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Kass: Why a 25% Drop Isn't Out of the Question

08/21/07 - 12:49 PM EDT

Doug Kass

The S&P/LSTA Leveraged Loan Index was established 10 years ago. Its monthly return over the 127 months has averaged 0.42%, with a standard deviation of 0.63%. So July's loss of 3.35% was over six standard deviations from the average. The largest monthly move prior to July was a loss of 1.51% in September 2001; this was 3.6 standard deviations from the average return.

Let's put the Loan Index's move into an equity perspective over the same 10.5 years and calculate what a six-sigma event would mean for equities.

Since 1997, equities have produced an average monthly return of 0.79%, with a standard deviation of 4.36%. There has never been a six-sigma event in that time frame. The largest monthly price change was a 14.5% loss in August 1998 (during Long Term Capital Management's demise); this represented over 4 standard deviations from average returns.

At time of publication, Kass and/or his funds held no positions in the stocks mentioned, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd. Until 1996, he was senior portfolio manager at Omega Advisors, a $6 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box."


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