Leverage resulting from increases in both shortterm and long-term interest rates. We anticipate that the majority of our interest rate hedges will be
interest rate swap contracts with financial institutions.
We also may use various hedging and other risk management strategies to seek to manage various risks
including market, credit and tail risks. Such hedging strategies would be utilized to seek to protect the
value of our portfolio, for example, against possible adverse changes in the market value of securities
held in our portfolio. We may execute our hedging and risk management strategy by engaging in a variety
of transactions, including buying or selling options or futures contracts on indexes and entering into total
return swap contracts. See “Risk Factors—Risks Related to Our Investments and Investment
Techniques—Derivatives Risk.”
We may use arbitrage and other strategies to try to generate additional return and protect the downside
risk of the portfolio. As part of such strategies, we may purchase call options or put options and enter into
total return swap contracts. A total return swap is a contract between two parties designed to replicate the
economics of directly owning or shorting a security. We may enter into total return swaps with financial
institutions related to equity investments in certain Master Limited Partnerships and Canadian Income
Trusts (as defined in the SAI).
In addition, we may engage in paired long-short trades to arbitrage pricing disparities in securities held
in our portfolio or sell securities short. Paired trading consists of taking a long position in one security
and concurrently taking a short position in another security within the same or an affiliated issuer.
With a
long position, we purchase a stock outright; whereas with a short position, we would sell a security that
we do not own and must borrow to meet our settlement obligations. We will realize a profit or incur a loss
from a short position depending on whether the value of the underlying stock decreases or increases,
respectively, between the time the stock is sold and when we replace the borrowed security. See “Risk
Factors—Risks Related to Our Investments and Investment Techniques—Short Sales Risk.” We do not
presently intend to short securities in the portfolio, and do not intend in the future, to the extent short sale
transactions occur, to have a net short position that exceeds 30% of our total assets.
To a lesser extent, we currently expect to write call options for the purpose of generating realized gains
or reducing our ownership of certain securities. We typically will only write call options on securities that
we hold in our portfolio (i.e., covered calls). A call option on a security is a contract that gives the holder
of such call option the right to buy the security underlying the call option from the writer of such call
option at a specified price at any time during the term of the option. At the time the call option is sold, the
writer of a call option receives a premium (or call premium) from the buyer of such call option. If we
write a call option on a security, we have the obligation upon exercise of such call option to deliver the
underlying security upon payment of the exercise price. When we write a call option, an amount equal to
the premium received by us will be recorded as a liability and will be subsequently adjusted to the current
fair value of the option written. Premiums received from writing options that expire unexercised are
treated by us as realized gains from investments on the expiration date. If we repurchase a written call
option prior to its exercise, the difference between the premium received and the amount paid to
repurchase the option is treated as a realized gain or realized loss. If a call option is exercised, the
premium is added to the proceeds from the sale of the underlying security in determining whether we
have realized a gain or loss. We, as the writer of the option, bear the market risk of an unfavorable change
in the price of the security underlying the written option.
4"

HSTRX: The consistent returns this fund gives is kind of amazing to me. I was swayed to buy this fund back in 2009 when former FundAlarm poster Fundmentals talked about it. He was right on the money about it's steady return and it's ability to preserve capital in poor economic times.
Take a look at these consistent yearly returns:
since 2003 = 7%
5 years = 7&
3 years = 7%
1 year = 6%
ytd (extrapolated thu 2011) = 7%
And it gets these consistent returns with volatility as low or lower than most bond funds. I hold this fund as part of my fixed income category with the expectaion it will deliver 6-7%. I've been pretty happy with it. It's not going to rocket up in a bull market, but it's not going to loose a lot of money when things get bad either. I think this fund suites Hussman's conservative style to a tee (more so than his HSGFX fund imho).
Thanks for the tip Fundmentals - wherever you are.

Many stock funds have very little cash on hand right now to buy stocks "on sale". This is due in part to investors selling out of these stock funds drying up the "redemption cash" position that these funds hold. Also, few stock fund managers make holding cash a priority. ICMAX = Intrepid Small Cap has a 37% cash position right now. Do any of your mutual fund managers hold lots of cash?
From the article:
"Many managers wish they could be in Mark Travis' position. One of the funds he co-manages, Intrepid Small Cap (ICMAX) had a 37 percent cash stake as stocks sank this week. Other funds at Travis' company, Intrepid Capital Management, were 10 to 28 percent in cash.
When the Dow Jones industrial average plunged 635 points on Monday, Travis bought shares of Collective Brands — the operator of Payless ShoeSource stores — after they sank below $10 a share. They had traded around $22 in April, when Travis considered the stock too pricey. He kept an eye on it because he figures Payless' low prices will bolster sales in a tough economy.
Stocks like that are one of the reasons Travis and his co-managers rarely let their cash slip below 10 percent.
"If we had been fully invested on a day like Monday, it would have been next to impossible to sell one of our stocks so we could buy another that we liked better," Travis says.
Their tendency to keep plenty of cash has also helped limit losses when stocks fall — one of the reasons why three of Intrepid's four funds have 5-star ratings from Morningstar."
http://www.thestreet.com/_yahoo/story/11168438/1/3-companies-that-are-potential-buyout-targets.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
Anyone putting their cash (fund redemptions) to work with fund managers who hold higher cash positions?
bee

Since I was retiring at 65 later in the year, last Jan I reallocated my all-equities funds 401k to half 3 percent guaranteed fund and left half in a mix of equities funds. It had a decent gain thru June 30 when I rolled it over to a Vanguard IRA, half in Total Bond Market Index, 40 percent Total Stock Mkt and 10 percent in Total International Index. Though I'm still down about 4.5 percent from the recent peak, it was a bit comforting last week to see the bond fund gains cushioning those awful losses in equites funds. Yes, I know bond funds can lose too, but Vang's Total Bond Market fund held up nicely in 2008-09 too.

Hi Catch ... Skeeter here,
I don't really know how; but, I am but slick for the year-to-date ... and, down about 1% last week.
From my perspective stocks in general are oversold and presently offer good value.
I compute the Forward P/E Ratio for the S&P 500 Index at 11.3 (1179/104=11.3). In comparison, the Index has a historical average Forward P/E Ratio of 15.5. Since, these are not normal times, lets discount that by about 10% to 14. With this, stocks from my perspective are now selling at about a 20% discount.
As such, I am still buying equity ballast at a measured pace. As anticapted gains are had form these transactions ... I will then sell them off sometime in the future booking a profit. Currently, my portfolio is somewhere between 55% to 60% equity.
Good Investing,
Skeeter

A Good Saturday morn'in to ya'll,
A quick one today..........
From the cash account, we purchased FINPX and added to FSAGX. A portion of DHOAX was sold and monies used to purchase APOIX. And noted in another post, we may have purchased these at the near term top. Only time will tell whether this was foolish and if we get lucky. This house still finds too much smoke in the air and looking at these new fund(s)/additions to prove positive in the future; and if not, will be a self inflicted monetary wound coming off of the high spirits of the vacation period.
Our biggest exposure area is in high yield bond funds; and shows them to now be down YTD in the - 1 to -2% area. Being cousins to the equity market has pressured this area, but the YTD numbers are still ahead of broad equity returns, and of course; providing a decent yield. IF the big market traders still pressure equities to retreat, we too; may have to unload more HY/HI funds, regardless of the yields in place with these.
Hopefully, you are able; if you choose to view the highlighted tickers here. I posted a note about this in the "tech section" as I no longer "see" the highlighted tickers in our own posts.
Ok, this is all for now.
Take care,
Catch
The immediate below % of holdings are only determined by a "fund" name, NO M* this week for changes the M* breaddown is at the end of this write; and a bit more realtistic, although with flaws, too.
CASH = 8.3%
Mixed bond funds = 81.8%
Equity funds = 9.9%
-Investment grade bond funds 18.6%
-Diversified bond funds 18.5%
-HY/HI bond funds 25.8%
-Total bond funds 14.6%
-Foreign EM/debt bond funds 4.3%
-U.S./Int'l equity/speciality funds 9.9%
This is our current list: (NOTE: I have added a speciality grouping below for a few of fund types)
---High Yield/High Income Bond funds
FAGIX Fid Capital & Income
SPHIX Fid High Income
FHIIX Fed High Income
DIHYX TransAmerica HY
DHOAX Delaware HY (front load waived)
---Total Bond funds
FTBFX Fid Total
PTTRX Pimco Total
---Investment Grade Bonds
APOIX Amer. Cent. TIPS Bond
DGCIX Delaware Corp. Bd
FBNDX Fid Invest Grade
FINPX Fidelity TIPS Bond
OPBYX Oppenheimer Core Bond
---Global/Diversified Bonds
FSICX Fid Strategic Income
FNMIX Fid New Markets
DPFFX Delaware Diversified
TEGBX Templeton Global (load waived)
LSBDX Loomis Sayles
---Speciality Funds (sectors or mixed allocation)
FCVSX Fidelity Convertible Securities (bond/equity mix)
FRIFX Fidelity Real Estate Income (bond/equity mix)
FSAVX Fidelity Select Auto
FFGCX Fidelity Global Commodity
FDLSX Fidelity Select Leisure
FSAGX Fidelity Select Precious Metals
RNCOX RiverNorth Core Opportunity (bond/equity)
---Equity-Domestic/Foreign
CAMAX Cambiar Aggressive Value
FDVLX Fidelity Value
FSLVX Fidelity Lg. Cap Value
FLPSX Fidelity Low Price Stock

Maybe someone should ask about this:
http://www.zerohedge.com/news/bank-america-scrambles-shore-capital-negotiations-sell-17-billion-china-construction-bank-stake

I think the issue becomes looking at what would appear to be a very (very) low-growth environment that also has a negative real rate of return and what that will result in, including what I believe will be continued flight of capital.
As I noted in another thread today, the Swiss Franc gained 5% today.
Edited to add:
http://www.zerohedge.com/news/price-big-mac-now-1719-zurich
Big Mac now $17.19 in Zurich.

Morn'in Cathy, NickF presented a nice write regarding TIPS functions. I still do contend that the upward gains in TIPS this year comes more from the relationship to safety of Treasury issues. One must know and consider that many bond funds and soverign wealth funds (China and others) do not only buy the more obvious Treasury issues, but also U.S. TIPS. As I have noted in the past at FA, our portfolio is not so much or only a function of a given yield, but a consideration as to the monies flowing into a bond sector and causing a price appreciation. Yes, we are chasing performance (price appreciation); although some bond funds move in slow motion when compared to equity funds....nickel, dime; nickel dime.
And yes, we here are performance chasers to one degree or another, eh? Otherwise, MFO would CDO (Cert. of Deposit Observer) and all of us would be discussing who or what is offering the best CD rate of the day.
One may expect another decent performance in TIPS funds today; perhaps thru the week, and until the current equity unwind finds the money flows into a "bottom feeding" mode and buying low.
Regards,
Catch

In terms of frontier markets, look at the list of people (former US Sec of State Madeline Albright, Soros, part of the World Bank and the Rothschilds) backing this African telecom company. I do think it's worth consideration of a little bit of money for the long-term in these areas. (I do own RIT Capital Partners.)
http://www.htghana.com/index.php/about/our_investors
In terms of funds, FPA Crescent (2.52%) held up fine, but Ivy Asset (-5+%) and Blackrock Allocation (3.2% down) not so much.

Hi Guys,
The controversial President’s Plunge Protection Team (the PPT) is Missing-In-Action (MIA). That’s a tongue in cheek opening since I am not a true believer in the tooth fairy.
The PPT is not an urban myth; it is a Washington myth. Its purported market action charter is an illusion. The PPT will not mount its white horse, nor will it ride to rescue our current dysfunctional equity marketplace.
Recall that the basis for the PPT legion was initiated when Ronald Reagan assembled the President’s Working Group several months after the infamous October, 1987 crash. The key players in that group are the Secretary of the Treasury and the Chairman of the Federal Reserve. The dominant characteristic of the group is that its meetings are held in tight secrecy, hence the speculation that their franchise includes indirect and direct equity market interventions. There is no evidence that this myth is grounded in hard data. It makes a great, and comforting story. It is false.
How to explain and understand yesterday’s equity market disarray that was global in scope? That’s not an easy question since its causes are multi-dimensional; it is a complex interactive problem with many root causes. Here is my quick, and incomplete answer.
My assertions (that’s all they are) are based on the Technology Adoption Life Cycle (TALC) model that was reported in 1998 book titled “The Gorilla Game”, with Geoffrey Moore as the primary author. That book established rules on how to choose winners in the high technology world. That same model has application in the entire equity marketplace.
The book states that most progress is continuous, but game changing innovations are discontinuous (like exogenous market shocks), and take time to penetrate the marketplace in totality. The TALC is divided into 5 reaction regimes: (1) Enthusiasts (true believers) (2) Visionaries (first to jump, often wrongly), (3) Pragmatists (the Herd), (4) Conservatives (the late towel throwers), and Skeptics (the real market contrarians).
The Gorilla Game argues that a chasm (a time gap) exists between when there is some small market acceptance by Visionaries and when the bulk of prospective customers (the Pragmatic and Conservative segments) are prepared to change their habits. The Herd likes the status quo and requires some special motivation. The chasm is jumped when small subsets ( a micro minority within the macro Pragmatic group) are provoked (perhaps panic and/or fear tilts the decision) into action.
The market reaction gains momentum as the basic instinct of the herd takes hold. The Gorilla Game calls this phase the Tornado, a phase that is dominated by rapid rates of change, a panicked herd, a real stampede. Dies this seem familiar?
What prompted the stampede? That’s difficult because it has many moving parts. Certainly the proximate global crisis crystallized with the Italian announcement. Within the United States, the proximate cause could be ascribed to the poor GDP growth rate that seems to be constantly revised downward, the stagnant unemployment numbers, and uncertainty over government inaction and regulations. We also had a perfect storm scenario in that the S&P 500 Index 200-day moving average was about to be penetrated in conjunction with these other real world events. So automatic technical indicator signals were penetrated and reinforced world happenings. These were all triggering events.
On a longer time scale, several disturbing patterns are evolving and make recovery more challenging.
Our acceptance of excessive debt financing needs to be controlled, both public and private. If you believe our public debt is enormous and dangerous, you should explore just how much our private debt has mushroomed. It puts great downward pressure on spending which is 70 % of the US economy.
In his 2008 book “Bad Money”, Kevin Phillips notes that our Financial industries contribution to the GDP is now larger than the percentage generated by our Industrial segment (like 20 % to 12 %). Phillips observes that our dominant and growing dependence upon financial invention does not speak well for our National’s retention of world leadership. Historically, when money matters dominated economic policies, the wealth of the nation deteriorated. The fall of great superpowers like Spain in the 16th century, like Holland n the 17th century, and like Great Britain in the 20th century can be traced to an oversized commitment to financial matters. The good news is that the United States has many more resources (especially its size and its persistent, resourceful, and innovative people) at its disposal.
In his classic book “The Rise and Fall of the Great Powers”, Paul Kennedy identifies military expenditures used at first to expand empire, and later to defend that empire, as a major component in the declining years of a superpowers lifecycle. The same players that Phillips mentioned are highlighted in Kennedy’s tome. The good news here is that the US is not an expansionary nation, and the GDP fraction that it expends on our military institutions is shrinking. My belief is that we should not necessarily diminish its size, but should reallocate its global presence.
So, what to do? As a cohort, those participating on this forum are not market timers, we are not day traders. That is clearly established since we basically own mutual funds, and were prohibited from acting during the panic. When Thursday ended, we had already absorbed a 3 % to a 5 % decrease in our equity holdings wealth. That’s gone. Might the marketplace suffer more losses? Probably a little more, since momentum persists. But will the market totally meltdown?
My answer is a loud NO.
Our real resources remain intact. We have suffered no wars, no destroyed homes or even boken windows caused by natural disasters. Our losses are more mental than real. We will recover, and we will recover smartly. Market prices are a bargain. Price to earnings ratios are attractive. Our corporate cohort has strong financial balance sheets and has money to invest. On a global basis, our relative strength is improving. Foreigners have already recognized our relative stability and are investing in government bonds.
I will stay the course. I can do this since I have plenty of reserve cash. I hope you all are in a similar position. Be brave. The PPT is MIA, but we're OK.
I prepared this posting very quickly without checking facts and without even proofreading this submittal. I hope my errors are minimal, and that the posting makes some small sense.
Best Regards.

Couldn't quite manage a "top ten" list but . . .
1. Birds of a feather fell together: A number of fund families clustered at the top (or bottom) of the one-day returns. The Fairholme's suffered across the board – Fairholme Allocation (FAAFX) and Fairholme Focused Income (FOCIX) were at the bottoms of their respective peer groups while Fairholme (FAIRX) was merely "well below average." Likewise with Templeton's global bond lineup (Global Bond, International Bond, Global Total Return) and the Driehaus income funds (Active Income and Select Credit) were uniformly trashed.
2. On the flip side, Hussman Strategic Total Return (HSTRX), Strategic Growth (HSGFX) and Strategic International (HSIEX) all topped their respective groups.
3. Mr. Gundlach & co. had a string of strong performances with DoubleLine Emerging Markets Fixed Income (DBLEX), RiverNorth Doubleline Strategic Income (RNSIX), and ASTON/DoubleLine Core Plus Fixed Income (ADLIX) all posting top 10 results. All of the DoubleLine funds (include Core Fixed Income, Total Return and Multi-Asset Growth) were in the black, with gains of 0.35 - 0.70%.
4. RiverPark Short Term High Yield (RPHYX) ignored the market again. NAV dropped a penny (0.1%), which is a fairly common fluctuation for the fund. It finished in the top 10 high yield funds.
5. Eric Cinnamond's Aston / River Road Independent Value (ARIVX) was one of the top five small-value funds, along with cash-heavy Pinnacle Value (PVFIX), Queens Road Small Cap Value (QRSVX) and his former fund, Intrepid Small Cap (ICMAX). The Observer has profiled all of them as solid, conservative choices.
6. Frontier markets paid less attention to the turmoil than did emerging markets. Of the 10 best-performing emerging markets funds, eight were explicitly "frontier" funds or e.m. small caps.
7. Matthews dominated Asia: almost all of the Matthews funds finished in the top ten. Those include Asia Dividend, Asia Growth, Asian Growth & Income, Asia Small Companies, India, Pacific Tiger and Japan. Of them all, Asia Dividend had the smallest loss, down 0.55% They also represent three of the 10 best international funds of any variety.
8. Fidelity Leveraged Company Stock (FLVCX) reminded me of why its investors rarely make money; the fund dropped over 4% for one of the day's worst showings.
9. I don't know what the First Trust Value Line Target 25 (no ticker) is supposed to do, but I'm betting that dropping 7% in a day – the worst performance of any unleveraged fund and the second worst among all funds – won't help it.

Thanks for update to RiverPark Short Term High Yield (RPHYX).
Took a position in this unusual fund after being introduced here,
NAV continues to be extremely stable while (theoretically) avoiding
most interest rate risk and credit risk. Practice may vary from theory,
see triple-A securitizations eventuating in half the global debt issuance
being riskless AAA followed by misplaced shirts. Global debt issuance is
again over half riskless triple-A, sovereign. To avoid misplacement a strait-jacket
that buckles in the back and keeps hands off keyboard is recommended.
http://seekingalpha.com/article/279674-the-horrifying-aaa-debt-issuance-chart
http://www.pimco.com/EN/Insights/Pages/Kings-of-the-Wild-Frontier.aspx
RiverNorth Doubleline Strategic Inc (RNSIX) continues to do well with both
yield and probably from the closed end fund sleeve, gains.

Reply to @VintageFreak: Vintage, I am not going to argue much so you can have the last work after this.
Obviously, you have your own ideas. You do not see risk as long as there is no permanent loss of capital. You are fine if the recovery from temporary losses takes 5, 10, 100 years (OK, I am exaggerating). And you will never need this money before such undefined timeline. Unfortunately, to me your definition for me is a pie in the sky. You are ignoring many risks that are true to real life.
You really do not know if the fund decline or the funds investments in the securities that has declined has had permanent loss of capital. Only time will tell and you you might not think you had a permanent loss now, time might prove otherwise.
Also, there is also opportunity risk. While hanging on to loss positions, you might be giving up on better alternatives. You have opportunity cost and risk. Permanent loss and opportunity cost risk are only accountable after the fact. So, you really do not have any measure of risk but an abstract concept or something that is observable after the fact.
I agree volatility is not very good in capturing risk. It still gives me an idea on the riskiness of the security. Yours does not even rise to that level for me.
It might be OK for you. I've rather have something better to work with even if it is imperfect. Thanks for your comments though.

With respect, I don't see the point in buying an active fund manager, who in my case eats his own cooking and then handicap/dismiss him by the volatility (sic) of his fund. If I own funds that are not volatile it is more because the fund manager worries about permanent loss of capital, equating THAT with risk. There is a difference between cause and effect.
Anyone worried about beta should be buying index funds. After all beta is a relative and not absolute measure. A lot of people - myself included - lost money because they didn't know what the F they were doing. They were letting those peddling financial pron influence their decisions. And they continue to do so. Beta, Theta, Omega. This used to be a joke - there are three kinds of lies : lies, damned lies and Statistics. I don't consider that a joke anymore. Here's another one - Statistics is like a Bikini; what it reveals is interesting, but what it conceals is vital. I don't laugh when I hear that anymore either.
Buying an active fund means assuming manager risk first and foremost. Market risk is secondary. Buying a sector fund is obviously more risky than buying a more diversified fund since one is putting more of ones eggs in a more narrowly scoped basket obviously more susceptible to changes in like securities. I can buy that THIS is risky. If sector funds are ALSO more volatile than ANY benchmark one wants to compare against, that's incidental.
Again, Beta is Elementary. Homework is Fundamental.

Reply to @VintageFreak:
Hi VF, I, of course; don't know how long the TIPS/funds will hold their gains; but your VIPSX gained a bit more wiggle room to the upside. This sector should continue to benefit as long as folks seek safety from the machinations in DC; and I feel this may persist regardless of a debt/debt ceiling agreement, which at the best; will not be a real fix to anything as I read/hear regarding the current proposals.
Excellent............
Take care,
Catch

Hi Guys,
Are you curious about the roots, the principle actors, and the interconnectivity that caused the housing bubble and its financial support system to inflate and then implode?
If you are and want to satisfy that curiosity in a painless way, I suggest you secure a copy of Michael Lewis’s 2010 book “The Big Short”.
Lewis’s reporting is not pure academic research, but it seems to be an accurate and especially lively record of this wealth destroying event. Michael Lewis is the ultimate storyteller. His most recent book, like those before it, is filled with fascinating characters who played a major role in the development and resolution of the crisis, and permit Lewis to present the complex details of its financial underpinnings (like collateralized Debt Obligations (CDO) and Swaps of these opaque products) in an understandable and comprehensive manner.
“The Big Short” reveals the incentives and the financial machinery that was invented and introduced by a Wall Street that was mostly driven by the profit motive. Lewis names those responsible, and offers no forbearance. The book is filled with villains, but also identifies some unlikely heroes.
At the base of the villain list are the individual home buyers, many of whom simply lied about their jobs and incomes. In the end, the no-documentation loans originated by the loaning agencies and accepted by unqualified home buyers were doomed. Lewis reports about a Bakersfield, California strawberry picker who received a $724,000 loan, the total selling price of the house, when his annual income was merely $14,000. Do you think he survived the market downturn, or could even pay his summer air conditioning electrical bill?
The deceptive practices and misleading interest rate quotes generated by outfits like the failed Household Finance Corporation (HFC) were highlighted. The discredited HFC operation sold loans to uneducated buyers by improperly citing the interest rate on an equivalent 30-year mortgage, that was actually signed on the basis of a 15-year contract. This trickery permitted the unscrupulous lender to quote a false annual rate that was almost one-half the rate he was charging in reality.
The big Wall Street Investment Banks were major players. They not only invented many of these highly leveraged products, but they also did themselves a disservice using grossly faulty statistical analyses methods that underestimated default probabilities and their own Value-at-Risk. In the end, they bought into their own junk science.
Lewis identified Goldman-Sachs, Deutsche Bank, and Morgan Stanley as essential innovators, participants, and big time losers. Some of these firms kept selling their defective products to sophisticated, but unknowing, institutional investors and hedge funds even while the markets for these dubious products were collapsing.
Lewis described several financial advisors whose incentives were profit alone, without regard to protect their unsuspecting, far too trusting, clients. These advisors demanded and were rewarded with high fees for this disservice.
The analytical models were based on a set of doubtful assumptions. The data set timeframe was far too small to be statistically relevant. The modeling wrongly assumed diversification, not only in location, but also in product mix. The models postulated low correlation coefficients when in fact, the correlations approached the perfect level. A normal Bell Curve distribution was embedded in the Black-Scholes formulation that was used to price the products. That also proved to be erroneous. As did the fact that statistical fat-tails and the likelihood of Black Swan events were totally ignored
The statistical characteristics of the various loan pools and their tranches were incompletely documented. Most reports only listed averages without even including standard deviation data. For example, only an average FICO score was reported. That’s equivalent to saying that a group of nine unemployed workers plus Bill Gates had a millionaire’s average earnings level. Improperly formulated statistics can present a very distorted picture. The housing loan statistical modeling was a disaster zone, and gave True Believers a false sense of security.
Almost all housing bubble participants did not recognize the pervasiveness of the subprime lending. Almost nobody recognized that it was the 800-pound gorilla in that segment of the marketplace. Joe Cassano, chief boss at AIG Financial Products, never understood what fraction of his firm’s risk profile was tied to this particular financial structure. Yale professor Gary Gorton, the expert who built the AIG-FP model, never appreciated the percentage of subprime loans to which AIG was exposed. True risk mitigation by diversification was not accomplished in any of these first tier financial firms.
The rating agencies, Standard and Poor’s, Moody’s and Fitch, also participated in the Kabuki dance. They were complicit in allowing substandard housing loans that were well below triple-A quality to be repackaged in a manner that allowed these defective loans to be reevaluated as investment grade quality. The rating agency people were hoodwinked by the Wall Street crowd. That’s almost to be expected since the rating agency pay scale is so depressed relative to what Wall Street pays its employees. The smartest financial folks migrate towards the deep money incentives.
Somehow these rating companies deceived themselves that they possessed the power to convert Lead unto Gold. The Gold Rule wins again; he who has the Gold, dictates the Rules. And Wall Street has the Gold.
As a sidebar, the Rating firms claimed that their scoring was misinterpreted and misused. They argued that their assessments were quantitative, not qualitative. Hence the outfits using their judgments should not have assigned a failure probability based on the scoring; the scoring only yielded a relative ranking.
This is a rather long list of villains. But there were some heroes, at least given a modest definition of hero. There were a few individuals who recognized the pitfalls that were imbedded in the sub-prime real estate derivatives markets. Michael Lewis gives the story heart and pathos by introducing these less than perfect money managers to us. Although this small group viewed the market from distinctly different perspectives, they each saw the cracks in the smoke and mirrors charade.
Here is a short list of some of the unlikely heroes; Michael Burry of Scion Capital, Charlie Ledley of Cornwall Capital, and Steve Eisman of FrontPoint Partners. These men were short sellers during the mid-2000s and made enormous profits for their hedge fund clients. Each of their stories is unique and captured in Lewis’s engaging storytelling.
You must read the Lewis book to get a more precise picture of the short sellers contribution to the story line. I recommend that you do. The Big Short documents the chicanery that bank lenders and Wall Street perpetrated on a too trustworthy public. It once again demonstrates the need to be a skeptical investor. As one of the characters in the Lewis book constantly asked: “How are they going to screw me?” In Wall Street dealings, that is a relevant and necessary question.
There are plenty of lessons to be learned from the housing market debacle and from the financial mess that fueled and exacerbated the bubble. From a grand macroeconomical perspective, it demonstrated the complexity, the interconnectedness of that rugged landscape.
In economics, things do not happen in isolation. As the French economist Frederic Bastiat noted by the title of one of his most important essays “That Which is Seen, and That Which is Not Seen”, it is critical to identify and to assess the secondary and perhaps unanticipated effects of any market action. The subprime housing debacle is yet another illustration of unintended consequences.
Another enduring lesson learned from the housing market crisis was that leverage kills. The Wall Street investment banks were typically leveraged by multiples of over 10 to 1 ratios in their oversized commitments to CDOs and the insurance CDO swaps that they also sold. They lost billions.
On a very practical lessons learned level, the housing bubble and its crash demonstrates yet again the pervasiveness of the money incentive. That’s almost a given since we are mostly in the marketplace to satisfy our financial goals. As always, its good investment policy to follow the incentive money trail.
You will enjoy the stories that make “The Big Short” a lively read. You will also learn some of the how, who and why of the subprime real estate derivatives fiasco. You will be a wiser investor from learning its lessons.
In his book’s Epilogue section, Lewis finds that “Everything is Correlated”. Indeed it is. The primary theme of Complexity Theory is the interconnectivity that ties global agents together. Especially today, one event triggers many reactions, some positive and some negative. Expect a cascade of primary, secondary, and tertiary avalanches. Marketplace correlation coefficients have become tighter with time. Recall, no happening is an island onto itself. We often can not identify the potential network of interactions.
Best Regards.

Reply to @reids:
AFAIK, same tax issues. Fund has to generate K-1s to you or pay corporate taxes as a corporate level which will reduce your return and you will be double taxed on your gains. I think Steelpath does the later (i.e. pay corporate taxes) Check fund documentation.
I am not a tax expert buy holding MLP's that generate K1 in IRA also has complications. You could still be subject to "Unrelated business income" taxes in your IRA.

A Saturday morn'in howdy to you,
The old Funds Boat "staff" will be in and out of the office for the next few weeks; so, this will likely be the last post for a bit. There were no buys/sells since last week's post.
IF DEBT could write a song, fighting for its life; the following lyric seems to fight the bill. Hopefully, you will have the same cranial connection as this house; via the link and lyric just below. Our funds holdings data is just below the music section.
Take care of you and yours,
Catch

Don't Make Me Over
Don't make me over
Now that I'd do anything for you
Don't make me over
Now that you know how I adore you
Don't pick on the things I say, the things I do
Just love me with all my faults, the way that I love you
I'm begging you
Don't make me over
Now that I can't make it without you
Don't make me over
I wouldn't change one thing about you
Just take me inside your arms and hold me tight
And always be by my side, if I am wrong or right
I'm begging you
Don't make me over
Don't make me over
Now that you've got me at your command
Accept me for what I am
Accept me for the things that I do
Accept me for what I am
Accept me for the things that I do
Now that I'd do anything for you
Now that you know how I adore you
Just take me inside your arms and hold me tight
And always be by my side, if I am wrong or right
I'm begging you
Don't make me over
Don't make me over
Now that you've got me at your command
Accept me for what I am
Accept me for the things that I do
Accept me for what I am
Accept me for the things that I do
The immediate below % of holdings are only determined by a "fund" name, the M* breaddown is at the end of this write; and a bit more realtistic, although with flaws, too.
CASH = 14.6%
Mixed bond funds = 78%
Equity funds = 7.4%
-Investment grade bond funds 12.2%
-Diversified bond funds 18.5%
-HY/HI bond funds 28.4%
-Total bond funds 14.6%
-Foreign EM/debt bond funds 4.3%
-U.S./Int'l equity/speciality funds 7.4%
This is our current list: (NOTE: I have added a speciality grouping below for a few of fund types)
---High Yield/High Income Bond funds
FAGIX Fid Capital & Income
SPHIX Fid High Income
FHIIX Fed High Income
DIHYX TransAmerica HY
DHOAX Delaware HY (front load waived)
---Total Bond funds
FTBFX Fid Total
PTTRX Pimco Total
---Investment Grade Bonds
DGCIX Delaware Corp. Bd
FBNDX Fid Invest Grade
OPBYX Oppenheimer Core Bond
---Global/Diversified Bonds
FSICX Fid Strategic Income
FNMIX Fid New Markets
DPFFX Delaware Diversified
TEGBX Templeton Global (load waived)
LSBDX Loomis Sayles
---Speciality Funds (sectors or mixed allocation)
FCVSX Fidelity Convertible Securities (bond/equity mix)
FRIFX Fidelity Real Estate Income (bond/equity mix)
FSAVX Fidelity Select Auto
FFGCX Fidelity Global Commodity
FDLSX Fidelity Select Leisure
FSAGX Fidelity Select Precious Metals
RNCOX RiverNorth Core Opportunity (bond/equity)
---Equity-Domestic/Foreign
CAMAX Cambiar Aggressive Value
FDVLX Fidelity Value
FSLVX Fidelity Lg. Cap Value
FLPSX Fidelity Low Price Stock
.......MORNINGSTAR PORTFOLIO VIEW below.......
Asset Class %
Cash 12.28
U.S. Stock 13.12
Foreign Stock 4.05
Bond 62.97
Other 7.58
Not Classified 0.00
Stock Style %
Large Value 11.01
Large Core 14.47
Large Growth 29.64
Mid-Cap Value 12.57
Mid-Cap Core 7.75
Mid-Cap Growth 7.60
Small Value 6.78
Small Core 4.67
Small Growth 5.40
Not Classified 0.10
Stock Sector Portfolio %
Cyclical 68.79
Basic Materials 5.51
Consumer Cyclical 58.36
Financial Services 2.89
Real Estate 2.03
Defensive 9.54
Consumer Defensive 5.51
Healthcare 3.75
Utilities 0.27
Sensitive 21.67
Communication Services 2.57
Energy 7.45
Industrials 3.59
Technology 8.06
Not Classified 0.00
Stock Type Portfolio % VS S&P 500
High Yield 0.11 0.23
Distressed 3.57 0.67
Hard Assets 6.91 13.29
Cyclical 69.64 43.93
Slow Growth 5.14 14.80
Classic Growth 0.75 6.73
Aggressive Growth 5.52 16.15
Speculative Growth 0.87 1.98
Not Classified 7.50 2.22
Fees & Expenses Average Mutual Fund Expense Ratio (%) 0.75
World Regions %
North America 61.02
UK/Western Europe 4.20
Japan 0.87
Latin America 2.33
Asia ex-Japan 1.83
Other 0.30
Not Classified 29.45 (AAARRRGGGHHH !!!!!)
Stock Stats Average for This Portfolio Relative to S&P 500 (1.00=S&P)
Price/Earnings Forward 14.46 1.03
Price/Book Ratio 2.14 1.02
Return on Asset (ROA) 7.74 0.91
Return on Equity (ROE) 18.47 0.88
Project Earnings Growth-5 Yr (%) 12.77 1.29
Yield (%) 4.38 2.58
Avg Market Capitalization ($ mil) 10,260.29 0.20
Bond Style %
High-Quality Short-Term 0.00
High-Quality Intermed-Term 0.00
High-Quality Long-Term 0.00
Medium-Quality Short-Term 3.53
Medium-Quality Intermed-Term 14.77
Medium-Quality Long-Term 0.00
Low-Quality Short-Term 16.10
Low-Quality Intermed-Term 33.45
Low-Quality Long-Term 5.28
Not Classified 26.88 (AAARRRGGGHHH !!!!!)

I own FMLSX and QASIX (available no load at TD Ameritrade) which are long/short type funds. QASIX is very conservative and has been negative on the US for a while (down 2% in 2008 and up 13% in 2009). They place a premium on preservation of capital. FMLSX has done well for me and they tend to be longer than they are short. QASIX started the fund in 2005 and in order to navigate the volatile market period they've been very conservative. Their conservatism has led to them not gaining very many assets, but they have a good risk profile. I have been watching GADVX which is a different kind of absolute return return fund with fixed income, cash, value stocks, and arbitrage. And an interesting manager to boot in Gabelli.