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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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December 2004 Posts
12/31/04
Auld Lang Syne, by
GM Nigel Davies
New Year's Eve often brings back memories. This evening I
have been thinking about one of my early mentors, Sam 'Roberts'. He was an old
Jewish guy who ran a linoleum shop in Liverpool, always wore a hat and once won
the British Veterans chess championship.
When I was a boy he used to invite me to play chess with him at his house every
Sunday afternoon. His wife brought us regular supplies of biscuits and tea, He
counted the material out loud (always the pawns before the pieces) and took
greater pleasure in my wins than in his. He told me I would be a great player,
but warned against being a professional because of the sorry state of Yates.
Had he lived I would have disappointed him on both counts, I became a
not-so-great professional. But when my son was born there was never any doubt
about what his name would be.
12/31/04
O Deceptive Earth!, by George Zachar
I've not followed the details of the horror in SE Asia, but this account
describes how inquisitive humans were literally drawn to their deaths by the
initial "tell" of the tsunami:
"... In another minute or two we noticed LOTS of rocks we hadn't seen before,
and realized that the bay was emptying very fast. We saw lots of people from the
beach following the receding waters out, and we both realized - probably because
of all those years of watching the Discovery Channel - that we were about to
witness a cataclysmic event. We were about 100 feet above the beach, but I raced
up two more stories to the parking lot above. Jim elected to move up to the
reception area one floor above the restaurant.
I watched the bay continue to empty, and people continue to walk farther and
farther out. By that time I was already horrified about what I knew would
happen, and I kept muttering, "Those people, they need to run," but no one else
I watched with seemed to realize the danger. They just thought it was an
extremely low tide.
Then we could hear the roar. The sound materialized a few moments before we
could see the wall of water moving toward the shore. It seemed like we could
"hear" it through our feet as well as our ears. That's about the time Jim joined
me on top. It was a long time before the people on the beach realized they were
in danger. They started running way too late. We just watched as the huge brown
wave washed over them, then over the beach, over the bungalows and shops, and
everything else that was on lower ground..."
12/31/04
The Meaning of Life, by Jim Sogi
What is life and what is the meaning of life? The answer depends on the viewpoint. The atoms in the body will exist forever, so it doesn't matter to the atoms if we live or die. The difference between the quick and the dead is the transference of information through DNA. In one view, human existence appears to be a mere by-product of the spread of information by DNA. The more 'successful' the organism, the more its information will spread. Thus life can be considered information or in other parlance, a meme. History has shown evidence of numerous cataclysmic events which have wiped out many species, kingdoms and genera of life. Asteroids, volcanoes, continental migration, global cooling, and climatic changes all have wiped out life across the face of the planet. Ultimately it is of little matter if any one individual lives or dies, if the species carries on, or on a broader view whether any one species lives on, as life will continue to spread in one way or another. As market participants it make little difference if one or more of us is wiped out. The information or money is transferred on through the system to useful production like atoms or DNA. DNA has many apparently redundant patterns allowing reproduction with many missing parts. DNA carries obsolete patterns from long since dead prehistoric viral strains. The larger system of information, life, markets and the universe are the higher orders of existence that supersede the individual. The individual experience makes this difficult to accept.
12/31/04
Boom & Bust, by Russell Sears
I am bullish on the S&P, bearish on bonds for the following reasons. The S&P has
had 40 quarters which it has been in recession, with a slightly negative return,
average of -0.24% ignoring dividends, while during all 180 quarters it's had on
average a 2.43% return. I read an article for my first CFA exam in 2000, which
said that the feds cannot stop the business cycle, they have just expanded the
time between cycles.
Both the Boom and Bust will be longer.
My interpretation has been that the expanded boom will allow more misallocation,
irrational exuberance, and longer reallocation bubbling popping periods. The
bubble's about to pop on bonds.
12/31/04
Breaks & Breakouts, by Bruno
I daytrade patterns, and I keep seeing situations very similar to bridge.
Bridge requires a lot of pattern recognition. There are patterns in suit
management, in game plans, in bidding... Bridge is all about recognizing a
pattern and playing it correctly. However, even if you play a hand well, you can
still lose, due to the random nature of card distribution. For instance, at the
simplest level, if you have six cards against you, you know that they'll break:
3-3, 35% of the time, 4-2, 48% 5-1, 15% 6-0, 2%It makes sense to go with the odds and plan for 3-3 and 4-2 breaks. This is the proper way to play in most cases. But you'll still lose 17% of the time.
12/31/04
Hungry Hungry Hippos, by
Andrew Moe
We often compare the markets to games of strategy and skill like chess and
checkers where opponents observe rigid rules of movement and decorum. Thanks to
the generous bounty bestowed by Santa, I bear witness to a game that parallels
the more primal nature of the markets: Hungry Hungry Hippos.
Four players sit at polar corners of a convex circle. Each has a hippo lurking on
the surface in front. A lever on the hippo's back causes the head to lurch
outward and upward towards the center of the ring until the head suddenly snaps
downward, capturing everything beneath the oversized snout. The head then
returns along the surface, dragging its prey into the throat.
The object of the game is to snap your hippo's head in time to catch balls
rolling on the surface.
Though the rules of the game call for the deployment of a single ball at a time,
we have developed a ritual where my three year old, Makenzie, collects all of the
balls into a bucket, then swirls them around as we all open and shut our hippos
and yell "The Hippos are Hungry - Better Feed the Hippos". With great ceremony,
Makenzie dumps all of the balls at once into the middle and the feeding begins.
Player with the most balls at the end wins.
We have rapidly developed our own styles of play, as outlined below.
Madeline: The House Trader
At just over a year, Madeline can be an active participant or more interested in
eating the balls herself. Though her participation is random, she benefits from
a secret alliance with Mommy and Daddy when active. She is the ultimate insider.
Makenzie: The Scalper
Makenzie possesses both limitless energy and a focus of purpose that borders on
fury. Relentless pounding guarantees a steady supply of balls although the
orange hippo is already a little off.
Mommy: The Macro Trader
A college athlete, Mommy excels at games of fast motion and is perfectly suited
to time her snaps to the apparent random rolling of the balls. Always alert, she
can change the face of the game in seconds.
Daddy: The System Trader
Besides counting everything from snaps to snatches on
the table, Daddy regulates his play to observe the effects on the other players.
Though he thinks he's running the show, Mommy and the girls exchange occasional
glances that smack of nails, shopping, Nordstrom and credit cards.
No wonder my hippo goes hungry.
12/30/04
Cutting Through the Fog, by
GM Nigel Davies
I wonder if there's a relationship between the number of words someone uses
to say something and his efficiency. I suspect this is the case, but how can it
be counted? One thought is to compare the share price of the company with the
number of words in the last annual report.
A related area might be to count the number of words per sentence and characters
per word. My hypothesis is that a more hubristic CEO might use longer words or
sentences.
Another thought on these lines is that a higher
Fog Index by the same CEO (or
Fed Chairman) at different times might imply a degree of deception.
12/30/04
Tactics, by George Criparacos
In trying to speculate against market movements that seem
overextended, like oil in late October and now the Euro against the dollar, and
against the yen also, I am using the following tactics:
1. First hide the king. Indian Defense tactics against d4 in the opening seem
appropriate.
2. Forget about stop orders. They provide targets. Keep your pieces in defensive
positions.
3. Expect the offense to play aggressively, to sacrifice, to put you off track,
to give you tactical opportunities to counterattack, to lure you to open up.
Avoid all. Stay back.
4. In the middle game play for the draw.
5. Let the offense exhaust itself.
6. A small pawn ahead in the endgame can make all the difference.
7. Expect the game to last long.
12/30/04
My "Fed Model", by
Allen Gillespie
People often speak of the "Fed Model", which is an intramarket comparison model that unfortunately has several flaws, but does yield an answer to the question "what is the market worth?". One datum I began tracking in July 2003 is a bottoms-up "theoretical" value of S&P 500. I wish I had been tracking this for longer, but such is life. This is calculated by running the dividend discount model on each stock in the index, multiplying the discount/premium by the index weight, and then summing the totals. What I like about this model is that it yields much more insight because you get an index valuation, list of stocks that are theoretically over/undervalued and distribution of the number of over/undervalued issues. While this model has suggested steep undervaluation for most of the year, it had recently tightened up to overvalued by .74% on Dec 2, but now is opening up again since December 13 as the earnings data remain strong. Currently it suggests an undervaluation of the S&P 500 by 5.54%.
12/30/04
Cross Sections: Man-of-War, Stephen Biesty et al (Dorling
Kindersley, 1993)
Reviewed by the Assistant Webmaster
In reading to my young sons, I often (re)learn a subject
myself, typically in a for-dummies way. But this book, like
others by Biesty, is a masterpiece, Each page is a large,
incredibly detailed cross-section of a British man-o-war
circa 1800, with tidbits of explanatory text & anecdotes
sprinkled about. Thirty minutes with this book will increase
your understanding of
Patrick O'Brian many-fold. A sampling :
"Sailors accepted some risks, such as enemy fire or falls
from the rigging, as a part of the job. But what they feared
most was disease. For each seaman killed in action, as many
as 40 died of disease."
"To scrub the decks, sailors used blocks of stone. They were
the size and shape of big family bibles, so they were
nicknamed 'holystones'."
"Getting rid of maggots: (1) Put a large dead fish onto the
sack of biscuits, and the maggots crawl out to eat it. (2)
When maggots cover the fish, throw fish in sea and replace
with a fresh one. (3) Repeat (1) and (2) until no more
maggots appear."
"Scuttlebutt: Working aloft in the sails was hard work, and
a tub of 'fresh' water, called a scuttlebutt, provided
refreshment. Men drank from a mug chained to the tub."
"Some women who came on board tried to smuggle gin to the
sailors by storing it in a pig's bladder and hiding it under
their petticoats. Officers searched them when they arrived."
"'I'm not sick!': Sick seaman had their grog (rum) ration
stopped, so many pretended to be well rather than go to the
sick bay."
"Loose cannon: A loose, heavy object, such as a cannon, was
as dangerous as enemy fire. As the ship rolled, the cannon
rolled too, and could crush anything in its path."
"Sold before the mast: If a seaman died, his messmates 'sold
his possessions before the mast' -- they auctioned off his
belongings. The proceeds went to the man's family, so out of
generosity everybody paid far more than the goods were
really worth."
"Carpenter's walk: A narrow corridor, running around the
ship just below the waterline, allowed the ship's carpenter
to check for leaks. The quiet and secrecy of the carpenter's
walk made it the ideal place to plan a mutiny."
"Hanging cot: The captain slept in a boxlike cot that hung
from the deckhead (ceiling). It's no coincidence that the
cot looks like a coffin: it was made to fit the sleeper, and
if he died, he was nailed into it with some shot. The crew
heaved the cot-coffin over the side, complete with
cannonballs and captain, and it sank like a stone."
"The naval salute was unusual: the sailor held his palm
turned in toward his face. This concealed his palm, which
was blackened by tar from the ropes."
12/29/04
A Visit to Zimbabwe, by Ryan
Carlson
12/29/04
But Wait, There's More!, Timothy Samuelson (Rizzoli, 2002)
Reviewed by the Assistant Webmaster
What a brilliant book, wonderfully written
and elegantly produced. The author is the curator of
architecture and design for the Chicago Historical Society,
who as a guilty pleasure has assembled the world's leading
collection of Popeil & Ronco products, many of them familiar
to Americans of a certain age.. Veg-O-Matic.. Pocket
Fisherman.. Smokeless Ashtray.. Inside-The-Shell Egg
Scrambler.. GLH9 spray-on hair..
A testament to ingenuity & entrepreneurship, brothers Samuel
& Raymond Popeil, the children of Polish Jews who came to
New York in 1915, began a dynasty of manufacturing &
"demonstrating" affordable kitchen gizmos. In the 1940's,
50's and 60's, demos were held at county fairs, the Atlantic
City & Asbury Park boardwalks, and Chicago's Maxwell St
Market. The Popeils were the finest "pitchmen" in the
business.
Later, Samuel's son Ron Popeil, after some intrafamily
scuffling, founded "Ronco" and used television as his
distribution channel in the 1970's, 80's and 90's, with a
brief regrouping after a 1984 bankruptcy:
"Not in a financial position to return to television, Popeil
made a bold career choice. He packed up his products and
sold them at country fairs and public events as he had done
at the start of his career. By 1987, the humbling task of
hawking the surplus Ronco inventory was over."
The Popeils were the first to grasp the utility of
television, but were baffled by how to shrink their
boardwalk "pitch" into a brief timeslot. The result was a
frantic, breathless tone to their ads, in contrast to
today's minimalist, atmospheric TV ads. Obvious parallels
here to the struggle to understand how to make commercial
use of the web in recent years. But later, others understood
the power of TV; Samuel Popeil wrote:
"I created a monster. Everyone tried to imitate our
television marketing. Because of that, the demand for TV
time is so great that spots that we used to buy for $200 to
$300 cost seven to 10 times that much"
The Popeils shifted back & forth between manufacturing
in-house and "outsourcing" several times over the decades,
as business conditions warranted, a theme that resonates
today.
The author was able to interview Ron Popeil as well as many
other family members and business partners, and it's
fascinating to see how the economics worked from the inside.
And his affection and respect for the Popeils is clear; he
owns & uses a kitchenful of vintage Popeil gadgets.
A great fast read, full of lessons and lore.
Dr Zussman adds: Ron's sister Lisa (a friend of a friend) is a professional vocalist with genetically similar promotional proclivities, which raises a capitalism nature vs nurture question.
12/28/04
Victor Niederhoffer: Nobody Asked Me, But...
1 . The beaten-down companies in the Dow and S&P seem like very good candidates before the palookas come in to buy them in force at the beginning of the new year.
2. The movie The Aviator about Howard Hughes almost presents a heroic picture of a businessman trying to produce and create against the backdrop of corrupt government trying to buy votes through redistribution and bribery. Like The Untouchables, this touches on the problem . But of course the filmmakers limn this as examples of special veniality rather than a natural function of robbing Peter to pay Paul. The only way they are able in their collective consciousness to praise a businessman is to present him as a freak or a nutcase. Or else people might actually feel big and this would be against the idea that has the government in its grip.
3. I have been brushing up on polar coordinates and complex numbers lately and see many areas where this could be fruitfully used in describing the moving time series relations between two markets in a simplistic way.
4. I am going to an area where much shuffleboard is played shortly and will hope to find the many strategies employed there of blocking and then going for a high number and throwing with a spin, applicable to forecasting the shuffleboard game of the market in a week.
5. So often, I find that the insights that one has in a field one knows the most about are directly applicable to the market. And I encourage you to think about what you know the best, and relate it to making money in the market as much better than following the ideas of gurus in books such as the one Doc promised to hide from us when not perfecting the shuffleboard or other games here.
12/28/04
Ask The
Senator, a continuing series
Q: What's your view on the S&P today?
A: Yesterday I spoke of a sell pattern which sold at
Thursday's high. That trade should be liquidated now and
profits taken. It is a short term sell pattern that does not
know about more than a day or two, nor do I. The setup to the
pattern was 2 consecutive up closes in an overbought market
while bonds are in a down trend.
Send queries for the Senator to senator<at>dailyspeculations<dot>com
12/28/04
Study vs Practice, by
GM Nigel Davies
There's much anecdotal evidence about a difference
existing between study and practice, but the size of the
difference is completely underestimated. One might study the
physiological behavior of people in love but this has nothing
to do with being in love yourself. Reading about death has
nothing to do with coming close yourself. And players in
various sports may practice like crazy without this having
much to do with actual competition.
Can one study the differences in a systematic way? It's still
going to be nothing more than a study. I don't believe you
even notice a lot of stuff unless you're there, in the arena.
And when you're there you've got to mean it, and not just play
at playing. A lot of people think they are playing but detach
themselves from the experience.
In chess there are many factors that are processed by a
player, both consciously and subconsciously, which never show
up when you look at the naked game score. Is the opponent
bleary-eyed or dishevelled? Is he confident? Does he play
particular moves quickly or slowly? What are the respective
players' aspirations in both the individual game or the
tournament? Are you in control of your nerves?
Body language, energy levels, thinking times and emotions are
permutated in an infinite number of ways and interwoven with
technical knowledge and vision. And this is what shocks and
frightens people with a dry, academic view if they ever come
to sit down and play. They might be thinking that 'it's not
supposed to be like this'. But that's EXACTLY how it is.
12/28/04
Why I never listen to NPR news very long, by
Professor Miller
Big news item today: "Massive environmental damage caused by the
recent earthquake and tsunami."
It's always great to hear how the environment is destroying
the environment.
And E mentions this Australian editorial: To be fair, even the most animated America-hater, though, baulks at the idea of blaming George W. Bush for the destruction and death in southern Asia. (.. )
12/27/04
A Holiday Lobagola for Sharper
Image
12/27/04
The Edge and the Ever Changing Cycles,
Av
Oddmund Grøtte, skrevet 22. juli 2004
On Victor Niederhoffers home page, there are many good
stories and arguments. I strongly advise any aspiring
trader/speculator to scroll through his page once in a while.
Yesterday I found this absolutely brilliant metaphor from
"everyday life" related to trading (.. )
12/27/04
La Dolce Vita, by
John Bollinger
Some years ago I had the pleasure of being a guest at
Valentino's Rome apartment for New Year's Eve. It was one of
those left-very-old-on-the-outside,
stunningly-modern-on-the-inside restorations. At midnight
champagne was served and toasts were made, then everyone
rushed to get his bowl of lentils. The lentils are said to
resemble coins -- the more you eat, the more you'll get in the
coming year. The spirit of the thing seemed not only to be
wealth, but good luck, good health, happiness, etc...
I think I'll have to
serve some Roman lentils this year.
Doc writes from Rome: Dr Bollinger is indeed right. The traditional Italian New Year's dish is "cotechino con lenticchie" or pork sausage with lentils. Here is a picture taken just now in my Mom's kitchen.
Marcus Semones adds: Our traditional southern New Year's feast, hosted by my great grandmother, consisted of collard greens (quite unpleasant smell while cooking), black-eyed peas and ham hocks. According to family folklore having this menu on News Year's Day will afford good luck and financial reward, for the next year. Bon Appetit!
12/26/04
Fishing and Markets, by
James Tar
As a response to Victor's request that we make more of an effort to write about our areas of knowledge and how they relate to the markets:
One of life's activities that has rarely been discussed on the Spec-List and its relation to the market, outside of a few comments on boating and the oceans by Mr. E, is Fishing.
Fishing is a wonderful activity. Only a few other activities offer man such a test of patience, intelligence, and physical range. Man has lots of variables to either adapt to or control in order to be a fishing success. Man has to adapt to a myriad of nature's elements (the market): the water depth, the water current, the water temperature, the often changing bottom surface (flat, rocky, sunken trees or other structures, all that can create snags or snapped lines), the wind and its always changing gusts, above water brush and trees that one has to avoid when attempting a perfect cast.
Having the intelligence to understand what nature, or the market, has put in front of you is another must to be a success. Understanding what species of fish lies in the water is a primary. You must also know what they typically eat and where they lurk in the waters. Only then can a fisherperson properly begin. On countless occasion I have seen people leave a stream, lake, or oceanfront claim, "the fish just weren't biting today." Their efforts started in error because they did not have the knowledge to use the proper indigenous bait or mimicking tackle. I liken it to amateurs buying tech stocks in a bear market. On the contrary, in more bullish phases, you can cast your money lure at almost any fish or stock and come home a winner.
Successful fishing also requires a special range of physical skills: strength to delicate finesse. In order to land (reel in) a larger, more athletic fish, you have to combine strength and finesse in a way that counterbalances a fish's varying efforts to get away or break off the lure or line. When the fish suddenly surges away from you, you have to be firm with your rod and line, not to let out any slack, yet gently give the fish a little room to run and play which requires delicate strength and feel. When trading or taking a position, you need to be prepared for sudden strong moves against your cost (often caused by friction or a lame specialist) yet hold your ground. Don't let the temporary slack in your position bait you into dumping some or all of it at a nasty loss. Understanding the way the fish fights (the way a stock trades) will help you reel in more winners.
The Art of Casting requires a special combination of strength and delicate skills. Strength and efficient technique is required for the distance you might need to get your lure to a spot on the water where the fish may be lurking. Your technique also requires a deft touch to gently land the lure in a way that does not make a scary splash or large noise, both of which will spook the fish from biting. A quality cast is like a quality execution in the market. It gets you in proper position for a winner. You are there quietly, you do not disturb the market so that the risks of friction and publicity go by the wayside.
Experience and knowledge can not be reiterated enough. Equipment and information is also a necessity. Only then can one be properly positioned for success.
12/26/04
S#xulation, by
Lopez
When eight people were killed in an Everest blizzard in 1996, Sherpas claimed
the s#xual activities of a New York socialite before the climb had brought bad
luck to the climbers. "For them, it's a very sacred mountain, but people treat
it in unsacred ways," Pettman said. (.. ) He said having s#x - known as "making
sauce" to Sherpas - was as much a desecration of the sacred mountain as rubbish
and pollution.
Come to think of it - on that dreadful day in 1997 - Monty [VN's trader -ed.]
was bragging about "making sauce" the night before. I wonder if that brought us
bad luck....
Professor Miller adds: It's official: More s#x makes you happier!
Money, S#x, and Happiness: An Empirical Study Abstract: This paper
studies the empirical patterns in money, s#x and happiness. Using 1990s data
from the General Social Surveys of the United States, the paper shows that
s#xual activity enters strongly positively in happiness equations.
Professor Schnytzer
replies: You betcha! Although I did my own research on the subject and I got the
same results but didn't publish since I figured the results were trivial.
12/26/04
Ben Franklin on Printing Money, by
James Sogi
"About this time there was a cry among the people for more paper money, only fifteen thousand pounds being extant in the Province, and that soon to be sunk. The wealthy inhabitants opposed any addition, being against all paper currency from an apprehension that it would depreciate as it had done in New England, to the prejudice of all creditors. We had discussed this point in our Junto where I was on the side of addition, being persuaded that the first small struck in 1723 had done much good by increasing the trade, employment and the number of inhabitants in the Province, since I saw all the old houses inhabited and many new ones building, where as since I saw most of the houses in Walnut Street with bills on their doors, "To be Let," and many likewise in Chester Street and others which made me think the inhabitants of the city were deserting it one after another.
Our debates possessed me so fully of the subject that I wrote and printed an anonymous pamphlet on it entitled The Nature and Necessity of a Paper Currency. It was well received by the common people in general, but the rich men disliked it, for it increased and strengthened the clamor for more money.....The utility of this currency became by time and experience so evident as never afterwards to be much disputed, so that it grew soon to be fifty-thousand pounds, and in 1739 to eighty thousand pounds since which it rose during war to upwards of three hundred fifty thousand pounds, trade, building, and inhabitants all the while increasing, though I now think there are limits beyond which the quantity may be hurtful." -- The Autobiography of Ben Franklin
The question is, what are those limits. We will soon find out, it seems.
The Assistant Webmaster adds: Philadelphia changes very slowly. In 1988, as in 1723, there were houses "to be let" on Walnut Street, and I "let" a pleasant residence at Walnut & 23rd.
12/26/04
Review: Writings of
Marty Whitman
Reading through his books The Aggressive Conservative Investor (with our good friend Martin Shubik) and Value Investing, and the chapter precis "Value With a Difference" in "Forbes: Greatest Investing Stories," and following up on the first 100 entries about him on Google, I am impressed with the sagacity, intelligence and fruitful hypotheses that jump from this 80-year-old investor whose Third Avenue Value Fund was about the best-performing mutual fund in 2004.
Yet it wasn’t always so. When he was at the height of his fame in 1999, his fund was losing assets at the rate of $50 million a month, or about 33% a year, because of his lackluster performance. His fund was about unchanged in 1998 and 1999 while his peers were racking up 25% a year. Characteristically, he told Kiplinger's: "As for dealing with the public, scr#w him. You may quote me."
The main elements of his style are to find vulture investments in such things as bankruptcies, underutilized assets, turnarounds and beaten-down technology companies. He looks for stocks and bonds that are so far down that if almost everything goes wrong, shareholders should still come out ahead -- i.e., things that everyone else hates that appear to have reached a dead end. A very conventional method, but one that he seems quite expert at, disregarding his lackluster performance.
Some of his ideas are: "Safe is better than cheap. The less the risk the greater the potential reward." But this shows he hasn't kept up with the main wisdom of modern finance, that you get paid for undiversified risk. It also is against studies like prospective yield-based studies of Value Line, which would show that Timeliness Group 1, the least safe, perform much better than Safety Group 1. It also would preclude him from doing what Collab and I told everyone to do in the last two years: to buy every new issue and make 50% a year or so the easy way.
Much more to the point is Whitman's focus on bankruptcies. He's an expert on this, knows everything there is to know about it, made his first fortune in Penn Central debt (achieving a 500% return). He is good at spotting value in the debt of certain troubled companies, especially those that possess substantial physical assets or perform vital services, like utilities and railroads.
Like many people without much of an education, he's a frustrated academic. Whitman suffers from the Marilyn Monroe syndrome. He's proudest of the things he doesn't have and sees his two books and his 25-year-old value course at Yale as his proudest achievements. "The course was absolutely terrific," he told Syracuse University Magazine, in a puff piece. "The students were absolutely super." He believes he has displaced the father of security analysis and is convinced his seminar "will shed new light on the subject and make a major contribution to finance."
There is much of the "just plain folks" technique of seeming small that the Sage possesses. "He is proud of his rolled-up sleeves and corduroy, the mail-order, extremely casual, open-collared mind set. "After all, I'm just a poor man who just happens to have a lot of money." He succumbs and has been snatched by the fund-raisers rather guilelessly. "Lois and I are fortunate to be able to support the causes that mean so much to us, empowering others, leaving an imprint on the future." The kind of person that you'd think might be a friend of the financial weekly cult leader, and indeed when his performance was better he used to sit next to the others at the leading financial weekly's round table.
He likes to buy discounted debt when the only good stocks outside tech are things like "the biggest and the best" (may they pay their policies when the holders lose) (ACE, et al.). He made a killing in KMart on this, debt and common, and apparently this is one of reasons he reached the top of the bottle of vipers in 2004.
He suggests that audit reports are much more important than earnings forecasts and this, I believe, a person could make a few meals for a life time. "Bad enough that estimates are often wildly inaccurate . . . that's lateral thinking." He likes to buy them when they're really down in the dumps in earnings and no one will buy them, and all the forecasts are bad. This seems very good to me , especially when the things such as the Starmine and IBES and Value Line ratings are lowest.
He points out that where entry is difficult and capital spending and research necessary to get in is highest, these companies tend to come back. This should be tested and is probably why so many of us have found that the companies that perform the worst in any year tend to come back the next year, especially in the earliest years.
Like most, Marty and his partner Martin have prospered and suffered mightily in the Orient. They are always finding companies with market values of assets 10 times as great as their market value. But they get hurt by institutional features and the old boy network there. A good reading of "Shogun" and a viewing of Sondheim's "Pacific Overtures," as well as a review of the Chair's own downfall, might be a good remedy here.
He uses multistage reasoning often. First he looks to the probability of default when a company's stock or debt is in the dumps. Then he looks to see what he can get when it does default. And since he works with lawyers all the time, there's a third stage when he directly or indirectly uses the legal threat as a tool for profits.
Martin Shubik Responds:
There are a thousand ways to make money on Wall Street and a thousand ways to lose money ----and they are all the same. Your picture of Marty is pretty good----my big problem with him is that he is unnecessarily one-down to academia and in spite of great brilliance and perception in his specialization he does not acknowledge the legitimate niches filled by math. Fin. Or other hustles.
Concerning myself ---I picked a modest adequate number (inflation corrected) as my financial goal---a 1988 Golf gets me the 8 miles to my office as well as a 2004 Porsche) and I spend my time trying to finish a decent theory of money ---not because I do not understand the money game, but because I believe that being a serious pro is a 24 hour a day proposition----and time, not money is our prime asset.
The economy is a dynamic stochastic system with constantly changing parameters----the macroeconomists delude themselves and others by acting as though ephemera such as the Philip's Curve are invariants---invariants with a 1/2 life of at most 5 years. They mistake applied advice to politicians with science. Many of the micro economists (including the fin crowd) are either consultant guns-for-hire or mathematicians manqué--proving more and fancier theorems than the physicists--with a disconnect from reality caused by little care or understanding of the connect between their level of abstraction and the phenomena.
I neither know nor worry about why I get my jollies from searching for the invariants in the economic system---but it keeps me out of the pool halls and in a game where I am reasonably good at controlling the deck. I am deeply fond of my old friend Marty and have tried but failed to teach him what real theory is about. He is deservedly rich, but to some extent using the appropriate metric I am richer---because to this very day he still is one down to the Steve Rosses of the world.
Concerning the Japanese market, you say we took hits----that depends on your time horizon and expected return---to phrase Marty, Herb Simon and I we did "good enough".
Victor, one of the important features that carries both you and me along---is that we can coldly and objectively know what we don't know. I have taken plenty of hits and expect to take a few more before the end---but like some disastrous shorting the blame was with me and I chalk it up to Rebbe-gelt [tuition -ed.]. I expect that both of us will leave the table still learning---and it does not matter whether you are 18 or 80---that is what "young" is about. On roughly the same topic----if he wants to, young master McClennan has a good shot at making a major league player in finance. Take no plugged nickels.
12/26/04
Juncture Recognition in the Stock Market,
Reviewed by Alex Castaldo, PhD
I looked at this book after it was favorably mentioned by Mr. Argyle. I hoped to find some new ideas; I found instead that it is the traditional technical analysis that was largely discredited in the 1960s by academicians like Roberts and is criticized in PracSpec for its lack of clear definitions and tendency to circular reasoning. On the one hand we are told that prices have been moving up recently because we have been in a bull market, on the other hand that as long as prices keep moving up the bull market continues. It is true enough, but non predictive, non falsifiable and not very useful. The title of this post (quoted from page 134) is another example of this kind of intelligent sounding but scientifically empty statement.
A brief summary of the book:
Page 50. The history of the United States since the 1920s shows that whenever the yield on the DJIA moves past the 3.5% mark and into the 3% area, it is a danger signal which should always set the investor double checking other information to see what else might be wrong. It also appears that a yield on the DJIA in excess of 6.5% represents bargain prices for the long term investor. Such a yield is not likely to be seen again, however, until inflation is completely stopped .
Page 51-80 The author, apparently inspired by Milton Friedman but never mentioning his name, presents a variety of money supply statistics and tries to relate them to the stock market. I found the idea interesting, although some of the indicators (like the ratio of time deposits to demand deposits or the ratio of money supply to U.S. gold holdings) seem quaint and probably no longer meaningful. Main conclusion: p67: When the rate of money expansion (demand deposits plus currency) is falling sharply, caution is advisable .
Throughout the book, the author presents charts of the Dow Jones average at the top of the page and a chosen indicator at the bottom. He then discusses the relationship between the two. Perhaps because I haven t looked at the charts long enough (or because the author has looked at them too long) I don t always see the same wonderful predictions that the author sees.
p119 Recommend looking at the crossover of 10 week and 30 week moving averages of the DJIA.
p137 What Mr. Argyle likes: industry groups. Measure how broad a group of industries is participating in a market movement, because a strong market must be characterized by a preponderance of industry groups moving upwards. As long as there is a rotation of interest which propels a majority of industries to increasingly higher prices the bull market is sound . The index is calculated by counting the number of industries that advanced during the week and adding it to a previous total; the number of industries that declined in the week s trading are subtracted from that total. It is the trend of this indicator that is important; during bull markets draw trendlines along the series of bottoms formed by the index, and become very wary when the trend breaks .
P149. General Motors is more important than any other common stock .
P239. Another highlight of the book according to Mr. Argyle: how to identify trends. Basically it is what some other books call a Channel: you draw a straight line above the DJIA chart and another parallel straight line below. The two lines hugging the index on either side. As long as the index stays in this channel we can say that the trend is continuing, if it goes outside we can say that the trend has been broken. Saying these things sounds very intelligent but it does not seem very useful to me.
In conclusion I am embarrassed about this book, I really am. When I put it back on the shelf I am going to put it in backward so the spine doesn't show and when my co-workers walk by they cannot see that I have such a stupid book.
John Bollinger retorts: The sign of an open and enquiring mind is an office littered with the literature of the opposition.
12/24/2004
One of our
Favorite Stories: Merry Christmas from Daily Speculations
12/24/2004
Fed Model Forecast for 2005
The S&P has risen 8.5 percent year-to-date. This compares with our Fed Model forecast from January, which called for a 15 percent return for the year. Assuming there are no year end surprises, the Fed Model will have correctly predicted the direction of S&P performance for the past 5 years running.
For 2005: The S&P 500 is currently at 1212, and consensus forecast earnings for 2005 are 69.83 for the aggregate S&P 500, indicating a forward earnings yield of 5.76 percent. With the 10 year bond yield currently at 4.21 percent, the differential between forecast earnings yield and the bond yield is still a robust 1.5 percent. Our regression specification of the Fed Model predicts that the S&P 500 will rise by 17 percent. See details here.
12/24/04
Ask The
Senator, a continuing series
Q: Have you developed a way to avoid drawdowns
in trend-following strategies?
A: Yes, it is a mechanical way to make certain there are no
large drawdowns. It actually goes way beyond that. I'm trying
to hook up with a fund, that's where it would help the most,
and have found one I showed the idea on a non-compete basis
and they are burning midnight oil on it as it is rather simple
-- but dramatic.
Send queries for the Senator to senator<at>dailyspeculations<dot>com
12/23/04
George Zachar Notes Russian Leader's Description of the
Seizure of Yukos: "Perfectly Legal, Absolutely Normal"
Putin minced no words in describing the de facto re-nationalization of Yukos: "Today, the state -- using absolutely legal, market mechanisms -- is ensuring its interests. I consider this perfectly normal."
We may now ponder the meanings of "absolutely legal", "market mechanisms" and "perfectly normal" in the context of 21st century Russia.
I think it is fair to say the Russian state now officially claims for itself what a classical liberal would define as full dictatorial control over its economy.
Not that this is a surprise, mind you, but noteworthy nonetheless.
Also, the response of the US business community is similarly unsurprising.
Gary Litman, the vice president for Central Europe and Eurasia at the U.S. Chamber of Commerce, said, "As long as state control does not imply that the state is using the company for noneconomic purposes, nobody is going to have a problem with it."
Oh, the Russians would never EVER do that....
12/24/04
How to Talk Like a Stock Market Operator
It is good for your image with the friends, kids, and others you are trying to impress to pepper your speech with Wall Street talk of the 19th century so that you gain gravitas as well as a rudder to understand present-day manipulations and squeezes. As an example of how effective this method can be, I note with approval the response from Duncan Coker to a request for his opinion of a certain stock: “Looks like the syndicates are bidding up pooled interests and public taking notice of tight control of capital stock and intentions of inside operators to advance. Some of these operators lending to the shorts precipitating a squeeze for which the syndicate at that time unloads large blocks to the public.”
Mr. Coker, of course, is noted not only for his Conversational Activities (see list) he is also quite the debonair man about town who is equally proficient at Factory Activities, (see list) (his family founded Sunoco Products) and Financial Activities (he serves as head patternmeister at our firm) and such Recreational Activities as fly-fishing and helicopter skiing. You can imagine the enormous esteem this combination realizes upon the fair sex.
You, too, can take a step in this direction, by studying this list of words from a dictionary the Collab and I are compiling, and using them to pepper your lingo at work and at home. Be sure to engage in this luxuriant activity before you trip the light fantastic or succumb to fair Morpheus each evening. Click for our small but growing list of Market Operator Talk:
12/24/04
Victor Niederhoffer: Reduced Capital
In talking about the values of real estate on Wall Street in 1900, Garret Garett says in Where the Money Grows: "You pass through the low-rent establishments of the tailors, stationers, tobacconists, and small shopmen. There are also a few dark places below street level , where even yet one whose capital is reduced may wager a dollar on the going up and down of one share of stock, stop one's loss at ninety-five cents, and lunch on the remainder." One is reminded of all the losers I have met who have a two-bit mentality and try to take out very small profits relative to the bid-asked spread and commissions. These have been the invariable losers I've come across and indeed after rescuing a few of these from certain death, some of these actually have, are or will be achieving gainful employment with me. But the thought of it still makes my blood boil even now. And whenever I take a trade that has just one small way of getting out with a horizon of a few hours or two, I grow apoplectic that my own pettiness in thinking it possible to make a fast buck has made me succumb to the same syndrome I rail against and remedy in others.
12/24/04
Ask Pam Poweruser, a new feature
Q: Any suggestions as to an under 3lb laptop
that doesn't require a separate docking station? -- Tony Corso
A: I am a big fan of the super small Sony Vaio but I have
small hands and only use it when I travel and for downloading
music and digital pics, and personal stuff like taxes, so the
overall smallness of it is fine for my purposes. The screen,
even though tiny, is amazingly clear and readable (even my
computer guy is impressed with Sony's XBrite technology). It
only has one USB port but I just got a multiple USB hub and
have loaded it up with a Blackberry, mini iPod, digital
camera, and a mouse, and it all works great. The Vaio comes
with an internal CD/DVD drive so no need for external drive.
Mine is the TR2AP (about a year old so the model numbers have
likely changed). The machine is small enough that it literally
fits in my handbag.
Send queries for Pam to pam<at>dailyspeculations<dot>com
12/23/04
Dick Sears: Weekly Technology Commentary
12/23/04
Victor Niederhoffer: Higgledy-Piggledy at Year-End
Frederick Hill in talking about the boom in Wall Street construction after the great fire of 1835 wrote in 'The Story of a Street": "Almost before the ruins had cooled the work of tearing down and building up was resumed. It is as difficult to wend one's way through Wall Street as it ever was. Physically as well as financially there is peril in perambulating that street. Stocks may rise but stones are falling prodigiously in all directions." The perils are still great but one has noticed that there is a tendency for the fees taken by funds to be maximized at the end of the year relative to "long-term values." Anecdotally, there is a tendency to extremes near the end of year and reversals at the beginning, so that the amount of frictional payment to cover the costs of keeping the wheels of commerce is well greased. And in that direction, one notes the dollar near a low at the end of the year, and wonders if it will take the same zigzag higgledy-piggledy course as Internet stocks from year-end 1999 to the first week in 2000, as so many other markets in similar positions have taken. But this must be tested.
12/23/2004
Victor Niederhoffer: Sometimes a Word is Very Important
Old timers remember how in 1991, Secretary of State Baker was able to drop the market 5 percent in a second, by using the word "regrettably" to indicate that no solution short of war with the Iraqis was possible. The book "What Makes Stock Market Prices" which the Collab and I are using as one of the sources for "How to talk like a big 19th century operator" with a view to walking the walk and talking the talk of manipulators of current day stocks knocked down to unseemly levels by bear raiders of the current day has a similar incident in December 1916 relative to Bernard Baruch and US Steel Common.
Mr. Baruch -- "The thing that affected the market first was the German Chancellor's speech. This was followed by Lloyd George's speech in Parliament on December 19th. The first cable said that he refused to consider peace. Later as the full speech came through he went on to say "but." The next day I covered a third of the stocks I was short on. The technical position was bad and this speech was a body blow." Somehow the linguistics of this speech remind me of the Palindrome and Bin Laden in addition to bringing back many pleasant memories of the tone deafness of Secretary Baker who single-handedly caused the crash of 1987 by his attempt to intimidate Germany into raising the value of the mark. I am interested in other single words that have had terrible impacts also.
Gregg van Kipnis Responds:
I do not think this is the correct explanation for the stock market meltdown in 1987. It was Congressman Rostenkowski who, for the 2nd or 3rd time, the week before Black Monday, said he would have his committee move a new tax bill to deny the deductibility of the interest costs associated with leveraged buyouts that did the market in. There we nearly 100 large cap stocks that had large price bubbles built in to their price on the rumor/belief they were takeover targets. As these stocks plunged simultaneously they brought down indexes which in turn kicked in futures selling to maintain the delta of the synthetic put protection products (i.e., portfolio insurance invented by Leland O'Brien and Rubenstein) that were all the rage at that time. A rather obscure white paper was published by the Fed about a year later emphasizing this explanation over all the alternative theories circulating at the time, that confirmed my own conclusion on this point.
Mark Mitchell and Jeffry Netter, "Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the House Ways and Means Tax Bill?", Journal of Financial Economics, September 1989, pp. 37-68
Roger Arnold Replies:
As the chair pointed out in his original post on the subject the classic single word message is the "BUT"; as in I love you BUT I can't marry you. And of course the similar words, ALTHOUGH, HOWEVER, NONETHELESS, etc. are just as much fun to watch for in political and economic discourse. It's a particularly fun game to play when reading FOMC statements; as in :
From the March 16, 2004 FOMC statement:
ALTHOUGH job losses have slowed, new hiring has lagged. Increases in core consumer prices are muted and
expected to remain low.
From the December 14, 2004 FOMC statement:
With underlying inflation expected to be relatively low, the Committee believes that policy accommodation
can be removed at a pace that is likely to be measured. NONETHELESS, the Committee will respond to changes
in economic prospects as needed to fulfill its obligation to maintain price stability.
From the January 29, 2003 FOMC statement:
Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on
spending and hiring by businesses. HOWEVER, the Committee believes that as those risks lift, as most analysts
expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide
support to an improving economic climate over time.
George Zachar Responds:
On June 3, 2003, in a by-satellite appearance before a conference in Germany, Alan Greenspan said, "We're far more unclear on the issue of deflation (than inflation), and as a consequence, we need a wider firebreak, in logging and forestry terms, because we know so little about it. So we lean over backwards to make certain that we contain deflationary forces.''
When the word "firebreak" crossed the tape, the debt market's front end gapped a dime instantly, taking the 2 year note through 1.25 for the first time in memory.
It bottomed yield-wise 8 days later at 1.08.
Allen Gillespie Responds:
Neither of those people put in the sell orders, nor failed to put in buy orders, so how did they cause anything? With yields on high quality bonds reaching double digits, it was natural for pension funds to asset allocate. That process however hit many a leveraged speculator as margin debt was up a full 20% Dec to Sept that year despite the fact the cost of that money was rising at a rather rapid clip. Any hard down, which the market experienced that Friday, would naturally lead to additional margin liquidation in a process not dissimilar to the sequential drops that occurred in the Nasdaq in 2000 following Bill Clinton's genomics speech. Once control passes from the spec to the banker (who will always move to liquidate collateral) the rest becomes a formality.
12/23/04
Art & Commerce, by Tom Marks
The remark about Joyce smiling at the notion that he could effectively ply
his craft without any noticeable perspiration, is well taken. Deeper art dawns
on the observer, and tends to dwell; that which initially overwhelms tends to be
more ephemeral.
Perhaps the hardest thing for a writer, or any artist, for that matter, is to
find a distinctive voice, and carve out a niche all his own.
Amidst all the cacophony around Spec List sometimes, if I were to do a blind
taste test, I think I could only conclusively determine the jottings of Mr. E;
Victor's idiosyncratic luminescence; and Kevin Depew's Racing Form raconteuring.
To be among three of 200 means that you're obviously doing something right.
In 1904 George
Russell offered £1 each for some simple short stories with an Irish
background to appear in a farmers' magazine, The Irish Homestead. In response
Joyce began writing the stories published as Dubliners (1914). ..
Joyce's
epiphanies appeared alongside the week's manure prices (he was so humiliated
by this location in "The Pigs' Paper" that he took cover under the pseudonym
Stephen Daedalus). On more than one occasion [he] called himself "only a
scissors-and-paste man". ..
12/23/04
A
Young-Hearted Man, by Charles Pennington
BEIJING, Dec. 17 (Xinhuanet) -- Nobel Prize laureate Chen Ning Yang, 82,
will marry a 28-year-old post-graduate from south China's Guangdong Province
next month, an official with Beijing-based Tsinghua University announced here
Friday.
"He also offered 'guidance' to post-graduates and attended all sorts of academic
'workshops'." (Quotation marks added.)
There is a very famous theory on elementary particle physics called
"Yang-Mills Theory", named after this laureate and Bob Mills, who was a
professor at Ohio State for decades after the development of the theory. Yang,
who has wide fame in the Chinese community, was always being asked by friends what to order at Chinese restaurants. He would
write some Chinese characters on a sheet of paper, and tell his friends it was
difficult to translate, but just tell the waiter you want what's written here.
Inevitably the friends would be treated lavishly with wonderful food, but the
food items were different from one time to the next. Yang had written "These are
my very close friends. I would be so grateful if you treat them as your honored
guests. Signed, Prof. C. N. Yang."
12/23/04
Calling Dr. Steenbarger, submitted by Steve Wisdom
Here's How You Can Get a Bigger Bonus Next Year: Mark Gilbert
Dec. 23 (Bloomberg) -- Disappointed with your 2004 bonus? Traders, it's time to ditch those New Year resolutions to build bigger biceps or slim that waistline, and give your personality a workout to earn more in 2005. Be an introvert. Keep your emotions stable. Stay open to new experiences. Oh, and try not to be misled by randomness, stop thinking you are in control of the situation, and don't expect any help from your boss. Those are the conclusions of a study on what makes a good trader by four U.K. academics specializing in psychology and behavioral science. To get answers, the quartet interviewed 118 London-based traders and managers -- only two of them were women - - from four unidentified investment banks, three with U.S. headquarters and one based in Europe. The researchers are trying to fill an information gap. They discovered that while banks are willing to pay millions of dollars to their top profit-generators, they don't know how to spot or develop potential Masters of the Universe. Until he goes `ka- ching' or `ka-boom,' a trader's bosses have no idea whether they have hired a star or a turkey.
Are You Special?
`The traders and managers we spoke to were almost all clear that superior performers had `special' qualities, and yet no-one was able to articulate clearly the precise set of skills and attributes implicated,' the researchers wrote in their book. `There seem to be few resources directed toward identifying what makes a top trader, despite intense speculation on the subject, the large costs of recruiting a new trader and giving them several years to see how potential develops into skill.' The results of the study are in a new book, `Traders: Risks, Decisions and Management in Financial Markets' (Oxford University Press, 244 pages). The authors are Mark Fenton-O'Creevy, senior lecturer in organizational behavior at the Open University Business School; Nigel Nicholson, professor of organizational behavior at London Business School; Emma Soane, senior lecturer at Kingston Business School; and Paul Willman, a professorial fellow of Balliol College, Oxford. Using interviews, questionnaires and tests, the researchers tried to find the personality traits that make some traders more successful than others. `Personality accounts for significant variation in earnings,' the investigation found. `The higher performing traders in our sample are emotionally stable introverts who are open to experience.'
Keyboard Impotence
One of the tests featured a chart on a computer screen. The line on the graph started at zero, and then increased or decreased every half-second for 50 seconds. The traders were told that pressing keyboard keys Z, X or C might affect how the chart developed. When the chart stopped moving, they were asked how much influence they thought their typing had on the chart. The test was a placebo. The typing had zero effect on how the graph developed. While some traders realized the chart was predetermined, others were convinced they had full control. (The mental image of a guy in shirtsleeves bashing impotently at a keyboard, convinced he's making a difference, is very appealing. Not so different from what he does for 10 hours a day, maybe.) 'The results produced a statistically significant negative association between illusion of control and both total remuneration and desk profits, but not risk management, analytical ability or people skills,' the authors wrote. `There is a clear case for saying illusion of control is associated with poorer performance and lower earnings.' In other words, while the traders fooled by the graph were as competent as their less gullible peers, their earnings were typically lower.
Thick-Skinned Introverts
When everyone else is selling, there's often money to be made by buying, and vice versa. You have to have a thick skin, though, to go against the crowd. `Introversion insulates traders against social distractions including the need to be liked and accepted; useful especially where there is a need to seek or tolerate contrarian positions,' the academics said. They also found that traders' behavior typically changed as bonus time approached. `Traders expecting a good performance (and thus bonus) outcome will be reluctant to put those anticipated gains at risk, whereas a trader anticipating a poor outcome will be more willing to take risks that avoid that negative outcome,' they said.
`Training-Free Zone'
Think your boss is useless? You may well be right. The authors reserved their most scathing comments for the way trading rooms are managed. `Trader management is a training-free zone,' they said. `In a combined 70 years of experience, the authors have never encountered so little management development in sophisticated organizations of vast resource.' Banks are happy to leave traders alone provided they are making money. Managers only intervene when a trade has gone sour; post-mortems are held when money is lost, with scant investigation of why some trades are profitable. `The combination of trader autonomy, reliance on bonus and management spans of control generates an environment where managers see themselves as a safety net rather than as creators of value or profit,' the professors said. `Put another way, trading environments rely too much on managing outputs.'
If the 2004 bonus fell short, try these New Year resolutions from the authors to shake the money tree harder next year:
12/23/04
The Memory Hole, by
George Zachar
Most of the images of
FDR have
vanished from the Fannie Mae website.
I did find one remaining, next to this link:
>CEO Raines Answers Frequently Asked Questions<
That link yielded:
Error 404
The requested object does not exist on this server. The link you followed is
either outdated, inaccurate, or the server has been instructed not to let you
have it.
12/23/04
Pools, by Duncan Coker
In the Style of Edwin Lefevre's "Wall Street Stories"
...looks like the syndicates are bidding up pooled interests and public taking notices of tight control of capital stock and intentions of inside operators to advance. Some of these operators loaning to the shorts precipitating a squeeze for which the syndicate at that time unloads large blocks to the public
...Invariably some in the syndicate break ranks and begin to hurl at full at the market. Then the room traders as a favorite trick offer to sell thousand of shares lower than people are willing to pay in order to frighten the timid holders until the movement becomes general. Exacerbated by the Trust-maker's decision to simply pour the remaining shares on the market as one pours water from a pitcher to protect the interests of the associates while sullenly commenting " Somebody has been selling on us.."
12/22/04
Depression Babies
Barry Broadfoot, writes Daily Spec correspondent Jason Schroeder, is a Canadian historian who took his tape recorder to capture Canadian recollections of the Depression, crop failures, the Japanese internment and the War. "The stories open a window on a world of individual attempts to remember and comprehend what they went through," Jason says. "He has hundreds of them. I find them instructive and telling about people's impressions of making it through.
"I can pick a Depression Westerner out on any street, anywhere, and I'd rather have their company than any kind. Mind you, they are cautious folk. They keep the bird in the hand until they squeeze it to death. Give them three percent interest on their money and they'll love you to death. Offer them a nice piece of land that reeks of profit and they'll say, 'No thanks. I knew a time when they couldn't give whole sections of that stuff away.' They plod onward and upward towards that pension, giving the boss his due, and they get downright dewy-eyes when the day comes and they get their gold watch. They marry and sire and sigh and die and friends gather in the parlor and drink the widow's tea. And that's the end of it, except they made an honest mark.
"The trouble is, of course, that children of the Depression rarely realize their true potential because the experience of it glued them to the safe way. Breadth of thought must have budded in thousands of brains back in the Thirties, only to shrivel in the face of too many dust storms. Myself, I would quit my job right now and take a whack at something I like better but I dasn't because, deep down, I figure I was overdue for another grasshopper plague. See, that's Depression thinking."
Russell Sears comments:
I find this very one-sided. Sure, going through hard times whips the spirit out of many like a stick to a dog. However, in distant running, the stories of desperation bringing out the determination and heavy personal risk taking needed to succeed in this sport, have become standard. It is almost a requirement. Many of the entrepreneurs I know come from such hard times. The military has it down to an art: Strip a person down to the essential and they find they have what it takes to survive within them. Such confidence in your survival ability is very freeing of the paralysis of high risk. Geronimo, Washington and many military leaders believed they had providential protection in battle, due to surviving the worst. My Grandparents faced hard times, first as kids fleeing Communism, and then in the Depression... and they would never think of hiding their money in the mattress. As my first track coach told me, "Hard times can make you bitter or better."
Ken Smith comments:
Good post. I have seen media stories that seem to be an attempt to deny the suffering of the Depression, as if it did not exist; and attempt to say capitalism is pure wonder and cannot fail at bringing prosperity. The Depression was real. I was there.
Money and the lack of it was the worst part of the Depression. I was a child during the depression and I have a clear picture in my mind of sitting down to breakfast to a cereal that had weevils in it - squirming things, like worms. I called attention to my mom and she said I did not have to eat it.
The rent was due, we could not buy coal to heat the house, the water was about to be shut off, electricity too. My mom had tuberculosis and doctor bills could not be paid. The problem was work. There was no work for men with families.
Then the WPA came in thanks to Saint Roosevelt. My Dad got work driving a truck carrying rock for a jetty the government decided to build. Then as a former Navy seamen he got a job on a costal lumber vessel. But pay was almost nothing. Then Dad got a job on land so he could stay close to his family. He got on thru a Labor Union, which saved our lives. He started work on a logging job, rafting logs on the water as they came down from the mountains on rail flat cars.
Dad got food at times by hunting deer and killing bear. He dug clams on the ocean beach when he had time. But I wish to point out that although there were men who were in an environment where deer and bear and clams and oysters and crabs and salmon were at hand this did not enable them to pay the rent, water, sewer, garbage, electricity, phone, prescription drugs, doctors, dentists, gas station owner.
Since no money, then no one bought anything new. No one consumed. And consumption creates demand. If no demand, then no one will supply. If no supply then no jobs. A vicious circle.
In short, money is very important. The Depression was a money-related phenomenon. I will always stand by the fact that government intervention saved the lives of a million Americans. I am not saying this intervention cured the Depression. I am saying the people of this country were saved.
George Zachar comments:
Murray Rothbard and the Austrians (see Rothbard, "America's Great Depression", Mises Institute, 1963) argue forcefully that "government intervention" both caused and prolonged the Depression...fitting with the modern pattern of Washington creating a problem and then demanding the power and cash to solve it. The cash is spent, and the centralization of control in DC ratchets ever-upward.
One under-discussed result of FDR's New Deal/WW2 tenure was the utter transformation of the federal system into an unassailable centralized leviathan, whose credibility rested on mass memories of gratitude such as Ken's.
It is no coincidence that as those memories fade from our midst, skepticism of Washington (Reagan, Gingrich) started to take root.
Politics too has ever-changing cycles.
None of this, of course, is to suggest that Ken's experiences and those of millions more are without meaning.
FDR was a saint in my boyhood home as well.
Jason Schroeder Replies:
Great-great-uncles of mine are reported to have been involved in Alberta's plan during the Depression to get the money/economy moving.
Supposedly the goal was to issue currency that was to lose a portion of its value every week and require a (purchased) validation stamp to bring it up to par. The idea was to force a pattern of spending or devaluation.
The plan was halted because the federal government did not like another legal tender.
The Canadian history books state that a rogue province tried to print money and took appropriate action. It is curious to me if such a scheme would be more dastardly or be more upfront about the government's role in the economy. That is increase the government's power or force the people to take more responsibility.
Kim Zussman comments:
"Give them three percent interest on their money and they'll love you to death. Offer them a nice piece of land that reeks of profit and they'll say, 'No thanks."
Most of us with depression-era parents notice that the "buy on dips" meme was strange and anathematic to them. This relates also to the paradigm that one can learn from experience in markets and trading, since dynamics during the depression wood-burned different life long mindsets than the modern life of plenty. Luddism vs. adaptability.
How does one distinguish between advantageous learning new ecosystems vs. environmental ruses that dupe the cyclically unwary?
One answer is the chorus of statistical harmony singing repeating patterns. Yet they take root in "this is not your father's market", which remains fertile as long as the trend (1.5m%/100yr) remains the trend. Deception en masse: if everyone knew that dips were dips there would not be dips.
Then there is deception on the individual level.
Pocket Man
Father was an artist who painted depression street-toughs with wizened faces pulling smokes, hands deep in pockets jingling pennies in the cold.
An acquaintance stands by default with hands in pockets. In public, at the gym. Observing, surmising, cool. No one suspects and I did not know the secret of his common pose. Except on one occasion when it seemed odd to gesticulate with only his left hand with the other pocketed. Then I saw it. The hand-it was deformed-disfigured-underdeveloped from birth. Casually pocketed, especially when both, seems nothing amiss. A skill, a deception, learned in hard lessons at school taught by taunting boys and unsympathetic girls.
His performance is sleek automatic and smooth as he leaves the room, smooth coat over twisted arm. Does he think about this autonomic deception? Do we think about ours?
Russell Sears Responds:
I find this very one sided. Sure going through hard times whips the spirit out of many like a stick to a dog.
However, in distant running, the stories of desperation bringing out the determination and heavy personal risk taking needed to succeed in this sport, have become standard. It is almost a requirement.
Many of the entrepreneurs I know come from such hard times. The military has it down to an art, strip a person down to the essential an they find they have what it takes to survive within them. Such confidence in your survival ability is very freeing of the paralysis of high risk. Geronimo, Washington and many military leaders believed they had providential protection in battle, due to surviving the worst.
My Grandparents faced hard times, first as kids fleeing communist, and then in the depression... and they would never think of hiding their money in the mattress.
As my first track coach told me, "hard times can make you bitter or better".
12/21/04
Victor Niederhoffer: It is rare..
that one has a chance to help the President since he is much wiser than us on all matters except for hard ball squash rackets. However, he recently asked how the dangers from heart attacks vis a vis Celebrex compare to those of being struck with lightning while playing golf. He reports that there were 550,000 heart attacks in a year which, based on a population of say 100 million above the age of 50, is a normal 1 in 200 per year or 5 per 1000 which as Dan says is much higher than the 1.5 in 1000 per year found in the placebo group of the NCI study. The 5 per 1000 that the NCI study found for those taking the high doses of Celebrex is in accord with the total probability of getting a heart attack that the President reports from the American Heart Association above the placebo group was taken as the base .
And the President as usual is quite correct that the small incremental total chance of getting a heart attack that the government found of 3.5 per 1000 i.e. a 1/3 of a % a year, is much too low to even consider changing your life style considering the pain reduction and the side effects of the other alternatives even if the government statistics weren't completely random. The government study shows only one thing if you didn't know it was faulty. The way to stay healthy is to enter into a government study at the NCI, where you kindly don't know if you're going to get a placebo or not, and hope you got the placebo as that would reduce your heart attack risk by half.
12/21/04
Ask The
Senator, a continuing series
Q: Is it safe to do business in Russia these days?
A: The people I have dealt with in Russia have been more
honest than in any other country. Maybe I just got lucky, but
there has never been a question about their integrity. What
they say the will do, they do. Maybe I can get Vic to go
lecture there? They have large symposia 2-3 times a year.
Send queries for the Senator to senator<at>dailyspeculations<dot>com
12/21/04
James
Tar: Cooking and Markets
The Food Network (see your cable provider) is perhaps the most useful and instructional channel on television today. The range of techniques, ingredients, and genres across the programming is exceptional, and each of the shows' stars has an individual skill that stands out alone. I spent 5 or 6 hours a day resting while totally focused on the Food Network. I learned a great deal and feel that my cooking is more disciplined and creative. Despite the shows diverse programming, common themes emerge. Yes, perhaps well known, but they can not be spoken enough and they are more than applicable to our love of the markets:
Bruno Replies:
I have read James Tar's thoughts on "Cooking and Markets" with interest. I agree with most. However, I would like to add that there's much more to it.
Point number 4, "Follow the Recipe, Respect the Process", is fine, but it applies only to the intermediate stage. In the beginner stage, you try to cook a steak. It gets burnt. Then and only then do you realize your inexperience and purchase cookbooks. That's like my former girlfriend's first "investment". She bought a gold contract, lost money immediately, then bought a book about investing in metals.
In cooking, in the intermediate stage, you spend a lot of time following recipes. But there comes a day when you don't need cookbooks any longer. And there comes another day when you create your own recipes. You develop your own style. That's similar in trading.
Now, very interesting developments are taking place in the field of cooking. They should please this list since Vic and Laurel's site is "dedicated to the scientific method".
For years, cooking has been more art than science. For many years. In fact, most of the utensils we are using today are exactly the same as the ones our forebears cooked with in the middle ages. The only significant technical progress in 1000 years has been the micro-wave oven. But the times they are a-changing. Science is invading gastronomy.
There are two schools of scientific cooking:
The first one is led by Ferran Adria, in Northern Spain. Many consider him as the best chef in the world today. His restaurant El Bulli is open only six months a year. The other six months are spent experimenting innovative recipes in his laboratory. He and his team run many experiments. Things such as dropping orange juice into liquid nitrogen, or bean puree into calcium chloride. Sometime, an amazing new recipe is discovered through experiment, and served to happy customers in the next season.
That's very similar to a trader testing models, discarding most, finding one that shows promise, and eventually running it in the markets.
The second school is lead by Professor Herve This. He is a physico-chemist specializing in molecular interactions. He is also at the heart of a new branch of science: molecular gastronomy. What he does is to test the age-old sayings cooking is replete with. For instance, we have been told for centuries that gnocchi should be boiled until they rise to the water surface. But when Herve This measured floating gnocchi heart-temperature, he found that over a certain size, gnocchis are not cooked. Therefore, the old saying is wrong. It should be amended to: "boil SMALL gnocchis until they rise. Bigger ones should be kept in the pot longer".
His findings sometime infirm tradition. They sometime confirm it. The experiments can also yield innovative ways of cooking. For instance, it is now determined that the perfect hard-boiled egg is obtained at exactly 68 Celsius. This has to do with yolk/white relative densities and protein coagulation temperature.
In the same manner, there are many old sayings and cliches in the markets: "don't fight the Fed", "sell in May and go away", "rain in November, Christmas in December"... The trader equivalent of a molecular gastronomer thoroughly tests these sayings before committing any money. And in the process, he sometimes comes up with new ideas.
12/21/04
Ask The
Senator, a continuing series
Q: How did your Darlings of the Dow do this year?
A: I advised all subscribers to exit longs on the close, to take home profits. As most know, I select the
Darlings of the Dow each October; here at the results:
STOCK 10/25/2004 ENTRY EXIT SHARES
HEWLETT PACKARD 17.70 21.21 565
ALTRIA 47.05 61.04 212
HONEYWELL 32.50 35.79 308
HOME DEPOT 38.90 42.11 257
ALCOA 31.73 31.26 315
NET GAIN ON PORTFOLIO 13.2%
NET GAIN FOR DOW 10.1%
Send queries for the Senator to senator<at>dailyspeculations<dot>com
12/21/04
Intelligence from Mr. E
Wal-Mart Breaks Price Barrier with $498 Linux Laptop Running Linspire
New low-cost computer features complete operating system and Microsoft file-compatible office suite
SAN DIEGO, December 20, 2004 Walmart.com has released the $498 Balance laptop, which runs the Linux-based operating system Linspire. The laptop comes fully equipped with the operating system, Internet suite, and Microsoft-file compatible office suite, and can be used with both dial-up modems and broadband connections. The $498 price does not require coupons or rebates and can be purchased immediately.
Wal-Mart and Linspire worked together to offer a laptop that would give customers the best user experience at the lowest price possible. The Balance notebook is the lowest-priced laptop currently on the market to include a complete operating system and office suite - comparable machines cost hundreds more even without an office suite or software included.
Hardware specifications:
*1.0 GHz processor
*128 MB RAM, expandable up to 512 MB with included SODIMM slot
*14.1'' LCD screen
Included software:
*Linspire 4.5 operating system
*OpenOffice.org - full-featured Microsoft file-compatible office suite with word processor, spreadsheet, and presentation programs
*Internet suite including email with spam blockers, Internet browser, and built-in firewall
*More than 1,900 free software programs for download, with guaranteed software updates for 3 months
The $498 Balance notebook with Linspire is an extremely affordable Linux-based computer perfect for use as a second or third home machine. Users can connect to the Internet and create, edit and share documents within minutes of bringing the laptop home without paying extra charges for software or licensing fees. Wal-Mart and Linspire partnered to bring a full-featured laptop to consumers at the lowest price point possible.
12/20/04
With this post, we start a new Department of Don Quixotian and Maqrollian Financial Writings of the 19th
Century with timeless lessons for today. Contributions from readers are encouraged.
Like Don Quixote or Maqroll the Gaviero of Alvaro Mutis, I often "console or amuse myself by reading obscure historical texts, escaping into these books at moments of tension or danger, meditating on the centuries old lessons at moments of imminent decision". I am presently consoling myself with the silk and velvet leisurely lessons of obscure financial texts of the 19th century as I endure yet another of a Gaviero-like "life threatening and doomed money making scheme" this time by accumulating a line of Pfizer while a mountain of lava flows on its corporate soul. I find the 19th century books replete with that leisurely contemplation of universals that so often eludes the spare and also doomed attention to get rich schemes and disguised promotions of the more recent books. And I like the allusions to such things as ”unloading stock, tornadoes on the planes , foundering of ships, and clipper ships of speculation”. In those days like ours according to such 1857 classics as "Young Men in Wall Street", by George Train, "fraud in high places was the word of the hour, money in trust vanished with the air; and mercantile morality was hardly known among the pullers of the wires". I will take the liberty of sharing some of these timeless insights and locutions with you in coming days in hopes that it will increase your overplus.
The first contribution comes from the estimable Bardophile Mr. Duncan Coker:
In my research on the operators, syndicates and pools of an earlier era, I came across a nice history of Bears and the markets. It seems in mid 18th century New York City, bears of the four legged variety were not all that uncommon to be seen crossing the North River, where the locals would have" very good diversion and sport with them". Once killed they would be brought to market and where many would go to watch the "Bear down to the market" A Mr. Finck was credited with introducing bear meat to the populus which prior would only be eaten by Indians, hunter or slaves. Mr Finch's bear having been " dressed and cut up nicely" was well received and since that time was carried and sold in a particular market know as the Bear Market, circa 1732.
Later The authors of the Hand-Book of NYC gave this same market the title of Bare Market,as a play on words. By this time in "consequence of the sparseness of the population, business and supplies occasioned by the great fire of 1776". They state that in "the progress of improvement, it happened that the market-house was finished long before the streets were rebuilt or the generality of the inhabitants reestablished" As a result for a considerable time, few purchasers, or sellers for that matter. "This led the citizens when they mentioned it to distinguish it by the name of Bare Market or the market at which there is nothing of sale"
The Market Book, pg 310-312,Thomas de Voe
Dr. Alex Castaldo's Contribution:
What price Wall Street ?
by Forrest Davis
Goodwin Publishers, New York, 1932
Page 93:
The Western Blizzard - a name applied by an ironical Wall Street to the panic of '57 - howled and blustered down that narrow lane
on October 13. Blowing a clean swath through the nation's top-lofty credit, it upended banks and solid merchants. It whipped
the rigging of steam packets laden with gold bullion from the Sacramento for the greedy banks of London.
The rising town of New York, grown tall on seven jaunty years of California gold, bent under the blizzard's blows. Again, Wall Street surged, curb to curb, with the army of the disappointed. Unhappy speculators, now beggared; luckless depositors, usurers, ruined merchants, with chimney-pot hats awry, feverishly hurrying brokers' clerks, profane scamps, timid and respectable ladies.
But the blizzard did more than momentarily to wreck Wall Street's credit towers. [...] The raging wind tossed the aged David Leavitt out of the Wall Street scene and, passing, deposited Daniel Drew - the most pious rogue who ever descended from New York State on the metropolis - to plague the republic's finance for twenty years.
Alston Mabry's Contribution:
This idea of perusing old writings on the stock market brought to mind immediately a vague memory of something a little more recent, from FORTUNE magazine, which I then had to track down. Turns out that the article tugging at my tired neurons was called, "10 Stocks To Last The Decade", and was in the issue dated August 14, 2000.
Now this may seem a perverse exercise by the end of it, but the holiday season, while hopefully a time of joy and reflection, might also be a good time to explore one's inner Grinch, if only to see just how small his heart has gotten over the last year.
?Also, it is only fair to admit that the article's focus is ten stocks "to last the decade", and the decade has far to run. All may be well by Christmas, 2010.
So, here are FORTUNE's "10 Stocks To Last The Decade" (with a little follow up):
| Company | Ticker | Price: 08/14/00 | Price: 12/20/04 | Return | Required Return* |
|---|---|---|---|---|---|
| Genentech | DNA | 41.76 | 51.46 | 23.2% | 0 |
| Univision | UVN | 48 | 29.99 | -37.5% | 8% |
| Morgan Stanley | MWD | 96.84 | 53.65 | -44.6% | 10% |
| Viacom | VIA | 70.68 | 36.2 | -48.8% | 12% |
| Nokia | NOK | 38.71 | 15.24 | -60.6% | 17% |
| Oracle | ORCL | 41.19 | 13.58 | -67.0% | 20% |
| Charles Schwab | SCH | 39.26 | 11.71 | -70.2% | 22% |
| Broadcom | BRCM | 240.75 | 31.08 | -87.1% | 40% |
| Nortel Networks | NT | 79 | 3.41 | -95.7% | 69% |
| Enron | ENE | 73 | 0 | -100% | Infinity |
*Required Return: compounded annual return required to return to August 2000 level by end of 2010
Total, equal-weighted portfolio value of the 10 stocks: -58%.
You can read the entire article here:
Tom Ryan's Contributions:
Tom Ryan: Not quite 18th Century but:
"I remember the bank holiday. I was one of the lucky ones, I had a smart brother in-law who was an attorney. One day he said to me 'I don't like the banking situation'. About eight weeks before the bank closings, we decided to take every dollar out. We must have taken close to a million out between business and personal. In Clyde Ohio, where I had a porcelain enamel plant, they used my signature for money. I would go around the department stores I knew in Milwaukee and give 30 day IOUs of $1.05 for every dollar in cash they would give me. We did this because we could trust only the best and biggest banks and nothing in Ohio was any good for banking. The funniest story I have is in 1933, we were at this night club that got robbed. An associate of mine, his wife, and my niece from Wyoming we were all dancing in this night club and each of us had $25,000 in our socks. We were leaving the following morning for Clyde, and I was to deliver $100,000 for bills and payroll. We were dancing on $25,000 apiece when these thugs come in and take a few purses and the cash from the bar. Damn fools, if they had only known they could have shaken us down and got some real cash money." from "Hard Times"
Tom Ryan: "I Knew Livermore..."
"Yeah I knew him. I had a great friend, John Hertz. At one time he owned 90 percent of the Yellow Cab stock. John also owned the Checker Cab and the Surface Line of buses in Chicago. He was reputed to be worth 400-500 million. He asked me one day to join him on a yacht. There I met two men of such stature that I was in awe: Durant and Jesse Livermore. We talked at one point of their holdings. Livermore said he owned controlling stock in both IBM and Philip Morris. I asked him 'why do you bother with other speculations?' He answered 'I only understand stock I can't bother with businesses'. So I asked 'Do men of your stature ever put away 10 million where no one can touch it?' He looked at me and said 'Young man, why bother with 10 million if you can have big money?'
Later, in 1934, my accountant asked me if I was interested in backing Livermore as he was bankrupt and looking for help. He always made a comeback and would pay back with interest. I agreed and put up $400,000. By 1939 we had made enough to take out $1,300,000 after taxes. Jesse was by this time in his late 60s. He thanked me but I took mine out. I said to him 'Wouldn't it be wise to cash in?' In those days you could live like a king on $50,000. He said he could never get along like that.
So I sold out and took my profits. He kept telling me he was going to make the killing of the century. Ben Smith, known as Sell'em short Ben was in Europe and was wiring Jesse and telling him that there was going to be no war. Believing in Smith, Livermore went short on grain for every dollar he had plus everything he could pyramid.
When I got to Argentina that fall, Germany invaded Poland. Poor Jesse was on the phone. 'Art you have to save me'. I refused to do anything, being so far away. Plus I knew it would be throwing good money after bad. A couple of months later I was back in New York and he came to visit. He was destitute and I gave him a $5000 loan. Three days later he went to eat breakfast at the Sherry-Netherlands, went to the lavatory and shot himself. This was the man who said 'Whats the use of ten million when you can go after the big money?'"
Arthur A. Robertson
Tom Ryan: Another one I always chuckle at
"When Uncle Dan'l says 'up'
Erie goes up
When Uncle Dan'l says 'down'
Erie goes down
When Uncle Dan'l says 'wiggle waggle'
Erie bobs both ways"
......Drew then proceeded to sell short Erie shares to the extent that he sold more shares than actually existed. Ordinarily, such a practice would bring ruin, but Drew had a reserve of stock unknown to the rest of the market. Like Jacob Little, he had purchased convertible bonds and could use them to cover his shorts, making a fortune in the process because he wouldn't have to buy back his shorts in the open market. In order to get the price of Erie as high as possible before this operation, he visited a New York City club where stock traders congregated after work. Sitting down on a particularly hot day, he pulled a handkerchief out of his pocket to mop his brow. As he did so a small piece of paper fluttered out and fell to the floor but no one bothered to tell him. After he left, the other traders pounced on the paper which was a bullish piece on Erie. They then proceeded to frantically buy the stock pushing it to new highs in the market. It was only then that Drew began selling it short, wiping many of them out in the process as the stock plummeted.
from Geisst 'Wall Street'
Tom Ryan: Sage
Another of my favorite stories is in Geisst and also I believe in Clews...Russell Sage approached Gould who owned a controlling interest in the Union Pacific at the time. The target was the Kansas and Pacific which held a virtual monopoly on land and rights of way in the central region out to Colorado. The UP let it be known that a branch line would be built down to Denver from Wyoming which could then compete with the K&P for freight to/from Colorado. Denver politicians were paid to praise 'the public interest in ending the K&P monopoly', a crew was gathered, newsmen were invited all expenses paid to a ribbon cutting ceremony out on the Wyoming prairie, and a rail line started south. This created a small panic in K&P common stock and when the stock had dropped 50% Sage and Gould began buying. Rumors were planted that the AT&SF would also secur land rights to build a line to Denver from the south. Before long Sage and Gould owned a controlling interest in K&P and forced a sale of the company to the Union Pacific. Gould got the company added to his empire for 15 million less than market and Sage netted 40 million. Of course the 'competing line' was abandoned immediately after a cost of half of a million dollars.
Tom Ryan:The other Story that I always like..
was the one about Jay Cooke in 1862. Cooke had worked for Clarke and company which had gone bust in the panic of 1857 but he had walked away intact and started a small bank of his own in Philadelphia making commercial loans. When the war broke out between the states Pennsylvania wanted to raise money by selling an issue of bonds. All the big banks went after this issue and bid discounts of 5-7% from par. Cooke bid at par for the whole issue. All of his competitors thought he was crazy. The state treasurer was suspicious but Cooke was legitimate and had a good reputation and sold the governor that he could place the whole issue on two conditions, 1. he would take the issue in lots once per quarter for five quarters rather than all at once, 2. the face denominations would be lowered to one fourth and one-tenth the normal. This was agreed to although he was forced to take Drexel as a partner to ensure the ultimate financial backing. Cooke proceeded to sell these "little" war bonds to the public as a patriotic act and they sold well. So well in fact that he collected money well in advance of the quarterly placements. By collecting the client money and then placing it months later he was able to create a cost free float which he turned around and lent out to manufacturers of munitions in New Jersey and Pittsburgh as 30-90 day commercial paper rates had soared to 10-15% rates as the demand for war production soared and specie payments were suspended by the banks. This way he was able to multiply his commercial banking business five fold on his capital employed. It was the perfect arb play that the larger banks didn't see coming. this story is apparently not just legend like many of the others but is documented and is in several books including I believe Clews.
Richard Gula Contributes:
A Recollection on Greed, Hubris and Ugly Endings I (How the Grinch Won...)
In the late 1970s there raged a truly wild bull market in companies destined to make fortunes outfitting the casinos being built in Las Vegas-east, Atlantic City. Some of the stocks seemed sure things: Bally Manufacturing (BLY) was the RIMM of its era, a highly volatile issue with very heavily traded options (maybe convertible bonds as well, I think.) The stock often moved well over 2 percent in a day. It quickly became the darling of the retail brokerage world, and the Group (CASINO AND GAMING) created was credited to one Joseph Granville, the father of On Balance Volume and his CLIMAX Indicator.
Bally manufactured one-arm bandits, slot machines. The clientele of Atlantic City was considerably less prosperous than that of Sin City itself, choosing nickel-dime-and-quarter slots over craps, roulette (my favorite...my roulette model still works, is perfectly suited to statistical testing, and the roulette crowd is generally better -educated than, say, black-jack!) The profits from the slot machines had an exponential curve attached to them, and the stock responded accordingly. It kept splitting...so my memory is unsufficient to recall its final highs...but I think the stock moved from something like 10 to 240 in its "lifetime."
More interesting were the stocks that "became" gaming stocks because gambling would be legalized most everywhere, in short order. Hilton (HLT), Holiday Inns (HIA) (yes the same corporate entity that now brings you "Hey, But I stayed at a Holiday Inns Express last night" commercials today) Ramada Inns (RAM) and Marriott would all have one-arm bandits in their lobbies, perhaps in the rooms. The most unlikely of companies drifted into the sights of the speculators: Howard Johnsons Motor Inns (HJ): along with 25 varieties of ice cream, one could get as many choices in the slots. These stocks ran like crazyfor several years without the benefit of ANY valuation crutch. The years were 1977 to 1980, more or less. Caesar's World and MGM were the pure plays: they already ran casinos in Las Vegas and their empires would double and triple in Atlantic City, as busloads of crazed New Yorkers would bus and train and drive to Atlantic City every weekend.
But the Big Cahuna of the era was Resorts International, a casino development company with a very shady past. As i recall, RTA (RTA.B was the hot stock, the less liquid B shares) was once the venerable Mary Carter Paint Company, whose assets were bought up by some pretty crafty investors who reincorporated RTA in the Bahamas. The stock moved from the 10 area to 210 before it peaked. I was sitting with a very sharp stock broker when RTA opened at 198, traded to 203, then 210, then 200 and never looked back as it broke to oblivion, as did the entire group, in the 1980-1981 period. High interest rates (not the puppy rising rates the spec list rants about these days, but 20% plus SHORT RATES) killed construction projects and consumer spending, and even the movie Atlantic City showed the desperate side of impoverished gaming clients.
My broker friend, Warren S