Archives
Oct.
16-31, 2006
Write to us at:
(not clickable).
Please include your full name, and omit attachments.
|
Daily Speculations |
|
|
| |
Archives Write to us at:
|
31-October-2006
Humor of the Markets, By Vic Niederhoffer
I am attempting to consider the analysis of jokes, e.g. James Lackey's often stated "...get the joke..." as an aid to market analysis. The work of Arvo Krikman on Contemporary Linguistic Theories of Humour has been helpful. He divides this analysis into:
There are many events associated with markets that make one wish to roll on the floor with laughter. The selling out at the exact low, the attempt to make a profit without risk, the guarantees of profit, the attempt to make money the usual tested way that leads to oblivion because the cycles have changed, the assurance that the fund is in great shape the day before it fails, the loss of an estate built up over 60 years with one trade, the failure by one tick to make a good profit with a limit order, the trader that calls you with a seemingly good bid or offer that you trade on right before a number or news event or earnings report terribly against you that its 99% they knew about when making the quote, the change in position based on an economic number that's completely random, ephemeral, and certain to be revised in your favor as soon as you get out, the market move that occurs way before the news, the constantly one sided analyst who explains every event, no matter how improbable as supporting his view, the forecasters who can't forecast, the Chinese Wall that supposedly separates the buy and sell side and advisory role of Wall Street, the constant backdrop of explanations for the market moves and reasons to extricate from positions when buy and hold would be so much more appropriate, the shooting stars and falling comets, the attempt to couch a bearish sentiment in bullish terminology, the profits that can come from disaster and the losses from triumph, the inevitable fall from the top of yesterdays superstars, the inevitable results of overconfidence, the tweaking from the recommended 60% weighting in stocks to 58%, the flimsiness of the foundation for many runups or rundowns, the executive of the public company that chisels a hundred bucks on his expense account or dating of options when his salary is $100 million a year, the investments that's made partly for reasons that make one unpopular in the hallways of the service that you lose your entire stake on, the commentator that's always bearish who relies on the broken clock to be right once, the fundist who hits the top when his sector finally goes his way and receives great public acclaim for it.
All this humour, and so much more, which I call upon readers to contribute, calls out for a general theory of market humour which is falsifiable and predictive, and helpful to the trading process.
I am more partial to a mathematical theory which strangely I haven't seen, i.e. most of humor seems to be based on two events in some sort of probabilistic relation to each other- contrasts, collisions, unusual couplings, ambiguities, startling events et al. usually of a pithy nature. That's it. When an event A given B is highly likely, P(A|B) is near 1 and B occurs and not A occurs or P(A|B) is near 0 and B occurs and A occurs, that's usually the foundation of humor. Alternately if P(A|B) is much higher then P(A|C) and A occurs, but even though it's much more likely that B occurred, C really occured, then that's another Bayesian revision sort of humor. A linguistic aspect of humor typified by the bronchial joke must also be considerd. That's the joke where a very attractive young man with a bronchial condition knocks on the door of his Dr.'s house and whispers to his very attractive young wife, "Is the doctooor in?". "No, come right in she says". That would be typified by P(A|C) is much higher than P(B|C). C occurs and then B occurs but not A.
J.T. Holley responds:
The one that jumps out to me is the old formula that is not defined but given as:
Tragedy + Time = Comedy/Joke
The key being what is the definition of a tragedy and equally important what is the appropriate time elapsed?
Looking at 1819, 1837, 1906, all the "Black Days" in '29 - '32, Oct. '87, 10/27 in '97, '98 Ruskie, the Internet Debacle '00-'02, one would say that we have had our tragedies. Throw in the Hunt Bro's, Nick Leeson, and now Brian Hunter and you have more to poke at, but is it appropriate? Is the punch line the drift that the Mistress gives? It ain't funny when you lose, especially money. The further we do get away, time has a wonderful way of healing due to our tenacity to come back. The bear camp doesn't see the tragedies as lines in the joke; they don't even get to laugh with giggles of resiliency?
I am so glad that I have the Holley genes that makes me have a love of peanut butter on my pancakes, and a smile on my face. This has always been thrown back at me as a sign of not being serious about life, but I can't act or see life any other way than as Nock stated "as it is" with that smile.
Jimmy Buffet wrote the line "if we all couldn't laugh we'd all go insane".
I was thinking that the opposite of the formula above is also a wonderful joke the market provides if you have a sick sense of humor:
Comedy/Joke + Time = Tragedy
How many think they can trade/speculate but really haven't any clue and submit their money to the Mistress? They give and as Vic states "lose more than they have any right". This is the sickest of sickest jokes involving the markets due to the plethora of examples many more times than that of Tragedies listed above. Maybe that's a key to those that have been Body Snatched? They aren't aware of the part they play in the joke?
Sushil Kedia adds:
James Sogi responds:
Humor has the element of surprise, the unexpected. That's what the market gives, the unexpected. Its never what you might think it is, its always something else, something counterintuitive, not what you expect. And it knows ahead of time what you are going to do and sees you coming. Like the thread on the group mean, the group knows everyone's secrets, for it is theirs. The market trains you to go the wrong way, feints, always gets you off balance. You need to be a step ahead, look over the horizon, over your shoulder. You can't be a step behind, reactive, you have to lead and take the initiative. Following is too late. The reflexes are not fast enough to defend in the market, you have to punch first, and let the others in the market defend, and have that split second initiative advantage. On longer terms get that strategic edge moving the troops first,. Like lack says, don't let the joke be on you. You have to beat it to the punch line. Why do you think its called the "punch" line? Just like a punch, the reaction is always slower. Got to beat the market to the punch, bob and weave, come in low. Keep your distance. Always protect yourself. It really not all that funny except in a self deprecating sort of way.
Tom Larsen replies:
While I was working as a no-advice broker, a Texan who had added several spreads to his option position, told me: "I got myself so I don't know what I want the stock to do". Maybe it's funnier when I say it out loud with a drawl. In any case, it shows how people think they have a simple financial product figured out and then realize that they are in over their head. Some people who hear this are laughing at the guy who seems inferior, but thinking, "this could be me!" Or it could be reminding us to not get too cute with our positions. Don't take on more complexity than necessary. This is probably just a variant of a common form of joke where we laugh at somebody who gets confused. Superiority humor?
While working as an option market maker in the pit, it was common for traders to deconstruct the trading day in the brokers lounge after the close. During one such conversation another market maker told me that during the day he had been so desperate that he "would have paid anything for those puts. Fortunately no one would sell them to me." This is very deep for me, and reminds me that sometimes you can be unaware flying full speed toward disaster, and the only thing that saves you is grace. and it reminds me not to panic. This joke is probably funny because of the reversal implied as the speaker is clearly aware of his good luck. It's like the feeling you get when you tell someone about the near collision you avoided on the freeway. There is a release, relief and relaxation at the end.
James Lackey responds:
Why did god make chartists? To make weather men look good. The mistress of the markets can make traders look so foolish at times, it is much better to laugh than to cry. Your only as good as your last trade. However, your next trade might be your last, make it a good one.
The worst market jokes are those that everyone has known for years. The market makes "you feel" like a child. You start your joke to friends: a priest, Jesse Jackson and Clinton are all on an airplane that is about to crash. Your Dad, the old man immediately chimes in and crushes your joke "only two parachutes get back to work!" They have heard them all before.
The joke is "housing is a disaster, the consumer is all tapped out" the news tape blinks Bulletin: "US Housing lowest level in 30 years." The market immediately goes to the punch line. The old codgers come in, at the market "take it and bid it." The time and sales boys say "my limits never get filled all size trades the offer all day, who knew?"
Perma bear brain teaser: Bond prices fall as traders sell bonds to buy relatively cheap US stocks.. .interest rates rise, consumer sentiment falls, bonds rise on slowdown fears, stocks rise due to lower interest rates and future uptick in consumer spending, bonds fall as traders sell bonds to buy stocks. Market rallies 6 weeks in a row on short covering.
We watched Yes Men last night. The movie is a Sundance comedy. A couple of jokers start a website to mock the WTO. To their delight no one actually reads the website and offers them speaking engagements. They mock "free trade" and the "government of, by and for the corporation." Their last speech they had to regrettably cancel their presentation to Australian accountants. Their reason for a program change was the WTO was to be disbanded. The post interviews with the seminar participants was hilarious. "its great to see an organization admit their faults, scrap the program and restart from scratch." I was laughing so hard my wife called upstairs to see if I was okay! I said yea this skit is hilarious. Now the sad joke. She says, "that is good Jimmie, that is the first time Ive heard you laugh in 6 weeks" yes Jennifer as you have heard, the markets were strait up for 6 weeks.
About two weeks into the fall rally, the headlines read Ford Motor company might go private. All the talk of how bearish and difficult SBOX is for public companies we thought, wow a double bullish whammy for the indexes. IPOs are far more difficult, the cash flow rich, no growth, dead money stocks are going private, a simple reduction in supply. All that index money must be reinvested in the market. Ill buy the next pull back. What if there is no pullback? Joke is first down move was after a huge "made in China," bank IPO.
Speaking of Chinese stocks...Is it possible to make an ETF of Chinese stocks that are unregisterable on the NYSE, yet float the ETF as a "Chinese investment". Oh the joke is an ETF on private equity.
The daytraders joke they are never right, why bother? The funniest joke is everyone can be right if they wait long enough. You might go broke waiting, but eventually you can be right. Funny debate between admitting your wrong or the market is right vs. your right, just too early. Of course we strive to be rich rather than right, until your rich, right?
The worst market joke. Get even post from Mr. Clive. From the Yra Harris interview....Inside the house of Money:
The worst thing you can do in a trade is try to get back to even. I call that the "prayer trade." I can spot guys on the floor who have it on because they shake back and forth, basically in prayer, mumbling, "oh, please God, just let it come back to me. Let me break even." What is that? Break even? That's a loser. I'm not in this business to break even. There's always opportunity in the markets, so forget breaking even. If breaking even is your goal, you're not trading anymore.
Rick Foust on traders:
Here is a short one that reminds me of some trades/traders.
Question: What is an Ohno bird?
Answer: A bird with 5 inch balls and 3 inch legs. When he comes in for a landing...
Quick followup.
I have this placard on the instrument panel of my Cessna.
"TAKEOFFS ARE OPTIONAL. LANDINGS ARE MANDATORY."
Craig M. shares a market truism:
The best joke of all is that the market allows you to think you actually know what you're doing at times, and while you may profit during these times you never 'make enough' and when you lose it seems even worse. The actuality is that you never really knew anything in the first place.
31-October-2006
Briefly Speaking, By Vic Niederhoffer
The discussion of window dressing by mutual funds as of their oft October month-end fiscal years elicits one to ponder many pragmatic and philosophic subjects. i.e. the last 11 last trading days of October, the market has gone up as of the open and two days later 11 times for a nice t-stat of 4, a 100% of the time, and an expected move of 1.5%. One ponders whether runs of 11 of a seasonal nature such as this are non-random, and notes that it's only 1/2000 for such an event to occur and there are 250 days in a year, many 1, 2, and 3 day patterns, many markets, and a direction that are free, and quickly concludes that the one event in and of itself is completely consistent with chance. But in so many cases, this has nothing to do with its predictivity because for one all such events would be well known to those who study such things, and for two it would depend on how many patterns the average market researcher looks at, and what the degree of consistency that catches his attention is, and how many other such seemingly non-random phenomena but actually consistent with chance events also exist.
On another topic, two unusual round numbers appear. The Saudi Arabia index (SASE) at 9,673 down 3% breaks below 10,000 for the first time in 18 months, (oil down another 1% to a 13 month low) and the Israeli stock market (Tel Aviv 25) goes above 900; an all time high, up 1% for the first time ever (This latter must be sent to Dimson). One hypothesizes that doomsdayists, and ghosts will concentrate on the former.
31-October-2006
SAD, By James Sogi
Big wave season is here - both in the ocean and in the markets. Time to dust off the big wave boards.
Yesterday at Mahaiula it was 15 feet and glassy with only four of us out. We had to paddle about half a mile out to sea as the waves were big. Surfing, running, biking, sit ups, push ups, weights, stretching helps get in shape. Out on the water it was cosmic. The moon was rising above the mountains in the distance, the blue water and spin drift from the big waves filled the air and the energy was big, but the water surface was smooth clam and glassy. To line up our positions to be in the right spot for the take off not too far out, but not too close in to be crushed by the waves there are a number of things to watch. I've been surfing 40 years and can modestly claim to have mastered the basic skills.
1. Line up the cosmic elements by lining up the moon, the tree and the two volcanoes and lava flows. This triangulates well to give a good analog location, but isn't enough, It would be possible to digitally locate at N 19 degrees 47.496 by 156 W02.445 the theoretically historical take off spot but you still might get creamed. There are ephemeral and random factors at work that you have to be aware of in real time. Just the stats is not enough to hit the sweet spot.
2. The waves come in sets or series of 5 or more at a time with a lull in between. Just like the waves of day bars in the market in sets of five or six, and a big day up the last few months. We use the current pattern to choose the wave and where to sit. When the first wave comes, you cannot see over the top, but you can see off in the distance a group of waves coming and position accordingly. Never take the first wave, there might a bigger one right in back you can't see and will drill you if you take the first one. This is an execution issue. The waves come in 12-20 second periods, and the set come in 15-20 minute intervals, and these facts are counted and out in the mental plan. Specs do the same.
3. We look at the shape of the wave as it wraps over the underground rocks and coral reefs and focuses its power. It varies according to the shape and size of the swell, and varies from wave to wave and varies with the tide. This helps refine the position as the waves roll through to be in just the sweet spot where one or two paddles send you off on a 20 foot drop at high speed along the face of the wave on a two hundred yard ride as the waves explodes right behind you and curls way up three times your height above your head.
4. I watch what the other surfers are doing. If the guy on the outside, who can see beyond the next waves starts scrambling frantically, you know a big one is coming and the 3 second head start may be just enough to make it over the crest before it crushes you. In the markets our list is really helpful to stay connected with other trades. Thanks again to Chair for hosting the site and the list.
5. We watch the water currents and the drift. There is a steady trade wind pattern that we watch. I always keep an eye in the water or big sharks who frequent the area. The current pulls you deeper into the line up and if not accounted for, you will end up too deep and get caught.
S.A.D. is not season affective disorder, here it stands for Surf 'n Dine. After surfing we go three miles up the coast to the Four Seasons at Hualalai and eat at The Grille with Alan Wong chef, Yumm and sip Mangoritas with red and yellow color tomato soup with cucumbers and wasabi . Yes, its tough. If any of you come out here, Four Seasons is the best place to stay.
Gibbons Burke relates an industry story:
There is an interesting story, and perhaps a meal or two, about Gordon "Grubby" Clark, founder of the Clark Foam company in Laguna Niguel, Calif. This innovative industry pioneer abruptly quit making surfboard "blanks" - the polyurethane core of the board - which were the industry standard and the manufacture of which he dominated the world with a 90% market share:
The article includes a fax from Mr. Clark explaining in some detail his reasons for shutting the legendary firm down:
For owning and operating Clark Foam I may be looking at very large fines, civil lawsuits, and even time in prison. I will not be saying more than is in this letter so I hope you read it carefully. I do not want to be answering questions about my decisions for the next few years. Effective immediately Clark Foam is ceasing production and sales of surfboard blanks. I would like to give a lot more details but keep in mind that I may have both fines and criminal charges pending at this time or in the future. Therefore I have been advised by my attorney to say as little as possible. I do not want this document to be used as an admission of wrongdoing nor am i going to help the government prosecute me. I do, however, feel I owe everyone some sort of explanation- even if it is incomplete and not a full disclosure of my problems...
and ending with:
When Clark Foam was started it was a far different California. Businesses like Clark Foam were very welcome and considered the leading edge of innovation and technology. Somewhere along the way things have changed. The State of California and Orange County California are trying very hard to make a clean, safe, and just home for their residents. This is commendable and I totally support their goals. It is my understanding their plan is to remove selective businesses to make way for new, better jobs that will be compatible with the improved environment. They are putting an incredible amount of resources into their effort. This is a tough job and they are doing a good job of meeting their goals. The only apology I will make to customers and employees is that I should have seen this coming many years sooner and closed years ago in a slower, more predictable manner. I waited far too long, being optimistic rather than realistic. I also failed to do my homework. What will I be doing in the near future? There is a very good chance I will spend a lot of time in courtrooms over the next few years and could go to prison. I have a tremendous cleanup expense to exit my business. I have the potential for serious fines. My full time efforts will be to extract myself from the mess that I have created for myself. In closing I want to thank everyone for their wonderful support over the years. This has been a great ride with great people. I have loved this job and the people I worked with. Thanks, Gordon Clark
Echoes of Rand-ian heros Howard Roark, John Galt and Hank Reardon, no?
Prices for the remaining unsold Clark blanks took off after this event. Has the surfboard industry recovered from the blow yet?
James Sogi says not to worry:
Talking to my shaper, there are plenty of blanks now...from Mexico. All good quality, no problemo. Gee I wonder who is making them? The market always finds a way. Always one step ahead of government. Talk about government getting into bed how about Daylight saving time as the ultimate commie plot to extract more work out of the proletariat.
An offsite discussion of option trading led to this insightful post from a frequent contributor.31-Oct-2006
Allusion to Bacon By Steve Ellison
Similar to the Chair's admonishment that only the house can grind, Bacon in "Secrets of Professional Turf Betting" compared speculation and the grinding out of consistent profits to a pair of attractive sisters, either of whom might suit a man's fancy, but one sister was married. Bacon explained that the grinding out of consistent profits was already spoken for by the track operators, leaving speculation as the only feasible route to success.
31-Oct-2006
As I See It, by Bo Keely
By following the links in the website below for 30 minutes, I altered the shape of my eyelids and brought up fond memories of personal vision experiments. I had every common childhood vision problem -- or so was told -- from myopia to astigmatism to headaches. Now I have none by having taken vision matters into my own hands. I reckon the ophthalmologists of tomorrow will look back on the ones today, more so than other medical specialists, and shutter.
In conclusion, and before providing the website that launched this letter, I hope that others rather than raising eyebrows will adapt some of my rebellious visual techniques to perhaps hurry along the ophthalmology history and see the improvements in our lifetimes. Here is the page that, after following the links, provided thirty minutes of informative, stimulating reading.
30-October-2006
A Bintel Brief, By Vic Niederhoffer
The Bintel Brief, a Dear Abby type column that has been a regular feature
of The Daily Forward for 100 years, had the following letter about a husband's
death.
"...My husband died and...I don't know how it happened that during
the drive home from the cemetery, I was alone in the carriage with my husband's
friend. Seated in the carriage, I began to cry again, and the friend comforted
me, patted my hands and begged me not to endanger my health. A thought came to
me. Isn't this more than friendly sympathy? Isn't this perhaps the interest of a
man in a woman? As he comforted me, the friend began to kiss my hands and I
looked at him in amazement. Instead of drawing back though, he began to stroke
my hair and swore that he felt toward his deal friend's wife as toward an
unhappy sister. He drew me to him, and kissed me passionately. These were
passionate kisses from a man to a woman. But they were mingled with his tears for
the death of his dear friend and for my fate. I swear to you that in my heart
there was only one love, for my husband was barely two weeks in the grave when
he asked me to marry him. I told him I would marry him a year after my
husband's death. My daughter realized everything. With tears in her eyes, she
blurted out that her father's grave was not an hour old when I already had taken
a new bridegroom".
One is reminded of this by the Amaranth death spiral about which numerous articles have appeared describing how the brokerage houses and banks that were customers and suppliers to Amaranth made billions on the liquidation.
Scavengers (vultures, hyenas), decomposers (funguses and bacteria) and
detritivores (earthworms); all of whom recycle the remains of dead organisms,
play a large role in the ecosystem and are useful in breaking down animal and
plant remains so that their nutrients can be used again in the system. Many
organisms have developed specialized equipment for such recycling of the dead as
it is so much easier to prey upon an organism that can't defend itself than to
have to deal with all the defenses against death that living organisms possess,
such as disruptive behavior and death throes.
I have found many traders and institutions that specialize in the dead, and the stories of the Long Term Capital demise relative to the decomposers that; even as they were alive sold positions in front of them, is one that can never be emphasized enough. I found many such organisms hovering around me when I tried to climb up the stairs a few years after my 1997 disaster. Often I heard them laughing as they ordered me to liquidate positions shortly after they had taken opposite sides. I heard and smelled many similar such organisms in all too recent times also.
It is interesting to examine how these specialists in death organize their activities. And to figure out how to prevent them from having such easy pickings. The Bintel Brief answered the lady harshly "...Better if she had opened the carriage door and asked him to get out. There is no excuse for the disgusting behavior of the young man after his friend's death. It is possible the widow is making a mistake in deciding to marry him, because it is doubtful she can be happy with such a man". It is doubtful that we can't quantify some aspects of the death throes that these disgusting and all too common market specialists prey upon and preclude their undiminished happiness.
30-Oct-2006
How could she wish death on the mother she loved?, by Mark Goulston
"You're not a bad daughter," I told my patient, a grown woman with children of her own. Her body shook as she sobbed. Her 92-year-old mother was in failing health, living in an upscale assisted-living facility. Although she did not require a walker, wheelchair, feeding tube or oxygen as did many of the other residents, she complained incessantly — about the food, uncaring family members, the brusqueness of the staff. Julia tried to be an advocate for her mother but found it increasingly difficult in the face of her nastiness. Then there was her mother's constant criticism of Julia's children, who never called or visited. Julia thought that they were merely doing what she would have liked to do — but couldn't. As a result, my patient found herself wishing that her mother would die.
The more she wished this, the more guilty she felt. The more guilty she felt, the more she called and visited. If some animals attack when they smell fear, maybe the same is true with difficult parents who attack when they smell guilt. Whatever the case, the more Julia tried to appease her guilt, the more negative her mother became. The vicious cycle was pushing her into a clinical depression. I clarified what I was trying to say. Many elderly parents would be appalled, but not surprised, to learn that their adult children want them to die, I said. And equally as many adult children would be relieved to know they are not alone in feeling that way. These adult children, often in their 50s and 60s, live under a cloud that will not leave until their parents pass away. For them, there is no such thing as good news — not when their mother or father is chronically ailing or, worse, in good health but with a bitter or negative disposition. A sudden physical decline may trigger sadness or possibly a fear of the child's own death, but a turn for the better can seem to delay the inevitable for a person already in physical, psychological or emotional decline. "Why feel glad to get six more months, just to have to go through the same process again?" they may ask themselves.
I told Julia that these thoughts are normal. Watching a parent become weaker, sicker or more enfeebled is stressful, of course, but most adult children can bear that. It's when that parent becomes vicious, hostile and resistant to help that stress crosses over into distress. Then, the goal of assisting the parent to have the best life possible is replaced by the goal of relieving one's own distress. If a parent's attitude and behavior don't improve, the child wants an end to the suffering. That can only come when the parent dies. The desire for a parent to die sooner rather than later can escalate to a point of obsession. At that point, it can take all of an adult child's energy to keep such a death wish from wreaking havoc — making the child truly wish that a parent takes a turn for the worse and is closer to death. That was the threshold Julia found herself facing when she came to see me. She spoke at length of the frustration and exhaustion caused by overseeing her mother's care. How, she asked, could a good daughter think such awful thoughts — especially after the many things her mother had done for her and her family over the years? I stressed that her feelings didn't mean she didn't love her mother. Nor did they mean she really wanted her to die. They simply meant that she wanted resolution — to put this chapter behind her. Furthermore, I told Julia that I thought she loved her mother deeply and that those feelings, not guilt, was what caused her to visit so frequently. What she didn't love or like was how her mother's negativity had so completely taken over her personality and reduced her to a bitter, angry shell of a person. Julia continued to visit with the hope of seeing the positive sides of her mother somehow show through.
When Julia realized not just intellectually, but emotionally, that she did love her mother but resented her behavior, she felt emboldened to stand up to her mother in a way in which she had been unable to in the past. On her next visit she confronted her: You're my mother and I'm always going to love you, for as long as you live and beyond, but if you continue to act as negatively as you are, I'm not going to like you. And if I don't like you, I'm going to visit you less often and shorten the amount of time I spend with you at each visit. What I will not do is let myself become so angry and so dislike you that I stop visiting all together. Before I do that I will shorten contact to minutes per week and check in more with the staff about you than visit with you. I am asking for your help in making the best of the situation — being respectful and kindly toward others and showing the dignity that I know you are capable of. Julia's mom heard the resolve in her words and did what bullies often do when called on their behavior in a firm, no-nonsense way. She listened. What's more, she changed for the better, and Julia was able to replace the "death wish" she had been harboring with the true desire to visit her mom. Like others who are exhausted by caring for a physically or emotionally ill parent, she eventually found solace in realizing that the thought is not the deed, that she was not alone in such feelings and that she was not a bad, or even, unloving child. She simply wanted to love her mother as she had been, not resent her as she did.
Mark Goulston is an author, speaker and psychiatrist in Santa Monica. He can be reached via http://www.markgoulston.com/. Copyright 2006 Los Angeles Times26-Oct-2006
Barron's Roundup, by Professor Gordon Haave
Abelson: Karl Rove is the man behind the curtain, tells W what to do. There is no October surprise, except for the bad economy. A smart guy from Merrill predicted the bad GDP numbers, and he thinks housing is going to get worse. For some reason, the stock maket has been strong. Google is so overpriced, that Abelson admires them for using their overpriced stock to buy things. It's not just the economic fundamentals that look bad, Frederic Ruffy says the techinicals look bad, too. The sky is falling.
Page 19: Canadian Natural Resources is sitting on a high-growth project in the Alberta Tar Sands. Wall Street worries that it will spend too much money developing it, but over the last 20 years CNQ has done a great job with acquisition and drilling activity, so the shares are enticing.
Page 21: Verizon is a great company. Buy now. In May, Barrons recommended Sovereign Bancorp, and it is up 20% since. Now it is a buyout candidate. Buy now.
Page 22: Tellabs went from over $60 in 2000 to $10.30 today. But it has great long term prospects and is undervalued.
M4: The market goes up, and it goes down, so don't sweat the fact that it went down on Friday. Coming off of last week's assignment of human character traits to the Dow, Michael Santoli is upset because this week the market was not forthcoming with us about why it does what it does. Anyway the rally is legit, because a lot of people haven't participated in it, and are now itching to get in. The options back-dating scandal still has legs, and will hit a bunch more companies.
M8: The Airbus deal with China presents a lot of problems for Airbus because working out the logistics of the production agreement will be tough. Royal Dutch Shell paying top dollar to minority owners of Shell Canada. Costs in their tar sands operations are way over budget (but don't let that scare you away from CNQ, mentioned earlier).
M9: Sinopec (SNP) looks cheap.
M13: In case you have been on a desert island, GDP growth was bad, and the housing market is bad. Washington and Wall Street will be watching October's employment data, due out Friday.
M15: Sugar supplies may dissolve quickly in early 2007, due to the vagaries of the sugar market in Brazil. Somebody says prices could top out at 13.50. Due to ethanol used in Brazil and elsewhere, sugar prices are now influenced by oil, somebody points out that if crude remains high, and lot of Brazil's sugar will go to ethanol. Corn futures were up.
M18: When MSO reports earnings, option traders, like Dan Quayle, will be expecting the unexpected. Therefore, options traders have all sorts of different positions.
Page 25: United Health is looking good now that they have raised earnings projections and fired their chairman. Christopher Bonavico says the stock is dirt cheap when he considers where earning could be in three years.
Page 26: Feature article detailing the fact that the tech sector is very competitive. Paul Wick of Seligman Communications and Information has done a good job of picking the winners and losers. He likes ASML, CYMI, KLAC, MFE, STX, SYMC, SNPS. He hates APCC, AVCI, CCI, DELL, NTES, NYT, KNOT, WBMD. Dell is a one trick pony and the trick is gone.
Page 30: Chrysler and Mercedes haven't meshed well because Mercedes doesn't want to ruin its image by being associated with Chrysler. Chrysler is a mess, and CEO Tom LaSorda has lost credibility despite his legendary record on the field. Chrysler, however, is doing what it can to improve.
Page 32: The guy on page 26 was wrong, Dell is at the bottom, and there is real value in it. The release of Vista ahould help.
Page 33: New rules for options margining, now you can take a "portfolio approach" to your position, and net out your long and short positions in the same stock when calculating maintenance margin.
Page 34: Former Columbia Professor Michael van Biems now runs a value focused fund of funds. Says it is impossible to forecast growth, so he likes value strategies since they don't try to forecast growth. He doesn't like leverage. He has $155 million in his funds.
Page 35: Fund of funds are listing on exchanges in Europe, people like this because it provides liquidity. There are also tax efficiencies.
Page 38: Before you buy a Chinese index fund or ETF, figure out what you are buying. Different funds have different construction rules. The Powershares global dragon fund is based on the Halter USX China index. This Halter guy has a side business having Chinese companies do reverse mergers with shells that he has an interest in, and then they make it into his index. This could be good or bad.
Page 40: M.D. from Stifel Nicolaus ponders various telecom issues. Says the most important issue for the next two years is what happens with the direct-broadcast satellite companies. Lots of different things could happen to them.
Page 46: Capitalism is the answer to health care costs. In Maryland, the state is reneging on promises it made to its deregulated utilities.
30-October-2006
All Bettors are Losers, By Larry Williams
All bettors are losers...and baseball proves that past performance is meaningless...Yankee Fans were elated to get Kevin Brown. For what? $100 million? The top in that market! So many greatly paid athletes fall apart at their peak (that's said with humor) and owners buy these guys when they could have picked up 10 equally good players for the same dollar amount.
My point is owners buy the highs in athletes...you'd think they would have learned by now.
30-Oct-2006
Roll Back the Clocks, by Andrew Moe
With a wry smile, Benjamin Franklin proposed the basic idea for daylight savings time to the Journal of Paris in 1784 but it remained dormant until 1916 when the Germans adopted the idea during WWI. The UK fell next, with Newfoundland and the US close behind in 1919. Despite small pockets of resistance in half a dozen states, it remains an accelerator to natural perception of the seasonal shift that kicks us into accumulation mode as daylight wanes.
The effects are felt across all age groups, all nationalities, all types of people. In the morning, 6 am looks like 7 am so the early risers feel behind right out of the gate. Lazy teens are no better as 11 am looks like noon and the days are short enough already what with school taking up most of the time anyway. Darkness arrives an hour early with predictable results on traffic. Monday's commute will be one of the worst of the year as freeways crawl with light dependent drivers thrown into the black.
But instincts developed over millions of years quickly kick in. A sense of urgency prevades our existence as schedules shift to capture the dwindling daylight. With holiday shopping bearing down, we dig in and accumulate wealth as fast as possible. Everyone's out for a quick strike. Festivals and rituals resonate the theme. It's time to bring in the crop.
The markets show a confoundedly significant jolt around the rolling back of the clocks, though I leave the particulars as an exercise to the counters.
30-Oct-2006
Sabermetrics and Sports Writers, by Alston Mabry
Sabermetrician Bill James, from his 1981 Baseball Abstract, on the difference between sports writing and sabermetrics:
For that reason, good sabermetrics respects the validity of all types of evidence, including that which is beyond the scope of statistical validation.
Stefan Jovanovich responds:
Bill James picked an easy fight. The sportswriters have always been more clueless about baseball than any other American sport because it has no set plays other than the steal and the sacrifice bunt. Any fool with a Press Pass can learn the names of the pass routes for a wide receiver and then ask the coach why he called for the slant instead of a fade. It is no accident that the writers with the least experience in baseball have been the most enthusiastic supporters of sabermetrics. The statistics provided by Mr. James and others have become for journalists the core of their pseudo-wisdom.
Professional baseball started using statistics before American football players were allowed to use the forward pass and before Dr. Naismith cut the bottom out of his peach basket, but the players, coaches and managers have never believed that the box score was the game. Sabremetrics is deeply emotional in its belief that it is a "fair judge" of what happens on the field. Its "theories of relationship" are interesting but largely useless is determining the "character of the borrower"; yet character remains at the heart of what happens on the field - even in April. On that score alone Gil Hodges and Nellie Fox should both be in the Hall of Fame. James is right about sports writing being largely an adversary process, but then almost all journalism is now some form of "Gotcha". His stats have become like the body counts in contemporary war reporting; the ultimate confirmation that the civilians pecking away at their laptops really do know more than the people wearing uniforms. But, the notes alone are not the music.
30-Oct-2006
A Note on Privacy, by Bo Keely
I read with respect your intellectual posts on privacy and the justice system, and wish to add solid ones of my own. Anyone who desires to take a job in the criminal justice system, including attorneys, first should be required to spend a night on the streets, a shift on police ride-along, a day as a spectator in court and, most vitally, 36 hours in jail. The latter I've formerly compared to a weekend seminar with better speakers, worse food, but it's free. Any person who performs these four prerequisites for Life 101 may more expertly take a job of choice in criminal justice, or anyplace.
I grew up, as Ken Smith has described, as if on the cover of Look Magazine holding a fishing pool under a crescent moon. I still can't turn my back on the shoeless kids I went to school with, but I eventually dropped the pole, went through eclectic vicissitudes, and landed at the far end of the bell-curve in Sand Valley, California.
Sand Valley is the choice toenail for ten sociopaths for good reason. Thank goodness I hadn't this foreknowledge seven years ago on moving my belongings down from the Sierras in a utility trailer hauled behind a Honda 650 Nighthawk motorcycle with a sidecar and tow bar. I quickly learned in the Valley that the residents are obsessed and proficient at cherishing privacy. .
Yet, there are constant tangles with authority since the area of my Rancho is the epicenter of what I term Desolation, California. That is the bleak region where individuality, save the Valley that is a true Galt's Gulch (Ayn Rand's Atlas Shrugged), is almost smothered by authority and the worship of the group. I can write on of my neighbors' run-ins with the law, but shall relegate here to a few personal instances.
After three months of hard work to raise the Rancho out of the sand, one morning a sheriff drove up far from his tour ostensibly to run over a little tree in my front yard. He apologized and continued, 'An old lady suspects there's marijuana growing in your chicken wire garden,' that was quickly dispelled as he looked over the unplanted garden. A year after, another sheriff drove into my front yard and ran over a second tree announcing that he wanted to check out the car in the driveway (mine) that he'd not seen before. I have a clean record, and that was that. A year after, two Feds with bolt cutters and automatic rifles drove to my semi-truck van that houses a library and, as I wasn't there, my neighbor intervened. The Feds claimed a search warrant wasn't necessary because there was a report of a meth lab inside, but the neighbor yelled them off.
Seeking autonomy, a few years ago the 100-square mile Valley had a neighborhood meetin'. They elected a Mayor, Sheriff and Judge to oversee their private affairs. A few auspicious discrete events followed_. The shotgun brandishing Mayor stopped a Marine convoy of tanks crushing his private road and turned them back to Yuma. The Sheriff grabbed a local cop, lifted him off the ground, and dialed 911 to make a citizens arrest for trespassing. The Judge sued the U.S. government and won a few thousand dollars after the Marines riddled his roof with helicopter machinegun fire. So, my personal anecdotes are minimal next to what can be done by seasoned privacy nuts
The upshot is that anyone who wishes to take a job in criminal justice could consider, aside from a short trial on the streets, cop ride-along, court spectator, and jail, also visiting a beacon of privacy like Sand Valley within the dark depth of Desolation before it engulfs America.
30-Oct-2006
Life's Little Statistical Ironies, by Alston Mabry
2004: St Louis Cardinals
Regular season: 105-57
Best record in baseball.
Playoff record: 7-8
World Series: swept by Boston
2006: St Louis Cardinals
Regular season: 83-78
Worst record of all playoff teams, requiring a last-game loss by Houston to
Atlanta to get into the playoffs at all, and Houston lost that game by
out-hitting Atlanta 9-3 but leaving 11 men on base.
Playoff record: 11-5
World Series: beat Detroit in five games
There must be some market lessons in there somewhere. Probably about randomness.
Steve Leslie replies:
I am not sure as to the market lessons here. However I do know something about playoffs in baseball.
Baseball is unique from the other two sports. In baseball the regular season record is completely meaningless. Due to one major factor. In the other sports, home field advantage is critical to getting to the championship series. In baseball, it is all about qualifying for the playoffs. After that, anything can and does happen.
Basketball is the most critical for regular season success. Without home field advantage you are swimming upstream the whole way. There is perhaps no greater factor in predicting a winner than looking at who has the home field advantage.
In football, if you have the best record, you are rewarded in two ways. First you get a bye week to get well and rested (and after 20 games this goes a long way to making your team well) and secondly, you don't have to travel at all. When the regular season concludes, you can be at home for 3 weeks and only have to play 2 games. Plus your team is usually designed with the type of home field you play on.
Winning baseball games in the postseason is all about two things: Pitching and momentum. If you pitching comes out strong, like Boston two years ago or the Tigers this year, you can get on a roll and continue on a roll. Anecdotally, the Tigers lost their momentum by having to wait a week for the Cardinals to conclude their long 7 game series with the Mets.
Furthermore in baseball you can win a series by having your #1 and #2 pitcher carry the series. Who can forget Schilling bleeding in his ankle and giving the pitching performance of a lifetime. Or Kenny Rogers coming out of nowhere and pitching an amazing number of scoreless innings.
So if there are corollaries to be made to stocks, I will submit these two suggestions:
Pitching = earnings. great stocks have great earnings. They get their earnings from a great product with great margins. Microsoft in the 1980's. Xerox in the 1960's and Resorts International in the late 1970's. I find it interesting that GE wanted to be #1 or #2 in the fields that they chose to compete. They were not interested in filling out the roster for the sake of filling out the team. The moral is if you have a great franchise coupled with a great product line, this will translate to success in the stock.
Momentum = trends. Stocks once they get on a roll, stay on a roll for some time. Look on Taser a few years ago. Oil stocks for the last year. Stocks tend to take on a character all its own when they become in favor.
There a many more examples and I hope I have stimulated some thought for additional corollaries.
Allen Gillespie responds:
Having the pain of being a Braves fan, I can tell you what it is. The regular season is long, so a deep pitching rotation is more important than a lot of good bats as the weaker teams you will beat with either and the stronger teams may or may not be focused on a particular night. So, if you have a strong 3 or 4 pitcher, then you will likely win one of those two games giving you a solid record. In the play-offs, however, pitching rotations are shortened so the best guys get on the mound more. In fact, it has been demonstrated that two really good pitchers are about all you need in the play-offs. You need, however, bats that go at least 5 deep with some moderate production 6-8. The one year the braves had 6 decent bats, they won, the other years, check the record. Painful.
The lesson I think is that for long pull trading, statistics and time work for you, while in short term trading and series being able to score quickly is critical.
Larry Williams responds:
Baseball has more stats than stocks; some are just obvious: for example, teams that reach the playoffs can be quite different later in the year due to injuries and trades -- good to great pitchers are added to the roster of teams headed for the playoffs so the team then has more "mound power". Case in point this year was David Wells going to San Diego.
It's not just all numbers...
Steve Leslie relies:
My points are not assertions not supported by anything. I am not sure what you want to have counted. However if you want to go into greater detail about sports betting, I can tell you that it is an interesting exercise and in all likelihood futile because I have never met anyone who had a successful career as a sports handicapper. There are countless books on the market that one can research on the subject. I can not reference any since I learned years ago that sports bettors are losers.
I can tell you that the Yankee offensive lineup was so lethal this year that everyone went in thinking that they would overpower their opponents. They were overwhelming favorites to win the series. Until the pitching took over. In 2004 Boston was down 3-0 and won the series against the Yankees and went on to win the World Series. Thus momentum took over.
It is a fact, that good pitching trumps good hitting. This has been proven I don't know how many times. Look back to Arizona Diamondbacks beating the Yankees and The Florida Marlins last World Series championship. Their team was loaded with young and great "arms"
As far as stocks are concerned. William O'Neill proved overwhelmingly that stocks that are in the highest quintile in earnings growth and relative strength outperform all other stocks. so when you combine these two facets your chance of success goes way up. especially in the long run which as far as I am concerned is a minimum of 9 months and longer. Read his books
Read William O'Shaughnessy book How to retire rich. He has some great strategies for success in selecting stocks. Look at an extremely successful no load mutual fund the Cornerstone Growth Fund offered by Hennessy Funds. This is a quant fund. or Bernstein's book Against the Gods. The remarkable story of risk.
Other than that I am not going to type endlessly in an exercise to convince one of anything. If one does not agree with my points so be it.
As they say "That's what makes markets."
Professor Charles Pennington replies:
It is always tempting to say that some particular field, in which one thinks he has a special understanding, can not be approached through counting, but it's usually not true, and especially not here.
For the examples here:
In baseball the regular season record is completely meaningless.
A rudimentary, better-than-nothing way to test this would be to look at the playoff series for the past N seasons and count the fraction of them that was one by the time with the superior preseason record. If it's not substantially bigger than 50%, then that would support the claim.
[In basketball] there is perhaps no greater factor in predicting a winner than looking at who has the home field advantage.
Here you could take all NBA games played over the past N seasons and count the fraction that were won by the home team. If it's greater than 50%, that would show that playing at home is an advantage. But is there "no greater factor"? Hard to prove, but you could try to DIS-prove it by looking at some other factor that might be important. For example, it's possible that knowing which team has the best record over the past 100 games is more important. That could be tested as well.
Winning baseball games in the postseason is all about two things: Pitching and momentum.
For pitching: The question, I guess is whether pitching is more important than hitting in the post-season. You could take the past N series and count the fraction that was won by the team that had the better ERA during the regular season. Then you could count the fraction that was won by the team that had the highest number of runs scored per game during the regular season.
For momentum: For each series, calculate the fraction of games won by a team for the full series, call that Y, then calculate the fraction of games that they won when they also won the previous game, and call that fraction X. Now calculate X/Y for each series over the past N years. If X/Y, averaged over the past N years, is much bigger than one, then that would support the momentum idea.
Chris Cooper replies:
In contradiction, I have a close friend who has made a nice living for 15 years exclusively from betting football in Las Vegas. He is not a "handicapper", though. He applies a computerized, brute-force strategy to tournament-style contests.
29-October-2006
Overconfidence Biases, By John De Palma
There was a New York Times article last week headlined, "In '97, U.S. Panel Predicted a North Korea Collapse in 5 Years."
From the NYT article: A team of government and outside experts convened by the Central Intelligence Agency concluded in 1997 that North Korea's economy was deteriorating so rapidly that the government of Kim Jong-il was likely to collapse within five years, according to declassified documents made public on Thursday.
This forecasting case study makes for a good addendum to Phillip Tetlock's "Expert Political Judgment" (excerpt from "New Yorker" review below). Tetlock discusses the need for putting beliefs in testable forms, the tendency for statistical models to outperform human judgment, and the bias that motivates black swans to be overlooked.
From the "New Yorker" review: The accuracy of an expert's predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge...
Tetlock is a psychologist-he teaches at Berkeley-and his conclusions are based on a long-term study that he began twenty years ago. He picked two hundred and eighty-four people who made their living "commenting or offering advice on political and economic trends," and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert. Would there be a nonviolent end to apartheid in South Africa? ... Would Canada disintegrate? (Many experts believed that it would, on the ground that Quebec would succeed in seceding.) And so on. By the end of the study, in 2003, the experts had made 82,361 forecasts. Tetlock also asked questions designed to determine how they reached their judgments, how they reacted when their predictions proved to be wrong, how they evaluated new information that did not support their views, and how they assessed the probability that rival theories and predictions were accurate...
Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys...
Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable ... And the more famous the forecaster the more overblown the forecasts...
"Expert Political Judgment" is just one of more than a hundred studies that have pitted experts against statistical or actuarial formulas, and in almost all of those studies the people either do no better than the formulas or do worse...
Tetlock's experts were also no different from the rest of us when it came to learning from their mistakes. Most people tend to dismiss new information that doesn't fit with what they already believe. Tetlock found that his experts used a double standard: they were much tougher in assessing the validity of information that undercut their theory than they were in crediting information that supported it. The same deficiency leads liberals to read only The Nation and conservatives to read only National Review. We are not natural falsificationists: we would rather find more reasons for believing what we already believe than look for reasons that we might be wrong. In the terms of Karl Popper's famous example, to verify our intuition that all swans are white we look for lots more white swans, when what we should really be looking for is one black swan ...
[E]xperts routinely misremembered the degree of probability they had assigned to an event after it came to pass. They claimed to have predicted what happened with a higher degree of certainty than, according to the record, they really did. When this was pointed out to them, by Tetlock's researchers, they sometimes became defensive.
And, like most of us, experts violate a fundamental rule of probabilities by tending to find scenarios with more variables more likely ...
[Worse forecasters are] thinkers who 'know one big thing,' aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who 'do not get it,' and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. [Better forecasters are] thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible 'ad hocery' that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.
Tetlock also has an unscientific point to make, which is that "we as a society would be better off if participants in policy debates stated their beliefs in testable forms"-that is, as probabilities-"monitored their forecasting performance, and honored their reputational bets.">
In the macroeconomic sphere the corollary to Tetlock's work is this 2002 paper by Yale economist Owen Lamont. Lamont wrote, "[Wall Street forecasts are] not necessarily designed to minimized squared forecast errors; rather, forecasts may be set to optimize profits or wages, credibility, shock value, marketability, political power (in the case of government forecasts), or more generally to minimize some loss function."
Also, following Greenspan's Fed Chairmanship, WSJ's Greg Ip described Greenspan's approach to policy-making in the context of Tetlock's book.
30-Oct-2006
Time and Numb3rs: Random Midnight Musings, by
Dr. Janice Dorn
Time is the substance from which I am made. Time is a river which carries me along, but I am the river; it is a tiger that devours me, but I am the tiger; it is a fire that consumes me, but I am the fire...Jorge Louis Borges
The majority of human beings conduct themselves as if they intend to live forever. In essence, there is no systematic or productive review of the past, no real or meaningful planning for the future and minimal learning from the present.
Sigmund Freud posited that the unconscious mind does not have a notion of time, and that our deepest needs and wants remain, for the most part, unchanged throughout life. When you think about this, it is a compelling confirmation of the saying that most people lead lives of quiet desperation and die with their song still inside of them. They don't take time or effort to find out the words or lyrics to their song, let alone try to sing it.
Crowd or mass behavior is even more primitive and impulsive than that of any one individual, since crowds tend to pay less attention to time. An individual alone can at least be aware of time, especially,when feeling lonely or longing. In a crowd situation, there is only the moment and there is no limitation on time. It is as if whatever is happening can and will go on forever (Party like there's no tomorrow). Eventually, the music stops; however, crowds, in the heat of the moment, have little perception of time or limitations.
Gustave LeBon, the French philosopher and politician described in "The Crowd" a collective mind-set that is completely different from what that individual would feel, think or do in isolation. Freud believed that attitudes toward group leaders stemmed from childhood feelings toward the father--some combination of trust, fear, desire for approval and imminent rebellion. Group-think of this type can be regressive and infantile to the extreme. This is part of what manifests, on a larger scale, as panic buying and panic selling.
Mass mentality is magnified in real-time virtual stock trading rooms. The perceived necessity is to be part of this crowd by saying something which the individual believes to be clever, insightful or original so that one is not invisible, but makes one's presence felt. This type of behavior can, if not modulated and regulated, go on for very long periods of time (since crowds have no real time perception) and result in escalating behaviors as various members of the crowd struggle for dominance or simply to be heard, seen or recognized. It is noise and more noise. In order to be recognized as part of the group, individuals may resort to verbal or physical behaviors which would not be recognizable to those who know them apart from the crowd situation.
In the case of a "virtual" crowd, such as a trading room, the verbal exchanges can take on even greater intensity, since one is ( for all intents and purposes) anonymous in cyberspace. The primitive, aggressive portions of the brain overpower the newer, more developed areas of the brain, often in ways which even the individual does not believe. How many times have you heard someone say, or seen someone type "Did I really just say that?" The individual is in disbelief that he or she allowed and could not control primitive limbic impulses and deep-seated drives. "OMG...sorry, I didn't really mean that...or..I can't really be saying that, can I? or "What was I thinking" or "Oops, wrong room LOL." The use of emoticons and music further cloud ,deceive and add even more cacophony and tachistoscopy.
This situation is exacerbated further by the volumes of information, disinformation, misinformation and media verbiage that assault the trader's mind, body and spirit every day. With few exceptions, this is deception, smoke and mirrors. The rat brain (paleo/archicortex), designed for flight or fright is attuned constantly to the possibility of attack, thus highly paranoid about and vigilant for the many types of deception that are perpetrated on a daily basis in the financial markets. The rat brain reacts with fear, greed, anger, retribution, sarcasm and loathing of self and others. The new brain ( neocortex) filters the information, makes a logical decision about its importance and then responds. Sometimes, the best response is to do nothing. Great traders know when to react and when to respond and are acutely aware of the difference between reacting and responding. Great traders have learned to make the old brain and the new brain work in harmony and flow, rather than battling continually with each other.
Time and price are facts of economic life. Because ontogeny recapitulates phylogeny, people repeat behaviors and cycles repeat. Windmills of your mind are simply never ending or beginning on an ever-spinning reel. The brain is a "time machine," assert Duke University neuroscientists Catalin Buhusi and Warren Meck. Understanding how the brain tracks time is essential to understanding all its functions. There are cycles of weather, the moon, politics, commodities, currencies, stocks, sectors. art, fashion, food and just about anything that you can imagine.
Unfortunately, the majority of traders are unable to recognize these cycles because they are blinded by noise. It is only when traders are able to separate from the noise that they achieve the clarity of mind to recognize cycles and cycle changes. One way to attempt to filter the noise and look for order in the markets is through numbers. The work of Isaac Newton (1643-1727) and Leonardo Da Vinci (1452-1519) contains interesting correlates of numbers in the markets. Newton's Law: for every action there is an equal and opposite reaction translates to the AB=CD parallel movement pattern of Gartley. DaVinci's Codex notebook on the Fibonacci Summation Series illustrates the ubiquitous nature of these numbers throughout the entire universe. W.D. Gann wrote extensively on time, price and pattern. Gann ( who was born in 1878 and reportedly started trading in 1902) stated that time has the strongest influence on the markets because " when the time is up, the trend changes." The essential premise behind Gann's use of charts to predict price was : history repeats.
A ton of stuff has happened since 1452. The markets have become more complex, global, computerized and trade essentially 24 hours a day. The herd mentality is at work, but on a much larger and highly magnified scale. Deception is more subtle and sophisticated. Time seems compressed and trade more frenetic . It is as if the logarithmically- accelerating rate of change of technology is permeating our minds and bodies in such a way that everything is urgent, breaking news, want it now, get in and get out quickly, take the profits and run. Is time all we really have so we must grab for all the gusto and goodies now, quickly, furtively, and then start looking immediately, frantically for the next big win? It is not without coincidence that frenetic is synonymous with inflammation which underlies a huge number of human diseases, many of which fall under the general rubric of "stress." The toll on wellness and health is enormous, since stress debilitates and kills.
Accelerating change aside, human emotions have not changed. Greed and fear are the same now as they have been from the dawn of civilization. Those who win consistently more than they lose have learned to self-regulate the forces of greed and fear. They have trained themselves to harness and respect the power of numbers. They have learned that time takes time, and that a trade keeps working until it doesn't. They allow time, price and pattern to play out.
Successful traders have learned to filter, modulate and use whole brain thinking to their advantage as they trade the numbers. They realize that when the time is up, it is up and they are able to get out and get ready for the next opportunity. They know that time is on their side, and they are prepared for it. From a place of relative calm, stillness and centering, they open themselves to receive and act on the messages that their whole brain time machine is telling them.
Time is nature's way of keeping everything from happening at once...Howard Hoffman
27-Oct-2006
A Eulogy for My Mum, by GM Nigel Davies
I'd like to say a few words about my Mum in celebration of her life, a life filled with music, family and friends.
Mum was an outstanding pianist and piano teacher. Gordon Green, a former Professor of piano at the Royal Manchester College of Music wrote approvingly not just about her capabilities, but also her character and personality. The conductor of an orchestra for which she played solos, Donald Price, wrote that she was 'a most gifted and confident musician'.
Mum's more prestigious qualification was as a Licentiate of the Royal Academy of Music. She was also an Associate of the London College of Music.
Throughout her teaching career Mum had literally hundreds of students, teaching them with patience and dedication. When one little boy announced that he would rather be watching 'The Banana Splits' on television rather than have his music lesson Mum calmly replied that he could watch it next week. Not all of Mum's students went on to great things but most of them gained a love of music which will be passed on in turn to future generations. Besides her students, my sister Jacqueline and her children Gemma and Alastair are excellent musicians in their own right. In my case the musical talent appears to have skipped a generation, but my 4 year old son Sam enjoys listening to classic fm.
Mum met Dad through music and they performed piano duets together. A few days ago Dad told me about their first date at the cinema in which my father opened all the doors for her, including the one to the usherette's changing room. Fortunately Mum was able to see the funny side, which brings me to her great sense of humour.
If Mum could be asked about today's proceedings I suspect she'd quip that it was a bit grim. I found some quotes that I think she would have liked, such as Woody Allen's comment: "There are worse things in life than death. Have you ever spent an evening with an insurance salesman?" There's also Winston Churchill's "I am ready to meet my Maker. Whether my Maker is prepared for the great ordeal of meeting me is another matter."
Mum loved to entertain people and tell them stories, maintaining her jovial demeanour throughout her life and despite her long standing health issues. I think this is what many of us will miss most about her, Mum was great company.
At times like this I think we all reflect on our lives and what they mean, in Mum's case she brought a great light into the world. I'd like to finish with a quote from the Roman philosopher Lucius Seneca: "The day which we fear as our last is but the birthday of eternity."
27-Oct-2006
With Great Pride and Joy, by Victor Niederhoffer
I announce the birth of my first grandson, Finn Revere Niederhoffer Springer born to Katie Niederhoffer and Derek Springer of Austin, Texas on Monday, October 23, 2006.
27-Oct-2006
Anthony Bordain on BBQ, by Larry Williams
And that, finally, is perhaps the true glory of barbecue: No matter what barbecue you've eaten, someone will always tell you there's better. No matter what "home of the original barbecue" you've visited, knowledgeable people will tell you it in fact lies elsewhere. "Best sauce," most "authentic," to rub or not to rub, baste with sauce or sauce-on-side - ultimately, who cares? To wander this country and this world looking for the best barbecue - and never actually finding it would be a life well spent, a delicious journey in which enlightenment comes with the search - not the arrival.
27-Oct-2006
Here's Your Hot, Steaming, Jumbo Platter of Research, by Alston Mabry
One wonders, too, if there are mechanical/behavioural dynamics. Are buy orders predominantly limit, and sell predominantly market? Or, if one had the data, would one find that "take-profit" sell orders on an up day tend to be limit, whereas "get-out" sell orders on a down day tend to be market? And what about stop-loss cascades?
STOP-LOSS ORDERS AND PRICE CASCADES IN CURRENCY MARKETS C. L. Osler
This paper provides empirical evidence that currency stop-loss orders contribute to rapid, self-reinforcing price movements, or "price cascades." Stop-loss orders, which instruct a dealer to buy (sell) a certain amount of currency at the market price when its price rises (falls) to a prespecified level, are a natural source of positive-feedback trading. Theoretical research on the 1987 stock market crash suggests that stop-loss orders can cause price discontinuities, which would manifest themselves as price cascades. Empirical analysis of high-frequency exchange rate movements suggests the following: (i) Exchange rate trends are unusually rapid when rates reach stop-loss order cluster points; (ii) The response to stop-loss orders is larger than the response to take-profit orders, which generate negative-feedback trading and are therefore not likely to contribute to price cascades; (iii) The response to stop-loss orders lasts longer than the response to take-profit orders. Most results are statistically significant for hours. Together, these results indicate that stop-loss orders propagate trends and are sometimes triggered in waves, contributing to price cascades. The paper also provides evidence that exchange rates respond to non-informative order flow.
**********
Are Transactions and Market Orders More Important Than Limit Orders in the Quote Updating Process? Ron Kaniel Finance Department The Wharton School
Hong Liu The Olin School of Business Washington University
This paper details that transactions, market orders and limit orders are three major factors which affect a specialist's information set and her inventory position. In modeling a specialist's quote updating process, before any exclusion of any of these factors, one should first address the fundamental question of their relative importance in this process. This question, however, has received little attention both in the theoretical and empirical microstruc-ture literature. Using a simple nonparametric test we investigate the relative importance of these three factors. We demonstrate that both transactions and market orders affect the quote updating process signifcantly more than limit orders, and that transactions affect it more than market orders. Furthermore, we nd that market orders convey more information than limit orders about the value of the underlying security. These results hold even after controlling for transaction and order size.
**********
The Limit Order Effect Juhani Linnainmaa The Anderson School at UCLA November 2005
The limit order effect is the appearance that limit order traders react quickly and incorrectly to new information. This paper combines investor trading records with limit order data to examine the importance of this effect. We show that institutions earn large trading profits by triggering households' stale limit orders and that individuals' passivity significantly affects inferences about their behavior. Individuals are net buyers on days when prices fall because institutions unload shares to households with market orders-and vice versa on days when prices rise. An analysis of earnings announcements shows that institutions react to announcements, triggering individuals' limit orders: the orders executed during the first two minutes lose an average of -2.5% on the same day. Investors' use of limit orders may help to understand many findings in the extant literature, such as individuals' seemingly coordinated tendency to trade against short-term returns.
James Sogi observes:
Interesting that the sells tops are hidden, but the buys are shown to 5 ticks. Why is that? The finger revealed the various orders at a cheap price in the middle of the night.
Recently been missing fills on limits and the market takes off. Almost feel the need to just order at market to get a toe hold in. Not sure if this is just me or a changing market cycle?
Professor Pennington comments:
The paper by Linnainmaa is important.
The paper, from rigorous analysis of data on stock trading in the 30 biggest names of the Helsinki Stock Exchange, concludes that individual investors lose a lot of money by putting in limit orders that are far from the market. These orders become "stale", in the author's words, if and when news is announced, and the authors demonstrate that when such limit orders get executed, it's bad news, on average, for whoever entered them.
Conversely, they show that market orders entered within the first 5 minutes after intra-day earnings announcements tend to make a lot of money. It's easy to understand. An alert trader is monitoring the earnings news in real time. If a favorable report emerges, he quickly snaps up shares offered at a stale price by an individual trader who could be out playing tennis.
My bias is that limit orders are bad news, specifically limit orders entered by a trader who is not going to actively monitor the news on a minute-by-minute basis.
27-Oct-2006
Some Variations on Happening Again, by Victor Niederhoffer
On Sunday, Oct. 22, at 6:34 a.m., the S&P spiked up from 1374 to 1396 in one minute, shocking the sensibilities of all shorts, raising the hopes of all longs, and alerting all risk managers to the possibility of a squeeze of shorts the same way they are always attuned to the bust of longs, from the work of the doomsdayists and their academic legitimizers. Within a minute it had moved back to 1376. and it seemed like just a bad dream to those caught the wrong way and to longs who didn’t take the profits. I was immediately reminded that the most important thing that the Palindrome taught me in the 16 years of our close relationship was always to use two cans of tennis balls when playing a practice match as it saves time, and the one and only thing that a personage who worked for me and then became a billion-dollar fundist specializing in wringing out 3% annual returns taught me was that when a terrible price against you appears on the screen, enough to take your breath away and give you a heart attack if you're old and out of shape, and then you realize it's just an error, forget about it -- then you're really in trouble, as shortly thereafter the market will inevitably go to that price and much worse. I believe that he called such events "Finnigans," although when I took him out to dinner after giving him a drubbing in tennis recently he failed to remember the appellation. Such a "Finnigan" occurred on Oct. 22, as this week the S&P went from 1370 to 1395 in a gradual ascent over four straight days of rises -- the same terrible distance as the misprint that was taken down by the authorities.
It's Oct. 27 again today, the ninth anniversary of the only day that they closed the NYSE after the market declined the circuit-breaker limit of 550 Dow points, a day that will live in infamy as it was enough to bring me down, cause enormous losses to my customers and me, put an end to my customer business for many years, and appropriately humble me for the rest of my life (I was humble before also, but not enough). I have made it a point to remind everyone of how liable to error I am every week or so ever since, but it is always good to repent and reflect on the anniversary of such a tragedy (such tragedy a source of great merriment and misrepresentation and hoped-for recurrence by my enemies.
In the immediate aftermath of the Oct. 27 disaster, I received 50 copies of Tuesdays with Morrie, one of the most boring and depressing books I have ever read. Now, I receive many letters suggesting that I take the day off, and others inquiring indirectly and gently: "How are you doing this year, Vic? We were worried (hope, hope) that tragedy might have befallen you again. We heard you looked crestfallen at the Spec Party and you've stopped reporting your results."
Yes, I have stopped reporting my results for the same reason that General George Washington didn’t report his troop strength during the Revolutionary War. If the situation were bad, then the enemies would gather strength and confidence and be able to attack with renewed vigor and impunity. If the situation were good, then he wanted the enemy to be overconfident so that they would be asleep on holidays, especially around the end of the year when great victories can be won. I answered such correspondents with the Washington lesson, and added that it is possible that the hoped-for reports of our demise, such as have appeared on the message boards and papers spawned by the enemies encamped with opposite positions and agendas, the same way the reports of Washington's death that were spawned by the French generals who came to America hoping for prestigious positions only to be humiliated with token corporalships may possibly have been exaggerated.
The Fantasticks, currently running as a revival on Broadway, is the perfect musical, as it has all the elements of the whole history of musicals stripped down to bare essentials, the boy hero climbs a wall to assure his father that there is nothing on the other side (actually, there is a beautiful damsel he plans to run away.) It was one of those moments that seem eerily familiar; I had just read Frankensteins of Fraud by Joseph T. Wells after a very educational visit to the Fraud Museum in Austin, Texas (which I'll report on in detail later). In one part of the book, Wells describes how the Crazy Eddie team was able to engage in a hundred different inventory frauds. At the top of the list was the story of how one of the Antars climbed a ladder to report inventory that was actually empty boxes or vacant space. Here's a sample:
When the auditors came to make their counts [the warehouse manager] climbed on to the product stacks himself and called the numbers down to the person below. If the auditor insisted on climbing up, the warehouse manager held the auditor's notebook and marked the contents himself. He used a range of inflationary strategies: counting empty boxes as merchandise, listing cheap merchandise at premium prices, building tall dummy columns at the edge of a large shelf and claiming the containers were stacked three or four deep when the rear area was in fact empty...The warehouse also fiddled with what retail people call "the reeps," which are repossessions -- products that have to be returned to the manufacturer, who then refunds the wholesale cost of the merchandise to the store. How easy it was to do all this! Pulling it off is like playing with kids. The big firms use their audit detail as a training ground. It's not their fault, but these auditors, they're kids just out of college -- nice ones with 3.5 to 4.0 grade point averages. The auditors only took inventories at a third of the stores anyway, and I helped them decide which stores to look at. The auditor would hand a warehouse clerk a sheet of paper and say, 'Make me a copy of this, will you?' The paper lists the test counts showing which parts of the inventory the auditor planned to do tests on and which parts they'd just take rough counts. Of course we'd make a copy for ourselves. We knew where they were counting and where we could do what we pleased.
Considering the ease and variety of the frauds that this retailer was able to perpetrate, the methods of inflating comp store sales was particularly ingenious. The above is merely the tip of the iceberg detailed by the author, with much help from the divorce and family feuds between the parties. I have a certain skepticism for reports of fantastic profit growth from many fledgling retail chains, especially when the audits are not performed by auditors who don’t rely strictly on recent graduates, and if they do rely on old codgers, at least make sure that they do all the climbing of ladders and emptying of boxes themselves, with reports and notations to a member of their own staff rather than to the company representative itself.
How can one talk about the current bull move in stocks, from a low of 1223 on June 15, 2006 when the octagenerian Alan Abelson returned from his four months on leave to continue writing his humorous and acerbic bearish 40 year running column "Heard on the Street". He returned with the query at the market bottom, "The only question is whether the market is in a cyclical or a secular bear market" and made witty remarks about how this time Chairman Ben Bernanke is truly serious about inflation. Since that time, he has been continuously bearish about the market trotting out what seems like (I have not performed the content analysis here the same way I did in Prac Spec, where I analyzed all of his permanently bearish columns from 1966 to 2002 while the Dow moved from 800 to 10000) over a hundred reasons to be bearish with nary a single column bullish and merely one nod to his cloudy crystal ball, as the S&P climbed continuously to its current level of 1389. What can one say about this documented record of what must be the least accurate but most influential forecaster since Cassandra and Laocoon of the Iliad 10,000 years ago? One can say that perhaps he is part of the necessary backdrop of pessimism for a bull market to occur and that it is not chance that his return from leave coincided with this continuous increase in wealth.
Dr. Phil McDonnell responds:
The Chair writes of a mysterious event called a Finnegan. During such time the market appears to hit an ephemeral number but it is quickly nullified. Market participants are induced to think about possibilities previously unforeseen. In like manner managers conducting audits are all too willing to believe inflated numbers. It feathers their own nest.
Such events should not be dismissed as mere urban legends. I have met Finnegan. He is very real.
When counting the tomatoes in my garden one would think that would determine how many I have. One would think that a bitch suckling her newborn pups would know how many mouths to feed. It is all a matter of counting and auditing. So one would think.
Finnegan has traveled about 10 miles from his home in Renton to our home. He never knocks or introduces himself. He doesn't have to. I have seen him and know him from his mug shot Everyday when I check the garden there are more vegetables with little bite marks. Tomatoes which I had previously counted are now inedible. All my audits are completely useless. The only thing I am left with is a little green (*) souvenir with bite marks from a tiny mouth. For that I am grateful. Without that, my story would be just another Bigfoot or UFO anecdote. After all both stories started right here in the Northwest. Ostensibly the first UFO's were sighted in 1947 by Kenneth Arnold flying near Mt. Rainier. Mt. Rainier is the biggest and probably the most spectacular mountain in the lower 48 states. It is located nearer Renton just a few miles South of here.
There is no doubt about which one Finnegan is. He is the one who built his nest in a particular tree with a vantage point so he could watch our dog. Of all the gray squirrels in that nest Finnegan stands out. When our dog barks at the squirrels Finnegan barks back. After all he was the oldest of his puppy litter and knows what it takes to be the alpha male.
For any doubters who think this may be an urban legend.
27-Oct-2006
One of the Greatest Men & More on the Fantasticks..., by Victor Niederhoffer
One of the Greatest Men I have ever met is Bill McCarthy, formerly a student of my father, and chief of the bomb squad in New York, commanding officer of the public morals squad, chief undercover cop, a professor at John Jay, a psychiatric nurse, a championship boxer, the author of Vice Cop, the best novel about police I have ever read or seen, and President of an international security consulting firm. The favorite musical of his wife, Millie, is the Fantasticks, and after Bill retired, she saw it 30 times or so. Often Bill would pick her up on Sullivan Street where it ran. Sullivan street was also the location of many of the clubs frequented by residents of the Italian underworld. Bill was well known on Sullivan street from his previous work in undercover, where he had made many of his thousands of arrests. And on each occasion that Bill met her on Sullivan street, the entire block would empty out as all the denizens of the club, warned by their lookouts, exited before the presumed arrests were forthcoming.
Acting in a self damaging way based on previous vivid memories (Bill had a patented method of making arrests by punching himself in the head hard in front of the criminal and asking if the criminal wished to resist), often occurs in the market. The October 19, 1987 crash has been a vivid memory that has kept too many out of the market since that time, especially around the anniversary of the event. As counted out here by Mr. McCauley, such anniversaries have been particularly bullish since that time. Indeed, it is no coincidence that on the 19th anniversary of the crash, the Dow closed above 12,000 for the first time in history.
Of course, now your average investor has a vivid memory of the breakthrough 12,000 on an anniversary, so one hypothesizes they will not be as wary of the October 27, 1997 anniversary today. One hypothesizes that weak longs still exist as of today, as compared to the aforementioned.
26-Oct-2006
The Innocent Man (Men), by Professor Gordon Haave
John Grisham's new book The Innocent Man is really about four innocent men, all railroaded to death row or life in prison in Ada, Oklahoma, where my wife was born.
I know many of the locations in the book, having been to funeral's at Criswell's, the funeral parlor in town. I also was married in Ada, although not at any of the churches mentioned in the book.
I was encouraged to read the book by my mother in law, who knows most of the characters in the book. She grew up with and was/is pals with one of the judges who figures prominently in the book, and one of the accused's lawyers was her divorce lawyer many years ago.
This book was extremely disturbing to me. Despite the fact that I generally have a negative view of government as a whole, I found the complete and total breakdown of justice in this case to shatter my entire view of the US justice system, particularly in light of the fact that two of the innocent men are still in prison.
I have long been a proponent of the death penalty in theory. Per the thinking of Jon Locke, I believe that since all humans have equal rights, once you take away the human rights of another, you have essentially taken away your own rights as well since yours were equal to those of your victim. Hence, I have no problem with the execution last night of the Gainesville serial killer.
The issue, however, is that I no longer trust the government to only execute guilty men. My first major doubts began a few years ago when I read the book "Death and Justice" by Mark Fuhrman. Death and Justice covered the sordid tail of phony convictions across Oklahoma due to the fraudulent lab work by Joyce Gilchrest.
"The Innocent Man" covers two trials in Ada during the 1980's. During both of them, two men were convicted of murders with almost zero evidence other than videotapes of suspects relating dreams that they had about the murders.. the details of such dreams being totally conflicting with each other and having no relation whatsoever to the actual crimes.
In both cases, police employed jailhouse snitches to relate supposedly overheard conversations in the Ada jail, despite the fact that in certain cases the person claiming to have overheard a conversation was physically not in any position to do so. In fact, the same check-bouncing jailhouse snitch figured prominently in both trials.
Grisham tells a story of corrupt police, prosecutors, and crime lab personnel fixing evidence, encouraging false testimony, and failing to consider (or turn over to the defense) a multitude of evidence that clearly led to other suspects.
The judge in both cases failed to recognize that one man was clearly insane and not fit for trial, and in another case held a hearing on the prosecutions failure to over-turn evidence (the video-taped confession of another man) AFTER the trial was over and the verdict reached.
Ultimately, two of the innocent men were freed after DNA evidence was analyzed due to the work of Barry Sheck's "The innocence project". Unfortunately, two innocent men, Tommy Ward and Karl Fontenot, remain in prison. How this can be is frightful. More importantly, why those who faked evidence, both in these cases and in the Mark Fuhrman book, are allowed to walk the streets is mind boggling. To fake evidence and encourage false testimony in a capital case is nothing short attempted murder, and those responsible should be charged with such.
James Sogi responds:
Our legal system has many defects, and has great room for improvement. Yet it is among the best the world has ever seen in history. If you think the fog of war or the uncertainty in the market is great, you have never been in trial where the world can seem to turn on its head. As in the markets, the probabilities favor the proper outcome. Tell that to the unjustly accused, the wrongfully sued. I see many things in the smooth, fast, efficient electronic administration of the markets that the justice system ought to adopt such as standardized contracts and electronic filing. The system is slowly moving in that direction such as the Uniform Codes, use of standardized forms, arbitration, mediation, but the friction is very high. The friction comes from the participants, the litigants, the business people, who want, but cannot get, guarantees.
In an adversarial system where half the people lose, the common talk on the street is bound to have a large negativity factor. Who among you will volunteer to have your case be streamlined, and set aside the historical precedents that brought the US to where it is now to help speed up the system? Who will pay the extra costs to have a private qualified arbitrator decide the case and bypass the free service provided by the government for citizens to resolve disputes. Who has not thought that extra judicial process, such as Acme collections, guaranteed service 24 hours, 50% commission might not be preferable to the interminable delays, excessive fees in the short run, but which will leave us like Gaza, Iraq and Afghanistan? Who among you will ask their lawyer to skip steps, to take short cuts to save some fees? Would you ask your doctor to skip tests for your child? As your resident legal eagle, I apologize to all of you for the expense and slowness of the system, but do not think that throwing it out the system is right or reforming it will be easy or fast, nor is it all bad as you have claimed. You must understand that we are only historically one step away from trial by combat used a millennial ago in English jurisprudence. Though the adversarial system is difficult, like the markets adversarial nature, it helps arrive closer to the truth. Let those who criticize attorneys and the legal system step up and be the first to give up their rights for which our troops fight. If we were to listen to the losers in the markets one would think it should go as well, filled with scams, frictions, dishonesty, poorly qualified operators, underperforming funds, and brokers with divided loyalties and conflicts.
Stephen Jovanovich adds:
I hate to be arguing with James; but the primary virtue of the American legal system was that it had a relatively limited reach. That is no longer the case. For the statistically average American family with an income of $50,000 and assets of twice that much, a summons is the equivalent of a serious illness that is only partially covered by health insurance. Win, lose or draw the costs will be financially devastating. I write this as someone who spent a good deal of 2 decades being the lawyer (but, Thank God, never the plaintiff or defendant) in California's criminal and civil courts; but my best evidence is the experience I had while working my way through law school at Berkeley as a process server. If the legal system were not a financial horror for the parties, the lawyers whom I served would not regularly have threatened to (1) kill me and my few remaining Serb ancestors or (2) perform unnatural acts free of charge (an extreme example of pleading in the alternative).
The only cures for the extortionate costs and for the regular abuses of prosecutorial discretion that have also become imbedded in our system are to adopt the sensible rules of our British cousins: the loser pays the winners costs AND legal fees, and there is no pretrial disclosure or publicity of any kind in criminal cases.
Prof. Adi Schnytzer reminds:
Anyone interested in this issue should read Bleak House by Charles Dickens. It may be the finest novel in the English language and tells us as much about the legal system as we would ever want to know. Plus ca change ...
26-Oct-2006
Election Pop, by
Dr. Kim Zussman
One theory is that incumbent parties grease markets before elections.
In that September and (thus far) October has been good for stocks, how
do these two months compare for years with elections vs. not?
Checking SP500 index monthly closes (with dividends) since 1980, two-month non-overlapping returns were compared with two-month Sep-Oct returns, counting back every two years from 2006:
Two-sample T for election vs all 2 months
N Mean StDev SE Mean
election 14 0.025 0.0637 0.017
all 2mo 156 0.017 0.0646 0.0052
T-Test of difference = 0 (vs not =): T-Value = 0.44 P-Value = 0.667 DF = 15
Though Sep-Oct returns for election years are better than average two-month returns, the difference is not significant. But perhaps the levers are longer term. The same test on July-Oct returns of election years vs. all four-month returns shows election years to be lower:
Two-sample T for elect vs all 4 months
N Mean StDev SE Mean
elect 13 0.0160 0.0926 0.026
all 4m 77 0.0332 0.0913 0.010
T-Test of difference = 0 (vs not =): T-Value = -0.62 P-Value = 0.544 DF = 16
For two- and four-month moves prior to elections, it seems the greater powers which are working are not political parties.
26-Oct-2006
Everchanging
SEO Cycles, from Andy Humbert
Here's something I've just noticed GOOG is doing. Page Rank originally looked at how many other sites linked into another site. Their new tool, Custom Search Engine, allows them see which sites people specifically want searched every day. If I were still playing the search engine "optimization" game, I'd be hard at work on this angle, as GOOG no doubt uses this info in the current version of Page Rank. The more times a site is searched, the more valuable it is.
26-Oct-2006
Buy on the Rumor, by
Dr. Kim Zussman
On earnings: If you take SPY daily closes for
earnings-reporting months (1,4,7,10) and compare with the
non-earnings months (2,3,5,6,8,9,11,12), we see that for earnings
months variance (F-test) is significantly higher:
F-Test Two-Sample for Variances
Variable 1 Variable 2
Mean 0.000664 0.000353
Variance 0.000141 0.000103
Obs 1153 2309
df 1152 2308
F 1.36085
P(F<=f) one-tail 4.17E-10
F Critical one-tail 1.086825
And even though return for days of earnings months are higher, the difference is N.S.:
T-Test: Two Sample Assuming Unequal Variances
Variable 1 Variable 2
Mean 0.000664 0.000353
Variance 0.000141 0.000103
Obs 1153 2309
Hypothesized Mean Diff 0
df 2017
t-Stat 0.762086
P(T<=t) one-tail 0.223049
t Critical one-t 1.645609
P(T<=t) two-tail 0.446098
t Critical two-tail 1.961141
Thus earnings months are more volatile.
James Sogi adds:
The ES CME mini seems to have several modes of moving. One is the steady
grind up on high volume a the buying just eats away at any selling with
high volumes of bids and asks on both sides of the market, but at a slow
steady pace. The odd thing is that the market grind sup through higher
ask than bid. The other mode of movement is the airdrop such as this
morning when all the bids seems to dry up and the market falls fast, not
due to the 'grinding action' but more of a vacuum effect. This can
happen even when the numbers at bid are higher than the asks. There is
movement with up and down jittery price action and movement steadily in
one direction. There is movement within quantum levels, and movement out
of the levels which like boiling water takes more energy. The micro
structural elements should be able to be quantified to signal at least
descriptively what is taking place. Prediction is of course harder, but
the precursor conditions ought to help prediction.
As to whether stocks fall faster than they rise, Vic and Laurel's studies disprove that. The vacuum effect described above can happen to the upside and frequently sharp rises occur, as we have seen this past few months, with rises as fast as if not faster than drops. The rises are fueled by the short covering as well as the vacuum effect and can be even stronger. This rapid rise is what I call the 'swoosh' effect. This also oddly happens when the ask volume is higher than the bids. As usual, its not what you would expect. Another issue is whether the vacuum drops and pops are connected ala Lobagola effects. It would make sense. George Zachar has said that volume is not predictive, and I agree, but something else is going on, and I intend to find out what it is and why it does what it does.
Steve Leslie replies:
Intuitively I understand the aspect of crowd behavior and a group think mentality. I have also read where analysts are slow to increase earnings estimates usually taking 9 months or more to actually catch up with the company. It is probably due to and it certainly is exacerbated by some companies not revealing all of their cards. They therefore give out parcels of information over time. It also may be due to lazy or fearful analysts who key their work off of others. They just mimic what every other analyst is saying. That way if they are wrong they can state the obvious, that everyone else was wrong therefore it was due to faulty information rather than their own ineptitute. . Blaming an uncooperative exec at the company for not disclosing pertinent information for them to do their job is often a proper copout.
I liken this phenomenon to elected officials who like to keep their jobs by not necessarily doing anything big but not making any big mistakes either. We based our decision to invade Iraq on faulty CIA intelligence.
Execs who make big mistakes can get fired quickly. There just isn't much upside to being flashy when being average is just as financially rewarding.
On the other hand, how often do you see a stock get repriced overnight with a 30% haircut. Once again, fear may just be taking over. An money manager, hedgefundist, institutional investor, or similar professional may be saying well lets just step aside for now and see where the dust settles. There may be another shoe to drop and I don't want to be around when that happens. So what is it to me to sell 1/2 of 1 % of my portfolio. To that end, they are being very reactionary and the insiders the market makers and specialists step back and let the stock fall. And they execute the stops on the way down.
It could also be a "gentleman's" agreement on the part of the specialists and market makers to work in concert with other mkt makers to set the price and execute the outstanding tickets that may already be in the system. This way the "bookies" get rich and the public eats it. I suspect this is where the chair may fall in on. Just one more way to screw the investor for as we know most investors are long siders or "right way bettors" This way it can destroy the psyche of the individual make them easy prey for the predators and the scalpers (brokers included) and once more fulfill the prophecy of in the end the John Q. Public eats it. The publics time frame compresses and therefore they become the hunted rather than the hunter.
This is the stuff that runs through my mind and others are welcome to chime in. Or not.
As is one of my favorite lines from the movie "It is a fool who looks for logic in the chambers of the human heart."
26-Oct-2006
Super String Theory, by
James Sogi
I am reading
The Elegant Universe by Brian Greene about the development of
Super String Theory. Greene, a leading physicist and string theorist, traces the
development of the ideas which led to General Relativity and Quantum Mechanics
in the clearest explanation I have seen yet. If an idea can't be explained in
simple non technical terms then it is not really understood.. They don't really
yet understand Super String theory, but have some interesting ideas.
General relativity came in part from the idea that accelerated motion and gravity are the same to the person experiencing it. Gravity is an artifact of the shape of space and time. Motion approaching the speed of light reduces space and time. So light should be timeless, and the same stuff that was around at the beginning. One of the main insights of quantum mechanics is that our predictive power is fundamentally limited to asserting that such and such outcome will occur with a given probability. Quantum mechanics arose form Max Plank's discovery in 1900 that rather than picturing energy as waves, lumps or packets is a better description in the form of probabilities. Super String Theory attempts to unify the conflict between relativity and quantum theory and their differing results in the macro and micro world by removing the infinite probabilities outside of the 0:1 framework. Super String Theory replaces the points of Quantum Theory with strings or Kalusa-Klein curls of multiple dimensions. (Out of Flatland revisited!) As an aside my theory is that our universe will be found to curve back on itself at the ends, and that it is just a Planck's length inside another bigger universe, and that the little Planck length curls inside the strings are separate little universes themselves and so on ad infinitum bigger and smaller dimensions.
Despite Doc's admonishment, the same ideas that helped physicists discover
new tools should help market speculators model the markets. Markets and physics
both rely on probabilities which is why physicists are seen on Wall Street
frequently. Markets tend to look like waves, but we know that it is better to
regard them in probabilities, and that it may be appropriate to see them in
packets. An example is the last three months have been lumps of price clusters
with jumps between them, five days of price clumps, then another big jump, like
the hotel maids I
wrote about last year.
A continuous model has difficulty capturing these packets of price and then the
quantum jumps to higher levels. Rather than model on linear time the Calabi-Yau
idea of multidimensional time provide a good model. Tick charts are a start in
this direction as they model a different dimension other than time. Market
depth, order speed, order source are all dimensions other than time upon which
to model markets,
Another example is microstructure theory as a parallel to micro physics. To the retail investor, the Dow represents the market. When it hits news high, he feels it is a good time to buy back into the market. To the public price is a defined point. To the chartist, the market waves outline meaningful relationships. To the speculator the price action is an transitory iteration of probabilistic sequence and uses statistics to model probabilities. Even deeper than the point of price are the deeper structures of the markets that like space and time to the relativist, and energy packets to the quantum mechanic, market structures shape the form and function of price movements and allow market events to occur and define the artifacts of their shape. To the market physicist, price is not just a point, but rather a field of probability spread out over a range over a period of time. The probability field is a better way to regard the markets.. Focus on point and execution can be misleading. Closer examination reveals that price is quite ephemeral. It jumps, changes, flips, and at deeper levels is based on much different criteria than simple price quotes against linear time. Modeling these things in markets is as important as the study of physics to modern life. The study seems pointless at times, but one or two breakthroughs can be indeed 'meals for life'. Why stay in Flatland and live a 2 dimensional existence?
26-Oct-2006
How Much Data is Required for Forecasting?, by Bruno Ombreux
I use an intuitive and unscientific rule of thumb derived from a law of cybernetics.
To forecast/control a system of degree N, one needs a system of at least degree N+1. Positing an arbitrary hierarchy of markets systems: years > months > weeks > days, means that to forecast one day ahead one needs to look at weekly anomalies.
That is sets of five trading days. Since in a parametric setting one needs at least 20 to 30 data to converge to a normal law, the minimum length of data is 5*20 to 5*30, that is 100 to 150 days, to operate at the daily frequency.
Paolo Pezzuti replies:
My opinion on this issue is that the length of data should not be defined as a fixed number (e.g. 150 or 200). Data selection to run the tests should reflect criteria of behavior observed in relationship with the scope of your test objectives. In the everchanging cycle process you might recognize that a cycle has changed because of increased volatility or directionality or what else you have identified as your guiding parameters of the market "personality". In this case your length could vary a lot. For example, if you assume that a new paradigm began in 2003 with a low volatility environment, etc. and this is relevant for the type of assumption that you want to demonstrate with your testing activity than you could use a 600-days data test set.
26-Oct-2006
Learning from Losses, from
Larry Williams
This is real life stuff from someone I met a few years ago. It's a sad story of the downward spiral of a trader -- but there are lessons here:
Dear Mr Williams,
Of course I don't know if you remember me. In 2003 we wrote some emails to each other. I'm the now nearly 28 year old man who wanted to raise a fund at that time. I was very passionate at that time and had a date with a special lawyer to take this initiative. He told me that this would take €120,000 to get it ready for real sales. Because I've not had this money I forgot the project and also forgot replying this to you.
Another result of our contact three years ago was that I bought your book "Right Stock at the Right Time" and was so convinced of the "Darlings of the Dow" system, that I bought the book another three times and presented it to people I like and recommended it much more often. Unfortunately I didn't follow the system, because I wanted to make "fast and more money" than 25% per year!
So I've lost and my portfolio has had a drawdown from €50,000 (much money for a 25 year old, I think now) at that time to now €30,000! I became a victim o