Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner
 Archives June 1-15, 2006 Home Write to us at: (not clickable). Please include your full name, and omit attachments.

15-Jun-2006
Significant Digits, by Philip J. McDonnell

One thinks back with mixed feelings to the days of the first graduating class in Computer Science from UC Berkeley. Our class was the first to officially have the term "Computer Science." Prior to that the relevant degrees were Math with a minor in Numerical Analysis or Electrical Engineering. Berkeley's Computer Science department was one of the first in the country as well.

At Berkeley we had Control Data machines with their 60 bit word size. This naturally allowed floating point arithmetic with plenty of significant digits - about 13 as I recall. As a programmer at Stanford Linear Accelerator Center we had a \$15 million IBM machine which offered both single and double precision arithmetic. It also featured 2 mb of RAM, very roomy for its day. One of the things I learned at Stanford was the difficulty of trying to use 6-digit single precision arithmetic to do calculations with lots of numbers.

Consider the problem of adding numbers using say 3 digits of precision. Suppose we have 1,000 numbers with average values around 500. By the time we get halfway though our calculation we have a running total of about 250,000. But in three digit arithmetic that is really 250,xxx. We effectively drop the last three digits. Thus when we add the next number we are doin the following calculation:

` 250,xxx +   500 ------- 250,xxx`

Note that adding the 500 has "no" possible effect on the outcome. Because we are only halfway through our computations we need to realize that we are effectively defenestrating half our data!

By convention when academics publish papers and data they are expected not to overstate their findings. In other words if their data are accurate to only three decimal places because of measurement, statistical or round off error they are expected to round those results to the representative number of significant digits. However this leaves us with a quandary as to what happens when others try to use their data. This problem is exacerbated when others try to use large quantities of such data in calculations. This is a strong argument for publishing more significant digits in raw data but accompanied by disclosure of the actual significance of the results. It also argues for the use of the now ubiquitous 16-digit precision arithmetic for all calculations so that we do not add round-off error to whatever uncertainty is already intrinsically in our data.

15-Jun-2006
A Plethora, from Victor Niederhoffer

Vic,
I recently was introduced to your site and have found the commentary very enlightening. I also read and enjoyed both your books, thank you. I wonder, now that you are certainly within two weeks of pulling another Niederhoffer, will you continue with the website once you blowout again?

I have received a plethora of letters of this nature recently from people on the other side of the war we wage. Like Washington, when faced with hostile letters from Congress when his men did not have food, shoes, or other wherewithal, but had spirit and the wind at their back, I have not answered them as the answer would give too much comfort to ill deserving adversaries. I hope the strategy Washington adopted and I have adopted will yield the same outcome.

Jay Pasch adds:

S&P multi-week declines, 7/2/04, 3/11/05, 9/16/05, so far carry the same attributes as the present, were all six weeks in duration. One reads your post and has visions of Hank Rearden in solitude as he confidently makes his first pour of the new metal, deaf to the envious whining of the world.

15-Jun-2006
Group Processes, from Debra Moon

Remember a while back I mentioned that group process theory has merit in terms of evaluating market patterns? I suggested that Wall Street (all markets, for that matter) and it's participants are one huge interacting group.

1. Initial stage of a group: meandering, small/talk, rapport building.
2. Transition stage: lots and lots of tension, conflict, covert and overt hostility, passive aggression, as the group decides where it wants to go.
3. Working stage: the productive, collaborative result of the strained and tense resolution of the transition stage marked by incredible movement, progress and success.
4. Termination stage: the group naturally retreats after the great intimacy of the working stage, nourished, fueled, increased awareness, goals met, insight gained. (from Irvin Yalom)

I have been keeping up with DailySpec. I find it fascinating from a group process perspective in terms of what it reveals of the larger group process associated with investing. Recent energy marks a "Transition" stage with a capital "T". This augurs a period of productivity to follow. Better yet, the degree of chaos and doubt and tension is usually positively correlated to the incredible productivity of the impending working stage once the group pops, or "transitions" to the next level. A boring "transition" stage leads to lower "working stage" productivity. A wild "transition" stage a predictor of more fabulous potential for the working stage. Now, that being said, a group can, but not often, abort itself, and never move to a working stage after transition. My experience is that an aborted group is more likely to follow a "boring" transition stage. My experience has always been that when managed well, when goals are held firm, when one does not run from the tension and chaos of the transition, the greatest growth can be experienced. Conflict, tension, distress, chaos of the transition stage are thrilling indicators. When a group feels ready to throw in the towel I practically salivate with the imminent success potential of the group process.

The recent, awful, disgruntled, "transitory", feel of recent days seem an indicator of great things to come for those who, as we say in my biz, "trust the process."

14-Jun-2006
What I Know for Sure, from Jim Sogi

1. Always keep some margin in reserve so they can't trap you.
2. After a good trade, don't throw one on for the heck of it, just because you are so good.
3. When falling asleep on the chaise in a trade, put the orders in ahead of time so as not to miss the big run up.
4. Wait on a down day to enter, don't be in a big rush to put on your position.
5. Remember volatility clusters. Trade accordingly. Count the ranges.
6. Take some out. Buy that new guitar, boat, surfboard, stove for wife, or whatever, before you lose it all back again.
7. One day can take you out. Be careful.
8. Follow the model.
9. When the ducks quack, feed them.

14-Jun-2006
Book Recommendations, from Jeff Sasmor

Whilst perusing the latest book offerings from the Science Fiction Book Club (member since 197x) I found a strange, but interesting, book:  Market Forces, by Richard K Morgan. Chris Faulkner is a conflict investor in the mid-21st century. He makes big money figuring out and financing the winning sides of the world's many small wars. People will kill for his job, literally. The more successful Faulkner is, the more hazardous his commute to work gets -- especially after some of his own colleagues decide to take him down. (Warning: Explicit sex and language)

Another is Quantico, by Greg Bear. A plausible near-future thriller that envisions the cataclysmic outcome of the War on Terror. When a truckload of inkjet printers leads to the farm of a white supremacist, the FBI hunts an American terrorist who's ready to unleash a terrifying plague. But the plot, the uncovering, is far more complex than anyone expected. Good to know someone is thinking about this stuff. Inkjet printers?

14-Jun-2006
Going For It! from Scott Brooks

I am a very proud father tonight (and a proud husband). My 11-year-old son and my wife both passed their Black Belt test tonight in Tae Kwon Do. Watching them perform their forms, watching them shadow spar, and watching them slam boards in half tonight was just awesome.

When the Master asked my 11-year-old what he wanted to do for his discretionary break, I was blown away by his response. Instead of picking an easy kick to break the boards, or even one that he had done before, he said he wanted to do a "jump back pivot kick". When the Master asked him if he wanted one or two boards to break, my son responded that he wanted to break "three" boards with the kick.

So there he was. He needed to successfully complete this discretionary kick/break to pass his test...and he choose something that he had never done before. At first I was shocked that he would pick that kick, but then I saw the look in his eyes...and I knew what he knew... he was going to accomplish the break.

To watch a 5-foot-4-inch, 85-pound, 11-year-old boy stare down these boards, and then with incredible speed and force, he gracefully pivoted his body and violently drove his right heel through these three boards (total thickness of around 1.5 inches) was a thing of beauty. Needless to say... I was and, still am, extremely proud of him!

What does this have to do with the markets and investing, or just life in general?

I watched my son push himself to new and higher levels. I watched him do something that he had never done before and have complete confidence that he would do it. I watched him put it in on the line when he didn't have too. I watched him put into practice something that I've been telling him for years: "That the difference between truly successful people and the 99% of the world that is, at best, average and ordinary, is that the truly successful person is willing to do what others are not. They are willing to dare greatly when others are content with the safety of sitting on the sidelines of life."

My son wants to take over my business someday. I think he's on his way. And the best news is that, at 11, he's already a much better counter than I am!

It's a good day to be a Dad!

13-Jun-2006
Lessons in Humility, from JJim Sogi

I play music with some guys that are very talented. The guitarist plays like Stevie Ray Vaughn and used to play in one of the top Hawaiian show bands of the 70s. The drummer's dad was in Canned Heat and played at Woodstock and knew Jimi Hendrix. It is intimidating playing with these pros. The surfers I surf with are better than I. One kid is the current junior world champion. Shano was rated 4th in the world pro circuit. All the young guys rip it up better than I do. The traders I know trade better than I, program better, know more math and statistics. It's all very humbling. So this weekend I went to Maui to learn windsurfing. All the beautiful windsurfers from around the world congregate at Hookipa, the Everest of the windsurfing world, and step off the beach onto their sleek boards and rocket off at 35 miles per hour without wetting their hair. Meanwhile, at the beach I am stumbling around, falling off a fat beginner's board with a little tiny sail. Another serving of humble pie. At last, I got the hang of it.

On Thursday, the 40-point drop was humbling, to say the least, and brings one's weaknesses and fallibility to the foreground for immediate review. There is always room to learn. Learn from the best. The more you know, the more you know you don't know. Have humility. Today's 20-point drop was an excellent teacher on the virtues of humility. It's all for the better. I'll try to get the hang of it.

So with the risk of hubris well in mind, enter my concurrence that the probabilities favor a rally and all that entails. This seems to one of the panics that take place with the regularity of the seasons, sometimes as often as several times a year. During these periods it is good to buy some quality stocks at a good price and put them away and rest on the oars a while. By and by, when there is an overplus thereof, perhaps put some of it into income producing real estate. Retire in the bosom of your family in your stately mansion.

13-Jun-2006
BBQ: Pulled Pork, from Dr. Kim Zussman

Here is a recipe from Diana Rattray for Crockpot Pulled Pork.

Delicious pork shoulder, cooked with barbecue sauce and onion, then shredded.

`INGREDIENTS:pork shoulder roast, about 4 pounds2 medium onions, thinly sliced1 1/2 cups water1 bottle (16 ounces) barbecue sauce, or 2 cups homemade sauce1 cup chopped onionPREPARATION:Place half of the thinly sliced onions in bottom of slow cooker; addpork and water, along with remaining onion slices. Cover and cook onLOW for 8 to 10 hours or 4 to 5 hours on HIGH heat setting. Drainliquid from slow cooker; place meat back in cooker.`

11-Jun-2006
Briefly Speaking, by Victor Niederhoffer

At times like this, with considerable cross currents, and stocks down a full 80 S&P points or 800 Dow points in a month, it is helpful to look at some numbers to gain perspective. The main proximate reason stocks have declined can't be denied. There were three or four bearish remarks about interest rates from the Fed. First the Open Market meeting, next the denial that there were mixed signals, next the bad CPI report that raised fears of interest rate increases (a good Lobagolesque setup for a reversal this week), next the statement that inflation is troublesome, and finally the orchestrated tough talk from the five "Governors." On each occasion the market declined some 20 S&P points or 200 Dow points. That's the entire decline.

But, what has happened to interest rates during this period?  Bonds have gone up from 105 to 108 and are at a two-month high. What has happened to gold, the major inflation indicator? It's down some 15% from 730 to 600. Most telling, the omniscient indicator, silver, is down 25% from \$15.00 to slightly above \$11.00.

What is the effect of such moves in bonds on stocks? In the short term, about 1% a week up. In the long term, there has not been a move in stocks during the last 20 years that has been less than 5% up, with the average up 15%, when the forecasted earnings yield has been 1% or more higher than bonds. Now the earnings yield stands at 6% and bond yield below 5%.

There are many arguments put forth by the bears. Short term rates could go up. The yield curve is inverted. Profits might not grow by as much as forecast. But are not stocks valued based on a stream of discounted earnings for the future? And what is the best estimate of the discount rate, a long term or a short term rate?

Eventually this decline will pass. I'll go on record with a prediction -- supported by the statistics on the table -- of what happens to stocks the next few days after five declines in a row, and what happens to them when bonds close at a maximum and stocks at a minimum. The prediction: the rise will start Monday.

11-Jun-2006
Book Review: Victor Niederhoffer Reviews Cause and Correlation in Biology

Cause and Correlation in Biology by Bill Shipley is a fascinating and enlightening attempt to try to find the true causal relations when many variables are involved in a hypothesis using methods based on directed graphs and partial correlations. This situation of unraveling multivariate causes from correlations and probabilistic dependence arising from spurious and real relations arises in all fields including market relations. In Shipley's cases most of the examples are taken from biology where one is looking for such things as whether plant cover is helpful or hurtful to survival or body size is related to mate selection or general intelligence is related to test measurements on verbal and mathematics scores.

In the case of markets, one would frequently wish to know the cause of a move in a market, trying to unravel the influence of multifarious other markets, qualitative factors, and unique current attributes.

The central method used in the book is partial correlation coefficients generated by path diagrams. Directed graph theory is used to find out which variables have separate relations with each other. A good introduction to directed graph theory would be helpful for this book and I found Chapter 6 of Discrete Mathematics with Combinatorics by James Anderson quite helpful in providing a foundation for the graphical approach contained in Shipley.

Many of the problems of unraveling true causes from the measure attributes of variables have been treated before in the context of path analysis and structured equations. Recent work by Shipley and others at Carnegie and UCLA for the first time now allows the questions to be answered much more precisely. A key variable used is the tetradic correlations: R (ab) x R(cd) - R(ad) x R(bc). By computing all such tetradic correlations and measuring their departure from 0 , one can zero in on the true underlying causes.

Shipley describes his work as comparing the relationship between cause and correlation to the relation of an object and its shadow. We use the observed correlational shadows to find what the relation might be in the populations from which we choose our sample from. To unravel it, he combines the work of directed graphs, d- separation ( paths that couldn’t account for the observed relations between vertices on a graph, and probability distributions. He solves the problem empirically by looking at partial correlations and conditional distributions between variables . His hope is that the methods "will be useful as you watch the correlational shadows dance across the screen of Nature's Shadow plays."

While there will be many mathematical improvements and augmentations of Shipley's work, the basic methods for unraveling will not change much. And considering the ideas, hypotheses, and attempts at solution in Shipley's work will broaden your understanding of what's going in the world at large and in your own field. It will expose you to ideas that were first developed in the late 19th century that now for the first time can be used to find deep causes of the complex admixture of sample variation and spurious and changing causes that we observe in the things that interest us in our work and positions.

The one shortcoming of the work is that very little is said about the problem of prediction. Many of the methods used are consistent with different models’ ultimate probabilities but they do not lead to sharp differentiations in how much better you will be able to predict the random world. While finding the underlying cause in biology can lead to basic research to improve or change the situation, finding the underlying cause in the social sciences often does not change how you would react to observed relations in the real world, although the power of your predictions might be impacted by throwing out the merely haphazard relations that are caused by more important and underlying causes.

In all, even thinking about such questions as how correlation analysis, maximum likelihood, ruling out of hypotheses by testing various partial correlations, computing tetradic algorithms, decomposing effects with path diagrams ill be very useful and enlightening. This book and related study of directed graph theory is a highly recommended extension of how we think about things that are the root of effects.

Dr. Alex Castaldo responds:

The title of the book is misleading. Causation can only be proved through careful manipulation of experimental conditions. After changing one condition in the test group, and carefully checking that this is the only difference between the test and control groups, you can conclude that your condition causes the changes you observe in the test group. Correlation is not causation.

The techniques of this book are helpful in analyzing complicated multivariable situations to find the most promising factors and to come up with hypotheses of causation "that would have to be checked experimentally." They do not really prove causation, only an association. (Of course in economics we usually cannot do experiments).

Chair had to purchase a second copy of this book to review, because he lent me his first copy and I was so angry that I threw it out.

11-Jun-2006
BBQ Bear, from GM Nigel Davies

It's probably tempting Providence, but here's a recipe for BBQ bear:

`3  lbs bear steak, cut in 2-inch cubesbr>1  piece salt pork, cut up1  cup catsup1/3  cup A-1 steak sauce2  tablespoons tarragon vinegar1  onion, diced1  tablespoon lemon juice1  teaspoon salt1  tablespoon chili powder  Makes 8 servings2 hours 30 minutes 30 mins prep Trim all fat from bear steak and cut into 2-inch cubes. Sear meat on all sides with salt pork in a heavy fry pan. Place meat in casserole. Add rest of ingredients to fry pan and bring to a boil, stirring constantly. Pour sauce over meat in casserole. Cover and bake for at least 2 hours in a 325F oven, stirring occasionally until meat is tender.`

More bear recipes here.

11-Jun-2006
Some Monday Morning Quarterbacking, by Victor Niederhoffer

I am often asked what I would change about things recently said about me. The first thing I would have changed is that I have not given enough credit to Susan Niederhoffer and Dan Grossman in my public utterances about speculation. Susan has guided the firm and the family in every aspect since the founding of the speculation business in 1980. Dan has been my major source of news and analysis, and resilience from decline, with the companies we owned that he ran and other wherewithals for the same period.

The recent interview about me contained a interesting point of view. How much risk can one take to gain considerable reward? Given everything, the interview was remarkably accurate and favorable and the reporter should be complimented.

However, there were a few things in print which because of the normal foreshortening and focus of an article that when taken out of context are unfortunate. The first is the unfortunate remark I made to the effect that people are always talking about what a failure in speculation I am and how I'm a poster boy for what not to do, and that I encourage such remarks and Soros and I often joked that he called me the loser even when I was making money for him almost every day, and he wouldn’t move an inch without consulting me for what to do that day in stocks, or bonds, and that although I encouraged such remarks, in fact I'm probably one of the greatest short term speculators in history. That was the gist of what I said, but it got translated that I trade along with my funds with a medium eight-figure amount of my own and I say I'm the greatest investor of all time.

It seems ridiculous on its face when taken out of context. Obviously the \$50 million is less than 5% of what many take out in fees in one year. Many other aspects would have to be discussed to put the quotation in context. What is the difference between speculation and investment? How much been made from fees from others and from your own trading? Does a person ever state or know what his net worth is, or is he talking about his net worth when he is asked about how much money he trades with along with his own funds which was the context of the medium eight-figure amount mentioned?

On another front, there is considerable dredging up of the 1997 episode, which I encourage as one should never forget or be less than apologetic for his mistakes and failures. In this context an investor is quoted that he didn’t realize it was that risky and my old partner is quoted as "I hope he's learned from the past. Here's what was actually said in that context:

From: Richard Zeckhauser
At: 6/09 18:05:14

Hi Vic,

I am annoyed at the guy who wrote the article. I spent a fair amount of time telling him what I thought were the secrets of your success: looking at the world differently and always developing your own perspective, intense interest in statistical analysis, a passion to investigate your every past success and failure dispassionately, and an uncanny feel for the markets, etc.

I also explained, and this was the basis for part of his quote, that you had a strong positive expected value (edge) every time you undertook a trade. Obviously, this rather relevant fact was omitted.

He then asked why you went broke in 1997. I told him something like: Victor gets enthusiastic about things, at time overenthusiastic. Then I concluded: "I hope and I think that he learned his lesson." OBVIOUSLY THE GUY MISQUOTED ME IN THE ARTICLE, SINCE WHAT HE SAYS I SAID -- "You hope and believe that he will learn his lesson" IS NOT EVEN CLOSE TO GRAMMATICAL OR SENSIBLE IN CONTEXT. I WAS TALKING ABOUT MY VIEW, AND ABOUT LEARNING FROM THE PAST, NAMELY 1997.

I am delighted that you are doing so well with your investments. Nice article. Congratulations on Aubrey. I hope that he grows up to be a bridge player, among other skills.

Best,
RJZ

A similar contextual foreshortening was the problem with the absurd statement they had me making that I'm the greatest investor in history. Similarly for the emphasis on whether I'm humble or arrogant. Who has mentioned his warts and held up his losses more often than I? In my books, the thousands of articles I've written for the publications or this site or in my downplaying of my own prospects? And yet a person has to have a reasonable degree of self-esteem or else there is nothing left for any others.

11-Jun-2006
Smoking Joe's Barbecue, from Mark McNabb

Given the market smokes hams who overtrade much the same way as they do in Memphis, it is good to have some good smoked pig after a wild week. For those on the east coast who've heard or been required to travel to the Williamsburg Pottery Outlet (100s of discount stores for the shopping addicted and one big nursery), there is a saving grace. On the Lightfoot exit, most will direct you to Pierce's BBQ (sweet sauce) near the Pottery; however, if you drive on 60 West from the Pottery up to Toano 10 minutes (or exit at Toano from I-64 before the Pottery), you'll find in downtown Toano's one block near the fire department: Smoking Joe's. Joe isn't actually a "Joe" but he and his family have a few of these in the Tidewater area of Va. and they serve good pig, chicken, turkey and good home-cooked southern items such as collards, yams, slaw, etc.

Next time, rather than go for the tried and true of Pierce's, why not walk on the other side and try Joe's? There you'll find farmers and equestrians as well as two like us caked in dirt with a pickup full of a several hundred dollars worth of 17 varietals of beach grasses having good 'cue with no pretense and no tourists. Excellent choice and very reasonable. Easy in, easy out.

Not as good as tonight's apple smoked ribs, shoulders, and chicken breasts along with fresh caught tuna that we grilled/smoked for three hours in soy, Sam Smith oatmeal Stout, and pepper. But when you want something simple and good, Joe's does it right. Two can eat for \$15 with tip.

11-Jun-2006
All Charts Look the Same, from Alston Mabry

Seeking Alpha led me to ETF Digest and a chart of gold YTD, which looked a lot like a lot of other charts, especially of emerging markets.

So, I ran contemporaneous correlations again between the YTD weekly % moves of selected markets, and also included gold, copper, the 10-year Bond yield (Yahoo: ^TYX) and the USD/Euro rate. The most interesting feature to me was the strong correlation between gold, weak-USD/strong-Euro and emerging/small markets. Must be a conspiracy.

Made me think of gold analysts/bugs/hawkers looking only at the gold chart and drawing conclusions about gold and inflation and the coming collapse, without realizing/discussing that gold is just one part of a larger package.

11-Jun-2006
Derailment in Southport, from GM Nigel Davies

There was a derailment at Southport's model railway today. The carriages started coming off the diesel, and aware this might cause a chain reaction I broke the rules by removing them from the track. I knew that crashes just caused more damage, so I took the initiative.

When I found the owner he knew what had happened. With no derailment in recent history it had to be human interference, and he quickly deduced that a couple of kids who were wandering from the path were likely responsible.

I'd seen them too, and had pointed out to the people I thought were their parents that we should all be staying on the path. The 'mother' told them nyet, which surprised me. It was Russian, but the instruction was not specific enough to be the kind of thing that would depict her as a native speaker. So I figured the kids were visitors of some sort.

My son Sam found the whole episode very interesting. I'd like to think that I'd appeared in his eyes as the savior of the model railway. As usual he had to be dragged away.

10-Jun-2006
Volatility Clustering, by Andrew Moe

Wednesday March 15, 2006 7PM

New tires are a delight on any car, but on my Lexus GS 400, they are heaven. Floating on air, I pick up a fellow hoops junkie and slide onto interstate 15 north out of San Diego. We're rolling Old School on our annual pilgrimage to Vegas for the opening weekend of the NCAA basketball tournament. 32 games will be played in the next 48 hours with 16 more in the following 48. Spread and total provide 2 ways to bet each game so there are 96 possible bets. As a counter, I have a precomputed edge but that edge can only be realized at high n so I must bet all 96 possibilities to make money. I am ready. We have eschewed convoluted flight schedules to put the pedal to the metal to get there on time. Black on black in a cloudless night, the inky Lex chews up the the speedway north in a scant 4 hours.

Sunday March 19, 2006

What happens in Vegas stays in Vegas, but the systems ran better than average this year so we're escaping with a mountain of cash. I can't get comfortable with wads of green bulging out of every pocket, so we stop for gas on the outskirts of town and stash our winnings in the trunk.

As Lack would say, "Oh man, if I only knew..."

50 miles out of Sin City, we hit traffic at state line (CA-NV). While there are a couple of token casinos and a gut wrenching roller coaster making a last attempt at one's money, the 200 miles of desert ahead present little danger unless ...

... traffic is backed up all the way to LA. Speed on the 15 drops to nil as we realize the magnitude of our impediment. 6 1/2 hours later, we limp into San Diego, ornery and haggard. Yet after a few hours playing with the kids and another in interrogation with the wife, I figure I'm home free with enough cash to pay for an upcoming weekend in Santa Barbara.

Monday March 20,2006

Inspired by good fortune, I burn a new disc for the ride into work. Suffice to say, I'm rolling all the way. 6+ hours of crawling home from Vegas are a distant memory. Life is going my way and I've got a fantastic soundtrack jamming.

"Oh man, if I only knew..."

About a mile from my warehouse, a teenager in the opposite lane drops to the floor to grab his cell phone. He doesn't realize that his Suburban has swerved severely into oncoming traffic. We collide head on.

There was no time to react. The officer who investigated the scene later remarked that there were no skid marks from either vehicle. I remember locking up as I plowed into his grill, but the ground showed nothing. Though the front of my car crumpled like an accordion, the impact to me was less than a ride at Disneyland. My airbag didn't even deploy. The CD player skipped, but picked right up again a second later.

I will drive Lexus for the rest of my life. Even the crash was comfortable.

We got out, made sure all parties were OK, then returned to our cars for insurance, paperwork etc. Not satisfied with one spooking, the black swan dropped in again as the kid panicked and drove off in his crippled vehicle, leaving me with an undriveable car and images of my own kids alternating with images of me driving over that SOB.

But just as fast as my luck went south, it Lobagola'd north as a as police cruiser rolled to a stop to inspect the damage. After a quick look around, the officer walked over to the warehouse next door. It turns out the whole thing was captured on high definition security cam, including the license plate of the Suburban that hit me. They had a match on vehicle and location before I could get through to my insurance company for a tow truck.

Things seemed to be going my way again.

"Oh man, if I only knew ..."

10-Jun-2006
Cramerica, by James Lackey

Cramer is using pre 2000 data off the top of his head just as written in Market Wizards or Street Smarts. The seminarians all say the same things. But there is some business sense to it as if one must enter at the close a MOC order as a fidelity would do, they buy futures to get long quickly, then the shorts in stocks do crazy things to "get me out." Firms like Goldman working both sides of trades and their own book, would signal day traders "I BUY" buy staying high bid all afternoon giving you the all clear sign to the close, then stand on a reasonable offer price ( a round) to flatten their books etc.

Stocks in those old days had a remarkable tendency of closing at a round (not a fraction) number and or just below a "big round" where they had another seller on their books and wanted out in front of them.

I use Goldman as an example as they always honored their markets were 1000 shares up at all prices where MLCO or MSCO was 100 up and never honored a quote from an electronic ping from a day trader.

Cramer didn't do anything much different than the day traders at Datek did besides juice his book with options. Also on CNBC pre open and sell his overnights as he touted them. It is a story well told.

Old "Market Wizards" and "Street Smarts" books all hold the old meme that a rally is better (bang for the buck) starting at 2 p.m. rather than from 11 a.m. or the open. However, they will give you another trade "trend day" if you open up and never trade below the open all day, it was a trend day.

It's all mumbo after the fact unless you are willing to buy up on the day and sell down on the day after a series of ups and downs; which many do, and they lose all their chips over a yearly grind.

There are 100 other trades like it is more bullish or Bearish with "TICK or TRIN" or arms index. I had a market wizard tell me one afternoon how bearish the next open would be as we closed on the low tick. The quick test was the exact opposite (that time or year) which again is all changing cycles must be tested and why....we ...all...lose.

But, that is what Cramer must have "meant" and he is a genius for quitting trading when everything he did and knew suddenly lost money. I have it from an old-timer that Cramer told him 4-5 things and they immediately turned into huge losses. Then the worst joke of all he wrote a book on "what is working now."

Which is the difference from a kid day trader to a man with 30 years experience that has seen all of this before. He realizes its just part of a cycle or a short term deal.

An amateur trader I know once described Cramer as "basically harmless" he tells you to buy stocks, best of breed buy dips and sell rallies etc. which if one has to be active vs. buy and hold your basically mostly long stocks which in the end will probably get you on average the average. That is over a decade minus the vig and if your lucky a great few years somewhere in a random cycle.

However, the joke is he makes so many predictions so much buy, sell sell sell, hold, buy more sell some that it is impossible to keep an accurate account and its just entertainment, but when he tells of "what I did in my hedge fund and earned 22% after fees over 10 years," I just want to say oh shoosh the Nazz went from 2000-5000 and you quit, same with the traveler saying the commodity bull market started in 1998 after he went on tilt, couldn't take it anymore, quit trading and drove around the world in a yellow (German taxi cab) but hey, they all have more money than me. Suddenly I am realizing that is what it is all about -- making money.

You might laugh at that but if I ever "cared" about "having money" I would. My mom set me straight when I said "all I ever wanted to do is drive race cars." But, I wanted to do it my way, make money and not have to play the corporate game. She said quit clearly "Jimmy that is total nonsense, if you wanted it, money or race cars, or anything you'd have it. You've always had it, that drive and done exactly what ever you wanted to since you were a child." Bam, thanks mom. Her gist was, I caused her hell raising me. Ha ha, true that.

10-Jun-2006
A Coffee Tip from Martin Lindkvist

If you take a pinch of salt and put in the coffee (before it goes into the coffee maker) you get a very smooth coffee, and all the bitterness in the taste goes away.

09-Jun-2006
A Cyclopean Workshop, by Victor Niederhoffer

`  Because Odysseus blinded his son the Cyclops...                                The earthshaker has been after Odysseus                                        Ever since, not killing him, but keeping him  away                              From his native land. But come now                                              Let's all put our heads together and find a way                                                               To bring (Odysseus home) the market back...                                     `

The market has moved down from 1316 to 1255 from the end of April. It sometimes feels like Giants are guarding a cave and eating the remaining adventurers for their late lunch meal as of 3 pm. Of the 60 points of decline more than half have occurred in the last lunching hour as follows. Moves of five or more points are enumerated below:

`Date          Move------       -----May  1         -11May  8         -10May 15         + 6May 23         -16May 30         - 8May 31         + 6Jun  5         - 5Jun  6         + 7Jun  7         -10Jun  8         + 5Jun  9         - 8`

Occasionally the giants sleep after a very satisfying lunch. Who be these giants? What songs do they like to listen to before they lunch?

Russ Herrold mentions:

We noticed them back in March, in the Dow Futures market, coming out to hunt after the morning session was wrapped up. They have two primary behaviors: the dramatic pro- and the contra-trend stop running. As we can see what is happening, the giants spend the midday feasting on the limit and stop orders of lunchtime participants, by sending some small testing probe orders out to "feel for" the edges, and to induce trendfollowers (human and automated) to pile on.

Once the momentum (and as I say, it is unclear at the onset if it will ignite pro- or contra-trend on any given day) is going, we see a series of large reversing orders and the pack of followers (assumedly either supervised with human reaction time operators, or simplistic pre-programmed pattern trading engines running on autopilot and unattended as their video-gamer owners leave for a bite to eat) obligingly transfer their liquidity to the giants. Watching the order flow, this usually starts to happen between noon and 12:15 EST.

As an example, for annotation of music, Wednesday then observed progressively lessening volume and lack of conviction, and by the 15:15, the reversal had run and a plateau followed for about twenty minutes, seemingly more tied to establishing end of day positional actions.

The morning was sung by Circe and the Sirens (as described by Homer) drawing the Captain and his crew near to hear and wonder; the time in between noon to the close has a soundtrack bedding of The Doors' ethereal wailing "Horse Latitudes." From noon on, one can almost see the horses, their hooves wildly thrashing in the sea, nostrils flaring, before they are swallowed up at the close.

The giants' initial probing orders are not free of cost to Polyphemus and his brother Cyclops of course, but the sustained presence of the order pattern implies that that cost is outweighed by the returns harvested from the "Nobody" mere mortals.

A simple 'flip' accounts for the bias of Thursday. The Noon start of the mid-day feeding and reversal pattern is hard to not see.

After thinking about the Chair's comments yesterday, I concluded today to let one of my brokers (the one I called some orders into early this morning) buy me lunch today as the giants feasted; I put on an old seek-sucker suit, grabbed my cane, stopped briefly at the bank to pick up a check, and after lunch returned home.

Andrea Ravano adds:

It seems the giant, probably Polyphemus, has been blinded by Ulysses and is in no way capable of seeing which head he is chopping: bond markets are in bear territory as much as commodities, as the greenback is not that healthy either. Now, I'm sure that some of these movements are just short adjustments to a long term movement, but the enchantment of "Scilla" and "Cariddi" is such that I'm about to fall prey to short term "save your butt" strategies. I think I'll have to put wax tampons in my ears.

Peter Gardiner says:

It is the greatest gift, to be able to laugh while engaged in an unfunny episode. It reminded me that, like Odysseus, we should introduce ourselves to this/these Cyclops as "Noone," that he might confuse his brethren should we escape. But unlike him, we should resist the impulse to divulge - from the the apparent safety of our escaping ship - our real identity, lest we similarly enrage the god which is his protector, and make much more hazardous our future journey.

James Sogi observes:

Chair gave a good tip last night about the giant's last few bites of the bid as lunch ended before taking an afternoon nap and sleeping today June 8.

After giant's last bite of lunch, bid, 08/06/2006, 06:52:30:000, 1245.75, 150, (Hawaii Time, just at the end of lunch hour) the nibblers of the ask started nibbling and the giants started to doze off to sleep for the rest of the afternoon after a big lunch. In fact the number of bites at the ask per 900 bites exceeded the total number of bites of the bid after this point. If one were to show and count the difference between the number of trades at bid and number of trades at ask at each price level and color the 900 tick bars in which totals of bites at bid and ask, the totals in which the trades at ask exceeded the trades at bid would turn blue. One might even have the intensity of the color increase as the size of the difference between bites at bid and ask increased by say 3000 as in a red hot iron turning bright red or a ph paper changing color as the chemical content changed, such that even a sleeping person glancing at the screen would be aware that lunch was over and a different group of giants had come to eat and that the menu had changed, all using just simple addition and subtraction.

While such a change does not guaranty a turn around, no turn around happens unless the menu changes. A large difference shows a definite change in the action. With 20-40 point swings, we are talking meals for life here. Globex counts these things, why shouldn't we? In some respects it's all quite mechanical. This helps with the question, what time is lunch over? Are the giants done yet? It is also a good thing to wait and wait, wait until the light turns green to cross the street and avoid getting hit and flattened by a Mack Truck.

09-Jun-2006
The Comfortable Trader, by James Sogi

Craig Maccagno said that one of the hardships the full-time trader may have to endure is to "sleep on the floor of the office or not at all."

Small suggestion. I work some odd hours in Hawaii, but I have a very comfortable chaise lounge for late hour market watching with nice pads and a warm blanket in front of my screens. The chaise is like the ones at the resorts that adjust to sitting up or lying flat and rolls out of the way during the day. During those long waits...well let's say, its very comfortable. And yes, I dream the market and sometimes have to pinch myself sometimes and check: was it a dream or is it real? Dawn breaks, birds chirp, and the pond stream turns on just as the NY lunch hour ends and chases many creatures of the night away with the new day. It would be interesting to study to what extent do market participants in other parts of the world move the market.

09-Jun-2006
The Same Story? from Roy Niederhoffer

I think this is simply amazing, how negative the NY Times can be even in the face of terrific news from Iraq. The Kuwait news service says the celebrations were as big as the celebrations for the liberation from Saddam in 2003. The NY Times interviews one or two people, who were appropriately glum.

This is how the Kuwait News reported the story:

`Iraqis celebrate Zarqawi''s death     IRAQ-CELEBRATION-DEATH-ZARQAWI     Iraqis celebrate Zarqawi's death     BAGHDAD, June 8 (KUNA) -- Iraqi citizens took to the streets celebratingAbu Musaab Zarqawi's death on Thursday.     Joy filled Baghdad's hot streets, as gun shots sounded through the air,and cars packed with overjoyed Iraqi's roamed the streets. Iraqis were sharingsweets with people outside their homes.     Civil organizations paraded as they condemned violence chanting "death toZarqawi and Saddamites." Thursday's celebrations could be compared to thejubilation in Baghdad's streets the day Saddam Hussein was captured.     Iraqis hope Zarqawi's death would bring an end to the series of terroristoperations on Iraqi streets.     Iraqi MP, Mahmoud Othman, said Zarqawi instigated sectarianism in Iraq andbloodied its streets.     He said he expected that the number of terrorist attacks will decreasedramatically and the new government will be able to stabilize Iraq. As a result,MNF troops will be able to leave Iraq sooner.     Zarqawi was killed in an area close to Baqouba in an air raid Thursday.`

Compare To the New York Times - Same Story!

` Zarqawi Is Dead, but Weary Iraqis Fear the Violence Won't Subside By SABRINA TAVERNISEBAGHDAD, Iraq, June 8 - Haifa Hassan stared with blank sadness toward aspot on her living room carpet when asked about Abu Musab al-Zarqawi's death. The larger-than-life terrorist had little to do with the killing of her12-year-old son, whose crumpled body was found beaten, burned and strangledafter local criminals kidnapped him several weeks ago. The family had raised\$10,000 in ransom. It was not enough. "The terrorists are here now, here among us," said Ms. Hassan, whose facewore a faraway look. "They did terrible things to my son. They are criminals.This is their work." "They still exist," she said, her hands in her lap, even if Mr. Zarqawi isgone. As news of Mr. Zarqawi's death settled into homes across the country,Iraqis at lunch tables and in living rooms found themselves wondering what, ifanything, would be different. A relentless stream of killings and kidnappingshas choked the routines of emife to a trickle, and the death of Mr. Zarqawi,while welcome, did not seem likely to stop the violence.`

08-Jun-2006
Touching the Void, by Henry Carstens

`All men dream; but not equally.Those who dream by night in the dustyrecesses of their minds wake in the dayto find that it was vanity: but the dreamersof the day are dangerous men, fore they mayact their dreams with open eyes, to make it possible.-- T. E. Lawrence, The Seven Pillars of Wisdom`

Touching the Void by Joe Simpson is the story of a mountain climber's survival after a fall that leaves him high up on a peak in the Peruvian Andes with a broken leg. At the point he breaks his leg his climbing partner has every right to leave him to die and save himself. But his partner doesn't leave him. He slowly lowers his friend down the mountain - until he unexpectedly lowers him into a crevasse, has no way to pull him back up or communicate w/ him and is forced to cut the rope...

It is a good and fast read with enough parallels to our world to provide succor and vantage from within market avalanches and the occasional crevasse.

Dr. Marion Dreyfus adds:

When I climbed Macchu Picchu, a man not with me disappeared on a climb --no one saw him for 48 hours, as the temperature fluctuated, as it does, from freezing to above 90. After two days, men reported being stoned with small pellets. Many people were hit. Many wondered what was happening. At last, someone made a landing by landing study of the mountain, and found the man, with a broken leg, white as last century's sheets, in a pair of shorts and a tee shirt, very weak. He had fallen off the path onto a narrow ledge; he threw stones and pebbles until people realized there was something, someone throwing them. He was lucky to be alive, with no food or much water, loss of blood and a broken leg. He was on the same plane returning to the States as I was. I saw a well-dressed American man with him, and mentioned to my seatmate, "Look. He is so fortunate: He was found before he froze to death or starved, his doctor has flown down from the US to be with him, and his broken bones will be attended to."

My friend dryly responded: "That is not his doctor. That is his lawyer."

08-Jun-2006
The Working Class, from LLaurence Glazier

Some years ago, a tall gentleman from Hong Kong came to our flat to do some painting. Whilst leaving a scattering of white specs on nearby furniture and carpets, painting in a meditative way, he would pause when financial bulletins came on the TV. He would sometimes talk of having made or lost thousands earlier in the morning on the Hong Kong markets, I am not sure if it was FX or stocks, but painting was apparently a pleasant enough way for him to pass the time between trading sessions. At the time I did not know enough to talk markets with him.

I've always found menders and fixers to be among the most intelligent people one meets. Most of our arty friends go vacant-eyed when talk turns to finance. Today a joiner visited from Bulgaria. He instantly guessed the purpose of my 2x2 computer screens. He gave me some fundamental analysis of the company which owns the one he works for, and added: that foreign companies are wanting to buy up Bulgarian companies now to have a foothold when EU membership begins next year./p>

I pointed out that having just regained its freedom from the Soviet Union, his country is on the verge of losing it again to the European Union, not a prospect that filled him with glee.

I have a friend who is building properties in Romania with similar expectations.

I am wondering is there someway to participate in possible booms like this by using proxy stocks in the U.S. markets, preferably with liquid options, or maybe there are appropriate ETFs.

Ironically it is easier for people from Eastern Europe to move Stateside than for us Limey's, because the green card lotteries exclude us. One suspects pressure from prime ministers to impose these restrictions to deter the whole British population jumping ship during very highly taxed periods of our history.

GGeorge Criparacos responds:

I would suggest to look at the region as a whole. Southeast Europe from Romania to Greece extending into Asia Minor (Turkey), Israel and perhaps including Egypt as a part. There are two possible ways to play into this: from countries like Austria and Greece (Eurozone) through companies that are expanding into the region. An example is through the banking system (banks in Austria and Greece, even Belgium, buying banks in Turkey etc.) Some of these companies trade in NYSE also. Another way is direct exposure into emerging countries that are looking into the Euro-zone, adjusting risk accordingly.

08-Jun-2006
Castling Long, by GM Nigel Davies

Losing three games in a row is sometimes referred to as "castling long" in chess circles, the code for castling long being 0-0-0. For some players this might happen quite a lot, for others to whom it is a rare occurrence it can bring about a very dangerous psychological moment. A loss of confidence can be coupled with feelings of desperation and an urge to gamble. Normal procedures for checking moves can be forgotten as the player thinks to himself that "it can't get any worse."

Yet things can always get worse, and it's not unusual to see the runs of three consecutive losses stretch to seven, eight or nine. Whilst the first three might have been due to chance, the latter defeats are usually due to a subtle degradation in the player's thinking processes and methodology.

So what should one do when faced with a series of losses? Frankly I haven't found a really good answer except to keep to routines and rituals no matter what, and that means having well-grooved rituals to begin with. I usually get to the board 10-15 minutes prior to the start of the game, ensure I have a good supply of pens, fill in the names, date, etc., on the score sheet and mark off the move numbers where the time controls come up (usually move 40). I then start to think about the ways the game may develop, and that's still before the clocks are started.

Does it work? Fortunately (to the best of my recollection) I haven't "castled long" since the Hastings Premier of 1987-88 where my 3.5/14 was, let's say, character building. Every day was like a nightmare in which I was simply outgunned by my stronger and more experienced opponents. What was the turning point? Interestingly, it was overconfidence on Larsen's part when he rushed in against the tournament punchbag (and time-troubled punchbag at that) and allowed me to sacrifice my queen.

Larsen was later to write in his chess column that I shouldn't have been in the tournament (Short pipped him at the post because of Larsen's loss to me). But I had earned the right to be there by winning the previous year's Challenger's Tournament. And, during my Hastings debacle, I learned enough to get my first GM norm three months later and then win the British Rapidplay Championship.

Castling long can be turned to advantage.

08-Jun-2006
Guardians of the Temple: The Goddess, by James Sogi

The name, 'Goddess' is more fitting than the tawdry moniker of 'mistress' to describe the market in this recent awesome display of power and beauty. No illicit relationship can match the ultimate grandeur of the temple and the riches that can flow from the bounty of the Goddess or the pain from her terrible wrath dispensed with largess and terrible fury. Her power extends to the very reaches of our society and government. Unlike Father Random, there is method in her madness. No trading room , no business, no transaction, goes unnoticed by her all seeing eye. Our worst fears, greatest hopes, faults, greed, hope, greatest accomplishments and failures and past lay naked before the temple.

Admittance to her temple is restricted to the few, the worthy, who have paid their dues, their homage. Those erudite Guardians of the Temple, restricted by secular law, requiring licenses and special certification, or by select membership. The masses can only approach the temple through these guardians of the gates. The masses seek whisperings of wisdom from the mists of the mountain where dwell the cognoscenti. Many myths swirl about the masses. False prophets speak heresies. Few can peer into the depths of the mists that shroud her secrets.

Approach the temple only with the proper mien, after due preparation, and with only an open mind and heart. Any hidden darkness will soon be revealed. Those strong of heart, clear of mind and quick of body shall be rewarded.

08-Jun-2005
The Cost of Living, by Yishen Kuik

Oddly enough I recently took a look at cost of living in 1700s London versus 2000s New York City.

I took the approach of figuring out how much of each item could an unskilled worker consume a year based on his salary and the price of goods then.

e.g. an unskilled laborer could purchase 511 lb of bacon in 1700s London with his annual paycheck versus 4122 lb of bacon in NYC today.

There's a lot of detail one can get rigorous about (like correcting for various taxes) and a lot of assumptions about prices, so I don't think the numbers I cite contain much (or any) precision, however the magnitudes of improvement should tell the right story:

`Item               1700s     2000s-----------------  -----    ------Postage 80 miles   1,872    83,324Coarse Soap, 1lb   3,744     5,833Beer, 1qt          1,404     3,888Barber visit         936     1,167Butter, 1lb          624     5,833Bacon, 1lb           511     4,122Mail, London-NY      468    41,662Steakhouse dinner    468       583Candles, 1lb         165     1,458Coffee, 1lb           94     1,326Tea, 1lb              62     1,750Simple dinner        899     1,167Ticket                45        93(Handel's messiah vs Madonna's latest tour)`

Our average Joe benefited the most in communication anywhere from 40 fold to 90 fold greater consumption.

Agricultural goods came next, some 10 to 30 fold for tea and coffee, 8 to 9 fold for processed goods like candles, butter and bacon.

Finally, a trip to the barber didn't change all that much in terms of affordability for the average Joe. Source

Stefan Jovanovich replies:

A perfect study of productivity - manufacturing and agriculture have benefited enormously from technology improvements but the arts of cooking, hairdressing and live music not at all. Why the prices for beer and soap have not benefited from their mechanization of their production is a puzzle. Perhaps it is because they were both things that people could still make for themselves in 18th century London and that kept their relative price low.

08-Jun-2006
Trying Times, by Steve Leslie

"These are the times that try men's souls." This simple quotation from Founding Father Thomas Paine's The Crisis not only describes the beginnings of the American Revolution, but also the life of Paine himself. Throughout most of his life, his writings inspired passion, but also brought him great criticism. He communicated the ideas of the Revolution to common farmers as easily as to intellectuals, creating prose that stirred the hearts of the fledgling United States. He had a grand vision for society: he was staunchly anti-slavery, and he was one of the first to advocate a world peace organization and social security for the poor and elderly. But his radical views on religion would destroy his success, and by the end of his life, only a handful of people attended his funeral

As we enter into a very confusing and brutal series of crosscurrents in the markets, exacerbated by headline stealing Fed Governors and overzealous financial news readers and poseurs, I think back to others who suffered true pain. Who better to remind us of that than our Founding Fathers as to what such struggle can be.

What we are experiencing now is painful, frustrating and above all typical of what markets do. They rarely do what we want them to. This is the standard. Markets perform seemingly against all that we planned against all the logic of the times and all our planning and training and preparation apparently leaves us ill-prepared for such events. The sand shifts dramatically we spend the end of the day scratching our heads and wondering how long it will last until our listing ship is once again righted.

When that will be is anyone's guess and it is truly a guess. I do know that the witless prognosticators and clueless curmudgeons will appear out of the shadows and proclaim their omniscient qualities of forethought. All in an attempt to forge a reputation of greatness at the expense of a desperate public hungry for useless information.

The financial survivors of this will be those who stand by their convictions. Those who ascertain that good stocks of good companies with good earnings will once again rise and patience will be rewarded. They will remind themselves hourly and daily that they have no control over said markets nor ephemeral events, but can have absolute control over themselves and their lives.

Albert Einstein once said "All tasks at first seem impossible."

07-Jun-2006
Paper, from Stefan Jovanovich

When J. P. Morgan began his career in 1857, there were no traders who dealt solely in securities. The exchanges throughout the country dealt more in agricultural commodities -- corn, cattle, hogs, wheat and cotton -- than they did in stocks. Daniel Drew had expanded from buying and selling "beeves" to the more disreputable trade of banking, i.e., handling paper. But even his speculations were tied to hard-won insider knowledge of the cattle market. In bidding to take over the Erie Railroad, Drew was speculating that the road's early boom in traffic would continue as New York City demanded greater deliveries of fresh milk from the same farms where Drew had begun working as a drover after the War of 1812.

The very notion that people should engage in buying and selling "paper" was still highly suspect. So was the idea that the private market could honestly represent the interests of the country. As Morgan set to work applying the then arcane academic skills of accountancy, newly-elected President Buchanan was reassuring the nation that he would put a stop to the horrors of finance, announcing in his Inaugural Address:

The country's existing misfortunes have proceeded solely from our extravagant and vicious system of paper currency and bank credits, exciting the people to wild speculations and gambling in stocks. These revulsions must continue to recur at successive intervals so long as the amount of the paper currency and bank loans and discounts of the country shall be left to the discretion of 1,400 irresponsible banking institutions, which from the very law of their nature will consult the interest of their stockholders rather than the public welfare.

07-Jun-2006
Kevin Bryant Watches the Fed

For the first time I can remember in recent history, Fed officials are speaking with virtual unanimity with respect to inflation fears. The fact that this appears to be so blatantly pre-scripted further suggests that the Fed has little desire to raise rates much further and in fact is leaning toward a pause. So, like impotent parents, they are using finger-wagging along with the analog: "if you do that one more time, I'll..."

With further declines possible in stocks, they will be able to accompany a rate pause and/or more dovish language with "the economy appears to be softening," and so recent inflation pressures (the next CPI is likely to be surprisingly hot) are unlikely to continue./p>

07-Jun-2006
SSeasonality, by Rod Fitzsimmons Frey

When I've broached the use of Fourier Analysis to investigate seasonal claims by various folks I know, the objections have taken two forms.

Both of these objections stem from a misunderstanding of the Fourier series and how it represents a time series. Although a seasonal trend may be non-sinusoidal, it will, if roughly periodic, itself be decomposable into sinusoidal components which will register on a frequency domain chart.

To demonstrate, I took the daily closing prices of the SP500, then produced four graphs by adding hypothetical seasonal signals to the prices. In all cases, I used a \$10 magnitude and a 21 day period, representing a 1 - 1.5% influence on prices on a monthly basis./p>

The Fourier analysis of the raw S&P data can be compared to the graphs of the altered signals below.

First, I reproduced Prof. Pennington's results (he used SPY) by adding a << hr<<<simple sine wave and noting the spike at around 130 on the x axis. (A spike at the 130th Fourier Coefficient can be interpreted as 2695 samples / 130 = 20.7 day wave period). The added wave and the resulting Fourier Analysis are here:

Next, I simulated a sort of "linear push" on prices by adding a sawtooth function to the SP data. Again, a clear spike at the 21 day mark is evident in the Fourier analysis.

Third, I looked at the possibility of a "+/-" pattern, that is, the possibility that the Universe shifts from bullish to bearish on a periodic basis, but without specifying magnitude. I did that by adding a stepped function to the price series. Again, the F.A. showed a clear pattern at 21 days.

Finally, I addressed the objection that the cycles were not as regular as the mathematical representations above. I did that by constructing a series of sine wave cycles. Each cycle lasted only one period: the cycle's individual period deviated from 21 days by a normally distributed (mean = 21, sd = 1 day) amount. What resulted is a series of sine wave segments, 90% of which had a period of between and 27 days.

In this case, the spike is much less conclusive, but it is certainly there. Interestingly, the spike around 21 days with a randomly varying period bears some resemblance to a spike at 100, which corresponds to ... you guessed it... around 27 days. 'Course, I might just be saying that because I'm a Cancer and my birthday is coming up.

Bill Rafter responds:

The 21-day cyclicality you found is caused by options expiration, there being on average 21 trading days in a month. For an illustration, look at the open interest.

One of the best ways to create a surrogate or smoothed data set is to analyze the data series for cyclic behavior, find the best fitting cycles and put them together. The magenta line below is a composite of the 10 most dominant cycles that can be obtained from the dataset using Fourier Analysis.

This cyclic behavior is an excellent way to fit past data. Furthermore, since one has the formulae for their construction, those formulae can be used to produce a cyclic prediction. But just because you can do something, does not mean that you should do it. Although FA can be used to generate a prediction, that prediction has no reliability. Many other smoothers are not good predictors either; it's just that most people believe that the past cycles will be repetitive. The Chair might have a horse racing parallel. Chiefly, the cyclic values are not stable/constant over time. That is, if you cyclically analyze N days through the most recent Monday, and then analyze an identical number of N days through Tuesday, the entire fit of Tuesday values will be different from the entire fit of Monday values. Thoroughly revisionist history. Contrast that with what happens if you smooth with other tools like (perish the thought) moving averages.

07-Jun-2006
Briefly Speaking, from Victor Niederhoffer

Whenever the market has a big decline on Monday, there is a tendency for it to recapitulate, a la the October 1987 moves, where there was a time around noon when it looked like the stock market itself would cease existence, until it went its merry preordained way.

Gaps like those, that occurred on Monday at the opening of the S&P 500 from 1288 to 1286, tend to be filled more quickly than chance would dictate. The decline in the trend following index from 1250 to 1140 is the main catalyst that set off the recent stock market decline. After four-day weeks, there is a tendency to recapitulate the previous big move before moving to higher levels.

TThe most dangerous thing in the world is a man with power trying to show that he has it, and build up his own reputation without regard to the unintended consequences of his behavior. Statements from Fed officials always tend to talk about what a great job they're doing, and how vigorous their views are on inflation, but in actuality are much more pessimistic about what they plan to do than the actual happenstance is, and are good things to fade. Regardless of what they say, the only thing the Fed operatives, who prepare the briefings and data that make the big boys look good, care about is the stock market. They tend to say bullish things when the market is down and bearish things when the market is up.

The rhythm of the market is designed to always put the public on the wrong foot at the beginning of the week, and scare them out of their good positions at the end of the week. The moves in silver are a precursor to the psychology of optimism for all wealth like things. After a big decline, all the bears in the world rise up as one to tell you "I told you so, we're going to recap 1987." Following them on such calls on a prospective basis would lead to grave harm.

There is a tendency for big Nasdaq stocks to show early strength in the first 10 minutes to set up bear positions by the higher forces in the feeding chain, and these moves are reversed in the next few hours. Then the forces are joined.

The best way to deal with market stress overnight is to remember that they always do it that way, and by the end of the day, the clouds tend to pass over. Irving Redel's method is also best. Whenever he was asked how he did during his streak of perhaps 2,000 days without a loss, he responded "I did fair." That way the others aren't tempted to buy the new car or think you're the world's worst too often.

07-Jun-2006
What Does the Fed Think? by Barry Gitarts

Does the chairman and the fed think their role is to increase the risk premium of business ventures so as to make it harder to profit, be it stocks, real estate or goods. If I was a politician and had the chance to ask a fed chairman one question, it would be "Chairman, do you have something against wealth creation?"

Gary Rogan responds:

I think that when the Fed detects that a price of any "input" to the economy, such as a commodity, is rising enough to cause an unacceptable level of inflation it will absolutely do everything in it's power to make it more difficult for the businesses or consumers that create the demand for this input to function. It will try to do it by making it more difficult for business to borrow and thus have the money to buy the input and it will promote unemployment to make it more difficult for consumers to do the same. Similarly, when the Fed thinks there is a "bubble" in some sector of the economy, such as housing, that is likely to promote inflation it will target that sector by making life more difficult for those who participate in it. Since the Fed can't be very selective in it's policies, other than, say, raising margin requirements, it pretty much has to make life difficult for all businesses and consumers to accomplish anything. Of course its perception of what it can accomplish is often exaggerated (like now).

07-Jun-2006
Market Formations, from James Sogi

The awesome power of yesterday's moves showed perfection of form. See tick chart for the perfect wave formations. With a range of 18 points with swings of 1%, there was more energy expended in an hour than in entire days earlier this year. The other notable fact was after the dizzying drops were immediately followed by supercharged pop-ups. I've noticed that on up trends, the market tends to march slowly up with few entry points, but following scary down swings, there are these radical 1% pop-ups. This lead to the unexpected and anomalous phenomenon of possible gains on the long side in a falling market. This is not what one would expect. The imprint of the hand of Globex affects formation of these structures. Statistically speaking this should be expected as the probability of a rise becomes greater as the market falls. This is probably one of the greatest laws of investing.

07-Jun-2006
Counting and The Mistress, by Dr. Michael Cook

If I had a mistress, do you think I would get very far generating testable hypotheses and then counting observations to test them?

My father who, among many other things, was a behaviorist psychologist, was in a bar in his twenties with some friends. They saw a pretty woman at the bar, and started testing some aspect of reinforcement theory by smiling at her, observing her smile back, then recording that "observation". Result: my father got beaten to a pulp when the woman's boyfriend returned.

We're at an interesting stage of intellectual evolution in this field, where scientific, empirical methods co-exist with personification, projection, and poetic thinking involved in attributing price behavior to "The Mistress"./p>

On the other hand, Einstein said things like: "The Lord is subtle, but not malicious" (The opposite of the mistress?). So the impulse to personification has some good company!

06-Jun-2006
Don't Have a Crystal Ball? from Dr. Kim Zussman

In the absence of a crystal ball (like the one with Maria wearing an "I Dream of Greenie outfit"), and beyond research results, investors might have a particular overall bias towards stocks. Bullish? Bearish? Where to you tilt when the compass of research is spinning rather than pointing?

Here is an empirical simulation of two trading firms with random strategies in an ideal world without transaction costs. Both held various days of the actual returns of ETF SPY from 1993-2006, and both had 10 traders each. Traders at 3-way LLC on any day will be long, short, or 100% cash, each with a random probability of 0.34, 0.32, and 0.34 respectively. Longjohn BFD traders could only be long or 100% cash, each with a random probability of 0.5 (these traders flipped a coin before each close to decide whether to own the next day in SPY).

Here is ANOVA comparison of 13-year means for the returns of 10 traders in 3-way, along with "day rt", which is the benchmark of holding all days (error bars are 95% confidence intervals):

`   Individual 95% CIs For Mean Based on Pooled Stdev.                                  Level       N       Mean     StDev  --------+---------+---------+---------+-r1       3363  -0.000326  0.008935  (--------*--------)r2       3363   0.000093  0.008846              (--------*-------)r3       3363  -0.000070  0.009115         (--------*--------)r4       3363   0.000095  0.009121              (--------*--------)r5       3363   0.000097  0.009040              (--------*--------)r6       3363   0.000091  0.008663              (--------*-------)r7       3363  -0.000109  0.008919        (--------*--------)r8       3363   0.000297  0.008950                    (-------*--------)r9       3363  -0.000124  0.008976        (-------*--------)r10      3363  -0.000055  0.009109          (-------*--------)day ret  3363   0.000441  0.010855                        (--------*-------)                                   --------+---------+---------+---------+-                                        -0.00035   0.00000   0.00035   0.00070`

From this we see that daily means for all of the traders were lower than all days, and since shorting is allowed some were even negative.

Longjohn traders, who can only be long or cash, are compared here with all days:

`Individual 95% CIs For Mean Based on Pooled Stdev.                                 Level       N      Mean     StDev    -+---------+---------+---------+--------r1       3363  0.000010  0.007705    (----------*----------)r2       3363  0.000289  0.007622                (----------*----------)r3       3363  0.000180  0.007925           (----------*----------)r4       3363  0.000275  0.007870               (----------*----------)r5       3363  0.000145  0.007880          (----------*----------)r6       3363  0.000156  0.007569          (----------*----------)r7       3363  0.000253  0.007780              (----------*----------)r8       3363  0.000129  0.007906         (----------*----------)r9       3363  0.000311  0.007957                (----------*----------)r10      3363  0.000238  0.007575              (----------*---------)day ret  3363  0.000441  0.010855                      (----------*----------)                                    -+---------+---------+---------+--------                                  -0.00025   0.00000   0.00025   0.00050`

In this group, though the limitation of no shorting prevented traders from averaging down, being in the market 100% of the time was still best, though not significant.

How did the two trading firms do against each other, and against the market?

`Individual 95% CIs For Mean Based on Pooled Stdev.                                    Level         N       Mean     StDev  ----+---------+---------+---------+-----day ret    3363   0.000441  0.010855            (-----------*----------)all 2way  33630   0.000199  0.007780          (---*---)all 3way  33630  -0.000001  0.008969  (---*---)                                     ----+---------+---------+---------+-----                                       0.00000   0.00025   0.00050   0.00075`

3-way did significantly worse than 2-way (Longjohn), and significantly worse than buy and hold (day rt). Longjohn (2-way) was lower than all days, but not significantly so.

One conclusion is that for periods when one is uncertain about the market (in the absence of compelling research), over this period it was better to be long. The addition of transaction costs would exaggerate the differences, and the message for the compelling is obvious.

06-Jun-2006
Say it Loud, Say it Proud, from George Zachar

14:51 *FED'S HOENIG MAKES COMMENTS IN COLORADO SPEECH
11:12 *FED'S BIES COMMENTS IN SPEECH TEXT IN CALIFORNIA
07:37 *POOLE COMMENTS IN INTERVIEW WITH WALL STREET JOURNAL

My strongly held view is that there is near-zero information value in Fed speakers other than Bernanke and Kohn. The new guy named today for the Philly Fed presidency looks hawkish on paper, and may supplant Poole of St. Louis as the voice of hard money going forward, but that does not shift the center of policy gravity away from Bernanke/Kohn.

05-Jun-2006
Fed Thoughts, from Gary Rogan

Today Bernanke rattled the markets in an apparent attempt to prove his inflation-fighting credentials, proving instead that if some sort of conventional wisdom is repeated often enough he has no choice but to go along with it. He declared that "The anticipated moderation of economic growth seems now to be under way" but also that he "will be vigilant" to ensure that the recent pattern of higher readings in core inflation (which excludes food and energy prices) "is not sustained". In summary, what he is saying, which is the only thing that you can expect the Fed to say, that no matter what's going on with the economy he will raise short-term interest rates if the rate of inflation is rising.

Let's imagine for a moment that the Fed's charter is changed to fight "bird flu" instead of inflation and also imagine that Bernanke would imply that he is about to raise rates to address the increased number of bird flu cases. You'd expect that type of a pronouncement to be questioned a great deal because it is (a) patently absurd (b) there is no known link between short-term interest rates and bird flu, thus proving (a). The funny thing is, there is no known significant link between interest rates and energy prices, and Bernanke acknowledged in his remarks that energy prices are the cause of inflation, yet his statements are taken to be sane and rational.

Will garbage bag and fertilizer makers not pass on oil and natural gas price increases if Bernanke raises rates? No they will not. Will transportation companies not pass along their fuel price increases? To some degree, yes. Is it reasonable to count on that degree to affect inflation significantly? I don't think so and I would like to see "something" from the Fed that proves that they can achieve their goals with the limited tools at their disposal. To a man with a hammer, everything looks like a nail. It's painful to watch that man about to start swinging his hammer in a blind fit of impotent rage destroying the good things around him he didn't create without anybody there that can even attempt to stop him. Ugly indeed.

Stephen Alpher comments:

Ben Bernanke is living proof that a life spent in academia will not prepare you for the real world. The markets and the entrenched NAIRU-believing Fed staff are playing him like a fine violin.

Ben makes dovish comments one day. A few days later, a pretty reporter flutters her eyes and he privately confides to her that market players didn't properly understand him - which she then promptly broadcasts over the TV. At the next Fed meeting, they release a statement that a pause in interest rate increases is at hand, only to find in the minutes of that meeting that some on the FOMC had argued for a 50 basis point increase in rates. Finally, Friday's employment report - not just a single number, but the latest in a string of weaker than expected economic statistics - is ignored because Ben seems worried that the moniker "Helicopter Ben" may stick. I think we ought to find Ben a new nickname that connotes hard money. Perhaps he will then refrain from policy actions intent on driving our economy into a ditch just to prove his "inflation fighting" credentials.

Just a question to Ben: Early in your speech, you stated that higher energy prices are a significant factor in producing the current economic slowdown (welcome news to the Fed). If higher energy prices act to slow down economic activity, why wouldn't the Fed welcome \$70 oil (or \$100 oil for that matter)?

05-Jun-2006
The Markets Giveth and the Markets Taketh Away, by Dr. Janice Dorn

Days like today can be demoralizing to traders and investors who see profits disintegrate, stops hit and stocks under distribution. It is precisely at these times that we must "steel" ourselves, and not give up in disgust and self-loathing. Your emotions are your greatest enemy on days like today.

The markets giveth and the markets taketh away. The markets don't care who we are, what we own, how much we need the money to put food on the table or anything else about us. The only thing that matters in such situations as we are now experiencing is that you do not quit. Do not quit.

Things always look terrible when we are near a tradable bottom. It is those who do not panic, stay the course and continue to believe in themselves and their positions who will survive to play another day.

Be strong, persevere, never give up, and you will be rewarded. Continue to see opportunity where others see only chaos and panic.

A excerpt from "Fifty Years in Wall Street" by Henry Clews:

Mr. John D. Rockefeller attributes his success to early training and perseverance. That is, like other men who have stamped their individuality upon the affairs of mankind, he is what is termed a causationist; in other words, he believes that nothing is got for nothing, that effects proceed from causes, and the cause of success he believes to be largely perseverance. He believes that perseverance overcomes almost everything, even nature itself, and in that opinion this ordinary business man is at one with the philosophers of antiquity

05-Jun-2006
A Personal Question from Clive Burlin

Several years ago Jim Lackey's wife posted a note about being a trader's wife. I wish I had saved that one because I'm having the hardest time. Not romantically, but just in general. When that P&L is deep in the reddest of reds all I want to do is hide away from everyone and if I have any personal contact, at the slightest provocation I just explode. How do you guys deal with bad days? Is there any secret recipe you feel like sharing on how to be social after a rough day in the market? Any advice would be appreciated.

Dr. Mark Goulston replies:

When I have had a day where I fought the law and the law won (a.k.a. a day from Hell), I know several things.

1. People in my life cannot make it better, there are just degrees of how much worse they can make it.
2. If they try to make it better and I am unreceptive, sullen and not fit company, I will then feel guilty for making my family feel as powerless and useless as I am feeling.

So, here are two tips:

1. On such days I call home and tell my wife and kids, "I had an awful day, you will not be able to cheer me up and I don't want to bring you all down. These lousy days just come with the territory of what I do. It will pass within 12-24 hours, because it usually does. When I come home I am just going to keep to myself and stay away from all of you, until I am fit company to be with." I find that when I do this, I feel very "classy" for giving my family a warning and protecting them from my lousy mood and it usually lessens the time by 50% that it takes for my mood to turn around.
2. On such days I will call my wife during the day and say: "Do you have a couple minutes? It's not a matter of life and death." She always says, "Yes" thinking the worst. I then ask her: "Do you think I am good at what I do? (shrink, consultant, writer, speaker, coach)" with my voice racked with pain. She again always says (tenderly): "Yes." I then say, "Good, because I've had one of those days where I question if I am good at anything and I just wanted to hear your sweet voice telling me I am not the loser I feel I am right now." This is one of the best uses of a marriage or love relationship. It helps my wife feel useful and as important to me as she really is, but that I don't let her know often enough.

Dr. Kim Zussman suggests:

1. Recognize diversification: your value and contributions to your life, and that of family and friends does not fluctuate with your investment results.
2. It could be way worse. See: life in pretty much any country but ours, at any time prior to now. Not to mention on a personal level, where the value of health is only evident when you don't have it.
3. Exercise: Best and healthiest treatment for anxiety and depression, guaranteed to work if done regularly involving a sport or activity you enjoy.
4. Outdoors activity, preferably in a climate with low % overcast. Hiking in nature, especially where you can see and smell the wonderful struggle of plants and animals, will put you in your place.
5. Food: the one thing that never disappoints, regardless of age.
6. Wine: in moderation, savoring the best bottles on the worst days (see "Sideways").
7. Good reading, movies, museums.

There are many others, not the least of which is this fine website.

Dr. Lee Shulman offers:

Markets rise.....And Markets dip.
At any time....We all may slip.
Keep your courage.....Keep your Light.
New decisions May be right.
Know you can't be always rising........
Also know you are enterprising.
The market makes us all Boo Hoo.....
Respect it and take care of you.

Pamela Van Giessen says:

Isn't the whole point of endeavoring for success in anything to focus on that which will create success as opposed to finding ways to solace one in defeat? In other words, if one's emotional state is entirely dependent on having a good or bad day at the office, isn't one being ruled by emotions -- which would seem to preclude success based on effort and acquired knowledge (which would make it highly dependent on luck)? Conversely, when you have a good day, is that a cause for ebullient celebration?

I am with Nigel and Chair in reigning in the emotional reaction to successes and failures. Maintain an even composure, irrespective of the wins or losses. Feting success can easily lead to a state of overconfidence, and anger in response to losses does nothing to improve one's craft. It does, however, make one an unpleasant companion. Seems like that is incentive enough to maintain social composure in the face of setbacks.

Save explosive anger and anti-social feelings for really bad stuff like death and trampling of individual liberties. And if all this fails to lead to behavior change, just ask someone to film you next time you explode after having a bad day. Not a pretty picture!

Russell Sears shares:

Lack of sleep, no s-x drive or even desire to be with anyone, irritability, loss of appetite: I have experienced these all before. Not by trading mind you, but by training, overtraining.

Marathoners often put themselves through too much pain because they assume that recovery and strength are guaranteed. They put in too much mileage, while not building up tolerance for it. They assume invincibility. Frankly, too many believe success comes by only trying "harder". The answer for the marathoner is to momentarily back off and attack training again when the timing is right.

For the marathoner, pain is too welcomed, as the gain is always assumed, time is wasting by not training. For the trader, pain is not welcomed, as the gain is never taken for granted. Stepping back will cause you to miss out. But the market will be there, and so will the tail-wind of human spirit.

04-Jun-2006
Leverage, from Victor Niederhoffer

We are often accustomed to thinking of the mechanical advantage that comes from the output that arises from the application of an input force to one side of a lever. The force required at the input is multiplied at the output by a factor directly proportional to the distance that the input moves relative to the distance moved by the output according to the well known equation (force output x distance output) = (force input x distance input).

We see in markets many occasions when one market moves and another rotates around its fulcrum because of the movement of another. For example, the bonds are an input force that always affects the output of the stock market usually in proportion to the distance of the move in bonds. Similarly the grains are locked in a levered relation with each other, corn versus oats, wheat versus soybeans, and the metals are levered with the dollar, as the dollar is with the stock market.

The question I'd like to consider though is how circular motion in one market affects circular motion in another. Many markets are attached to each other as the wheel and the axle, with a large market like the stock market acting as the wheel exerting a tangential force on the smaller market such as silver or jewelry. How could such a relation be best quantified. The stock market recently has had a circular motion from 1300 to 1250 to 1300. What other markets have had a circular motion because of their attachment to it -- one thinks of gold as an example, and wonders whether the attached wheel like action will soon spread to oil. The trend following index is attached in a wheel and axle configuration to many markets such as stocks and when trends went up they brought the much bigger us stock market up with much smaller force. And when they went down, they caused the attached US and foreign markets to spin. Similarly the US markets and Japanese markets and European markets are attached together on a series of shafts but their moves are separated in time.

I enjoyed James Brennan's explanation of the relation between wheels and Type 1 levers, which I am trying to research so I can do a better job of teaching Aubrey about all the things we see on wheels in a day, starting with the pull and riding toys of kids, to the bicycles and cars and dollies that we see every morning.

James Lackey comments:

The lever and work, force x distance all goes back to mass x acceleration. Those are the simple formulas that are very advanced in attempting to squeeze out horsepower for complex machines. But, first things first, which is where we all started, jumping garbage cans on a bicycle.

A human's horsepower is so low we calculate the output in watts. Crank arm length (lever) is about the same principle as for powering an internal combustion engine or connecting rod length for acceleration. The only thing a human can change is muscle mass or train muscle fibers to accelerate quicker or have a more endurance. It would be scary to add leg length by a surgical process.

There are many trade-offs to quickness of acceleration or HP vs torque in racing engines. The human body also has predisposed genetic qualities that too many BMX racers stumble around trying to calculate the best crank arm length versus the most important "gear inches" or gear ratio.

The best all around gear ratio for BMX  is about 54 gear inches for racing from a dead stop accelerating to 25mph, making a 180 degree turn, re-accelerating several times over 4-6 corners and various huge jumps. The way we calculate gear inches is to take the front sprocket, divide it by the rear gear and multiply that by (2 x radius) or simply the height of the rear wheel with an inflated tire.

A 44/16 gear ratio multiplied by a 20" bicycle wheel (that is actually 19.5" tall with tire) comes to 53.625. Then we take a quick of Pi and we get about a 14 feet of distance traveled, per one crank revolution on a simple machine, a bicycle.

All other forms of racing take the same gear inch principles and apply that to the dirt bike vs. a bicycle and we must reverse the sprocket configuration to a 14-tooth front gear and a 48-tooth gear in the rear for example. The gist is MX engine can rev 10,000 rpms, where the best in BMX maintain a 130-rpm or cadence and we blast a burst in the 170's (or have that ability for the start of the short sprints until wind resistance over comes our wattage).

Next we move to drag racing from a dead stop to 1320 feet in under 5 seconds at 330 MPH. we need 7,000 horse power a clutch that slips at the start of the race, locks up at 1000 feet, yet has a tire that actually grows taller or gains circumference as it spins from 0-250mph (31-36" tall) which in effect is like a changing gear ratio (on a single speed car as a transmission is too inefficient for that application).

Now that we have the simple math behind "how" it all works (leaving out drag coefficients, power to weight ratio and traction for now) How does this transfer from one market or racing series to another? That is just as simple to describe but much harder to gain the knowledge to predict. That is for the future of racing in general over a year, much less predict the correct combination for a race car for the meal of the day in the markets.

All I do know for sure is any advance in any type of racing is quickly transferred to all other forms of racing. There are only three basic things that affect all racing or what gear ratio to use. First is sanction rules or SEC market rules. The change in price limits this week in copper was quickly noticed by the floor traders. Well, for my personal benefit I wish they would re-introduce 1% limits on the S&P. It was good to buy limit down opens in the late 90s. He quickly showed me that a "big commercial" or, my example, a Kellogg's Corn Flakes, could "wreak havoc" on a small fixed market like corn. No market has the liquidity and depth of the bunds, bonds and S&P 500.

Next is the pressure or the ability to combust fuel and the weather. Many times a year you can over power a race track. Even on a bicycle. The best solution is to change gear ratios, (raise it) to "bog down" or keep the engine at a lower rpm, use the torque and try not to spin the tires. The worst position to be in is clear blue sky and to be under-funded in racing and in trading. What you need is pure horsepower, which in both cases is buying power for parts or contracts and that costs big money.

Lastly, is a combination of the two, changing track and market conditions, yet clear blue skies. If the sun shines for too long on a race track, whether it is dirt or asphalt the track gets "slippery" you still need to maintain the high power to run the high end top speeds. It takes high horsepower to run high top speeds. It takes "tunable" configuration on a bike, a car, or the markets to start out easy, let the clutch slip so the tires do not spin or to buy the market easy as you come into a daily stock market corner. Then stand hard on the throttle when you hit the apex of the prices or the corner to accelerate to top speed by the close and finish line of the day.

The most difficult thing for a racer or a trader to do is to change the power of their engine for race day. It is impossible for a small trader to add enough power on a bright sunny, dry cool air, high pressure day. All they can do is hope for a perfect race a good reaction time and not make any mistakes during the race for any hope of a victory.

On the other hand during treacherous market or track conditions one of the most difficult things to do for a big operation is to take away power. That is not to spin the tires, lose traction, lose the race or worse crash and burn. What the pros do is simply keep (most) their power, yet change gear ratios. It sounds simple, yet it is one of the most difficult things to do in trading or racing. Only those with years and years of data from racing on slippery race tracks or illiquid yet fast financial markets win.

I find this topic very interesting as some traders try to take the exact same approach from trading the S&P 500 to individual stocks, to energies, to copper. It is very easy for me to describe how and why some go all wrong or right. It is impossible for me to calculate the exact "set ups" for their accounts to trade these different markets or race tracks on one contract alone, much less switching from Drag racing, to Indy cars to sprint cars on the dirt back to MX/BMX racing. I just do not have the experience.

Each market has different rules we must operate. Each market has different ever changing cycles and racing conditions that we all must compete on the same tracks the same races. Yet, there is always a Moore's law-esc advances in new technology and ideas that are tested and new innovation applied. Those are then quickly copied and edges diminished over the constant, time.

It was a beautiful start to the month. Clear skies, high horse power conditions then a brief shower made for some great racing. We set out bikes up for a chance of rain and an all around race set up. It didn't rain, it poured and we got bogged down in the mud. I fell, was wounded, we got back up. The bike gained weight from its normal dry 220 pounds and now weighed 260 with 40 pounds of mud and losses attached to my frame. I did everything I could to stay in the race. The sun came out, the track dried and we started to move again. By the end of the race the track was as fast, and those that waited, stayed clean and injury free lapped me. We are sore tired, bikes are a mess, but we finished gained season and experience.

"Driving fast is easy, gas is go, brakes are to stop, crashing is even easier."

Sam Kumar adds:

There is one way amateurs (uninformed traders) can ensure that it's a good game. Only take long positions (if your "analysis" makes you bearish then don't trade) and don't leave your stop-loss hanging out there for too long for the market maker to just sweep it up.

Even if you ignore the long-run upward drift in stock prices if you bet \$10,000 at a time with a \$20.00 round-trip commission costs, then your expectation on a \$10,000 bet is \$9980. This expectation exceeds what you can get at craps and I think you have to be blackjack card-counter to exceed these odds.

As long as you don't assume you have any edge, you can at least entertain yourself cheaply by always going long and putting in a limit order for a small gain (say 0.5 per-cent) as soon as you are in. If you put in your stop loss as a trade-trigger, then the market maker doesn't know about it until the trigger fires, giving him less opportunity to deliberately sweep you up.

Jeff Rollert says:

Regulators impact the "alignment" by changing the capital ratios required within regulated financial institutions for loan/credit products. Their push to reduce subprime exposure on balance sheets over the last few years resulted in that demand showing up in 2nd mortgage/home equity demand in a less regulated market (securitization). Even non-regulated units are subjected to moral pressure, usually by quiet calls from the NY Fed. When those messages aren't received/listened to, we get public calls to "come on down boys" like we had in the unsettled derivatives call last Fall.

Central bank credit policies are the linking factor for asset class correlations. First, with the price sensitive borrowers, then the working capital sensitive ones.

I'd use orbits in place of alignments, as alignments implies a two- dimensional relationship to me.

J. T. Holley notes:

I looked at IBM's range today and noticed that the last five some years of data has been like a slow moving wheel of a coal fired run by a Taggert on which track was composed of a material made by Rearden just getting' started leavin' the station. Eighty is such a sweet number to dip below. It's seems even as though the sector is coming together to climb a hill?

04-Jun-2006
The American Way, by Paolo Pezzutti

Criticism with regards to the American system comes from part of my country's cultural and political exponents. A very ironic and famous song by Renzo Arbore, in Neapolitan dialect, (Pecch nun ce ne jammo in America? -- "Why don't we go to America?") talks about a land of cowboys, fast food, heroes and movies but that goes to war for oil and provides opportunities only to those who are strong. The view of a country with huge differences between social classes, where emergence is still a reality, with a welfare system that does not support enough the weak and most of all that is ready to fight to ensure its role as superpower has gained credit in Europe especially after Katrina and Iraq.

In Europe and especially in Italy there is not so much difference between social classes. The welfare has ensured enough support to the life-style of a large part of the middle class. This has been made at the expense of flexibility, productivity and an enormous state debt. Most of all, it has made a damage to our culture, our way to plan and build our future. Our system now has to change because of changes in the global economy. People, however, are not ready. They want to have their jobs, their salaries, their quality of life guaranteed by the governments.

Change and transformation in our society will be difficult. The American system has welcomed new workers for decades giving opportunities to everybody. Italians who emigrated to the US managed to find a job and integrate in that society. Their children managed to go to University and find better positions. The US, even with the existing contradictions, is a great country. Behind the myth of the "self-made man" and the "American dream" there is a reality. If you want to do something you can do it. If you want to work and build your future you can do it. The system gives you the possibility to do it.

When you talk to Americans it is impressive how much they trust their system. It is a very selective system, but those who want to achieve their objectives, those who want to work to build something for their families and their kids' future have the possibility to do it. That's why I admire the US and I do support the American system.

04-Jun-2006
An Experiment in Free Markets, from Barry Gitarts

I have been researching Somalia because it is a country currently with no government and might help in answering some of the political and economic theories thrown around for decades, but have been difficult to test. Below is an article I found that talks about the business environment in Somalia. It seems to have biases, but with so little reporting in the area, its a start.

These are pictures of Puntland, Somalia. I would have never imagined a place with no government to be so developed. I recommend the article, "Somali Businesses Stunted by Too-Free Enterprise", by Ian Fisher, Mogadishu Journal.

04-Jun-2006
A Bit of Market Humor, from Jeff Sasmor

Found while pawing thru the on-sale books at Borders yesterday: Milton Berle's Private Joke File. It has 650 pages of jokes; the title page says there are over 10,000 (arranged alphabetically by topic). It was only eight bucks, so I went for it. It's amazing: you can flip open the book to any page and find some really funny jokes. Some hysterical.

Stocks and Bonds:

`Two stockbrokers met in a cafe. Ordering drinks, one said,"Let's not talk shop tonight. Let's talk about women."The other stockbroker said, "Fine. Common or Preferred?"I used to be bullish, then I was bearish. Now I'm brokish.Yesterday the market went down so fast, three blue-chipstocks turned white!A stockbroker called a client and said," Procter and Gamblesplit today."  The client said, "It's a shame. They've beentogether so long!"If money is the root of all evil, then the stock marketmust be the Roto-Rooter!It makes me shudder. Lots of people drive to their brokers'office in Rolls-Royces to get financial advice from somebodywho came to work in a bus.I know what it is. In the middle of the night,Dracula comes in and bites my stocks in the neck.I have a lot of "sweet chariot" stocks. The minuteI buy them, they swing low!`

Wall Street:

`Does the stock market bother you?No, I sleep like a baby.No Kidding?Yup. I sleep an hour. Then I get up andcry for an hour!I made a killing on Wall Street today - I shotmy broker.I'd think twice about Wall Street. It begins ina graveyard and ends in a river!Wall Street is getting more and more like LasVegas every day. One big broker just put ina lounge show!Wall Street is where men spend the morning tryingto corner the market and the evening trying tocorner a secretary.One Wall Street broker is taking a big beatingbecause of a merger, but he insists he nevertouched the receptionist!On Wall Street you have bears, bulls, and if youinclude my stocks, dogs.A Wall Street billionaire got into his limo andthe chauffeur asked, "Do you want to go to theoffice first, or should we go right to jail?"It's hard to get the Wall Street out of a broker.One went to jail. Two weeks later he arrangedfor the prison library to merge with the laundry.They fined one insider trader a hundred milliondollars. Reaching into his pocket, he said, "YourHonor, you should know you're taking all my cash!"`

A longer one:

`A tailor worked many hours a day - saving every pennyhe could. He was about to deposit his bundle in the bankwhen the man who ran the diner next door told him ofa great stock. The tailor bought the stock. Itskyrocketed. The man from the appetizer store justbeyond the diner told him of a great stock. Thetailor walked to his stock brokerage and bought thestock.Before long, he was able to close his little shop.He spend his time at the stock brokerage, buyingand selling. Just before he became a millionaire,as is often the case, his holdings plummeted. In oneweek he was worth nothing.Returning home, he was a sad, defeated man. His littleold mother said, "Look, I saved up a few dollars from whatyou gave me. Open your shop again." The tailor hesitated,then agreed that the idea was sound.Two weeks later the shop was reopened. Above it was a sign:"SAM STEIN, ALTERATIONS AND CLEANING -- FORMERLY MERRILL LYNCH."`

04-Jun-2006
Correlated Assets, by Dr. Kim Zussman

Recent discussions about tandem movement of various asset classes prompts the question as to what, if any, effect this has on stocks. One way to look at this is to check whether correlation of bond and stock moves has an effect on subsequent returns for stocks.

TNX (10 yr treasury yield) weekly closes since 1962 were inverted to give a proxy for bond price, and from this weekly change in bonds was calculated. The SP500 index weekly closes over the same period were used for stock weekly change. At the end of each year, correlation was calculated for change in bonds with change in stocks, looking back over the prior 50 weeks. The return of stocks over each subsequent year was regressed against the prior year's correlation of change in stocks and change in bonds:

`Regression Analysis: sum nxt y versus cor st intThe regression equation issum nxt y = 0.0529 + 0.330 cor st intPredictor      Coef  SE Coef     T      PConstant    0.05291  0.02645  2.00  0.052cor st int   0.3304   0.1675  1.97  0.055S = 0.145077   R-Sq = 8.7%   R-Sq(adj) = 6.4%`

Higher correlation last year between change in stocks and change in bonds predicts higher return in this year's stocks, though the relationship was just shy of significance. 2005 correlation was about 0.08, so with any decent threats from the turban-beard crowd stocks should be up in 2006.

Here are the years and correlations between weekly change bonds and stocks:

04-June-2006
A Daytrading Story: A Vacation, a Move and a Panic, by James Lackey and Craig Maccagno

03-Jun-2006
Keep Out of Those Switches! by Martin Lindkvist, with Assistance from Victor Niederhoffer

With excuses to Bacon.

"Some amateur traders carry inconsistency to such a degree that they demand consistency from the market, while at the same time being utterly inconsistent in their methods of trading. It's not the markets that beat these traders - it's the switches!"

Trading is simple. Everything about the game is logical and common sense and elementary. You don't need a whole staff of PhDs. All the figuring and the mathematics and the mechanics of trading can be understood by a child in junior-high school. But the game is decked out in an endless number of minor contradictions and open switches and deadfall traps, in order to lure the average trader into doing everything wrong.

If the average trader kept out of all these switches and traps, then the powers-that-be would have to make the markets far more complicated in order to insure the fact that the majority of traders continue to lose and thus continue to furnish money to keep up the market.

The amateurs who trade so carelessly and who fall into all the wrong switches, do not stop to consider the percentages of their rightful losses. When an amateur goes to the market and loses nine days or months in a row and loses all his capital, he has lost many times what the percentage calls for. He has no right to lose so much. It's almost as if he did it on purpose!

Look at the percentages. For example, suppose the stock market goes up an average of 5% per year. If so, a blind play on January 1st, or February 6th, or any mechanically designated day and holding for a year, will give 5% per year, over a period of time.

The amateur trader makes every possible wrong move and gets caught in every wrong switch. Thus the careless trader loses from 33% to 100% of total trading capital over a period of time, instead of earning from 5% and more per year on the money put in the market.

The amateur goes long only to have the stock turn south. He goes short and the stock stands still. He goes short a straddle only to have the stock start swinging violently and then sink down. Then when he switches back to short the stock runs up ten percent.

This situation gives a rough idea of why some system promoters claim - and rightly - that for the average trader, any system is better than no system at all! At least the system, no matter how bad it is, keeps him out of the switches.

But, of course, we are not studying here to play any senseless systems or methods. We want to play the smartest angles and plans of the "insiders" and the professionals. And it should be clear to straight thinking readers that what the professionals win is the difference between the amateurs actual losses of from 33% to 100% of betting capital and what the markets move up over time, minus commissions.

The professionals, including the hedge fund managers who make good from putting a stake available to other peoples trading, can win no more than this margin. The market gives its 5% first (for example) and then the balance of what the amateurs lose is cut up among the professionals. Once a student of trading learns to view the whole picture of trading operations as a picture of percentages, all these facts of life become clear.

As noted, it's the switches and not the markets that beat the amateur trader. A whole volume of books could not record all the possible switches that the amateurs can get themselves into. But here are a few that the professionals take good care to avoid:

First there is the switch of position: The professional trades long, only, because there is the least unfavorable percentage against a long position due to long term positive market drift. He never goes short; that keeps him out of the amateur's position switches.

Besides sticking to long positions only, the professional always makes trades of even amounts. He isn't like the amateur who lets greed or fear change the size of his trades. The beginner plunges on a trend that suddenly turns, then puts on a light trade on a contrarian situation that does turn around. He keeps switching amounts and positions so that he never has a worthwhile trade on when the market goes his way. He is always one day behind the direction of a stock and several days behind the rhythm of the market.

The professional trader gauges his capital so that he has a planned series of trades of even amounts. If he is a big winner at the end of one month and feels that the next month will be good, he plans for a series of slightly larger trades for the entire next month. If he is not too pleased about the outlook for the next month, he plans on using a smaller scale of even trades for the whole month.

The amateur never does anything right when it comes to the handling of trading capital. He trades heavily when he has just gotten his bonus or the fund he's managing gets new inflow, which if it is in spring is the poorest time of the year for the amateur's corny method of picking the trending favorites. Then in the summer he trades heavily again on the type of contrarian setups that he should have traded in the spring, but summer is usually more serially correlated, so he loses.

In late summer the trader feels the pinch in the bankroll department. He trades lightly. By early fall he has used up most of his trading capital, so he can only make one trade. It is a stab on pyramiding a three week move that loses when the Fed chief blocks the move and the market crashes in the end of the third week when the first two weeks were up. Then when winter comes he has no money with which to trade, even if a terrific setup for a trade presents itself.

One of the worst (and most common) switches of all is to change methods of trade selection without giving the first method a fair chance to win. That is one of the switches that the professionals avoid by doing a statistical workout of their methods before actual trading, so that they know just what to expect. Amateurs switch from one method, one news story, one hunch, one angle, one stock, or one type of market to another, without reason.

The first wrong switch breeds a fear of wrong switches, which automatically puts the trader into an endless chain of unfortunate decisions. For example, the amateur starts trading bearishly based on some reports of terrorists threats or the negative outlook for the dollar. But he changes to long positions based on the good earnings reports, just before the market tumbles in a fine losing streak. He is afraid, at first, of getting caught in another switch, so he dares not jump right back to shorts based on that Roach is coming out with a gloomy view. He sticks to the fact that consumer sentiment continues to rise. But the markets continue to go down while all his news stories are bullish. Finally he can't stand it any more, so he goes back to short because the President is losing trust among the voters or because some species somewhere caught a virus. Yes, he goes back, just in time to run into the long overdue streak of up days.

But there is now use kidding: The professionals keep out of switches by waiting for the sound trades with a positive expectancy. They don't take bad trades at any end of the trading week. They don't take bad trades -- period!

Everybody knows that there is no better sport or entertainment than taking family or friends to the market for a day's fun. Everybody eats and drinks from the meals for a lifetime and laughs and hollers. Everybody in the party makes crazy statements as basis for trades, such as "It's like '87 again", "May is down a lot just as in 2000, better sell it all" or "It's inverted, the market always goes down when it's inverted", or "Everybody's long, there's a psychological disjoint", and then shrieks "I was right all along" as the market breaks down the last 15 day stretch. That's some fun! But it's fun only. It's not professional play.

The Professionals always remember that it's not the markets that beats the trader -- it's the switches.

Kevin Eilian comments:

It reminds me of my favorite Wiswell checkers proverb offered by the Specs -- "the move that disturbs your position the least disturbs your opponent the most."

03-Jun-2006
Warning Signs and Gauging the Worst Storms, from GM Nigel Davies

Life is full of surprises, and it turns out that I'm spending a considerable amount of time in the Southport Model Railway Village.

It's funny where your kids lead you, with their utterly direct questions and interests. I'm also getting to know the owners quite well and understand that their business is dependent on the weather. At one time they had a lot of staff at the on-site cafe, but given a drop of rain they'd be standing around doing nothing. And, in the last month, most of the days have been rainy.

They tried having algae on the ponds, but some of the kids didn't realize this was water and ran straight onto them, and then the ducks came and ate the algae. They tried a fence round the railway, but one kid tripped over it, ripped his pants and they were liable.

"It was an early warning," the owner told me, "If you don't listen to it then worse is on the way." He took down the fence and now just asks people to stay on the path.

Seems to me that there are many analogies with markets here. Many people curse the 'rain' for interfering with their profits, but surely rain is inevitable, not to mention the occasional monsoon. And one should listen to other warning signs too.

Question of the day: What is the worst that can happen and how will you deal with it?

03-Jun-2006
Weekly Commentary from Dick Sears: "Green Planet"

02-June-2006
Ugly Market Moves, from Victor Niederhoffer

There's something disgusting about a market that goes up when there is bad news. And, it is so wrong, because better employment reduces inflation as there is a greater pt (price times trade) to handle the mv (money times velocity). But, on the other side, the market going down when there is good news is even more disgusting especially when there are so many who have not participated in the previous 10 million % rise, while hoping it goes down.

Gary Rogan adds:

As the price of energy and to a lesser degree the prices of other commodities get more and more disconnected from the aggregate US demand, the Fed's classical inflation-fighting techniques morph from their Goldie Locks intentions to Alice in Wonderland's "good is bad and bad is good" reality. What kind of global depression would the Fed have to achieve to reduce the price of oil, all else being equal, by even five dollars?

Yes, they can affect the copper price more by obliterating the US housing, consumer, and industrial demand all at the same time, but certainly their leverage isn't what it used to be before China and India started building up their infrastructures in a big way. When the negative feedback loop the Fed has been trying to create for decades between the economic growth and inflation is broken all you have left is an inverting path between good news today and bad action tomorrow. Welcome to the neo-voodoo economics.

03-Jun-2006
Applying Leverage in Chess, by GM Nigel Davies

Leverage is far from being unique to markets, it can be applied in chess. Certain openings and indeed styles of play create a considerable increase in the odds of a decisive result. Others decrease it to the extent that certain positions may produce 80-90% draws.

When should one apply leverage? Many players do so against weaker opponents in order to reduce the odds of them 'getting away with a draw', but there's also a downside to this approach. Highly leveraged positions dramatically increase the value of each move to the extent that a slip by either side can be fatal. As we all make mistakes, the fact that the mistakes carry greater weight increases the randomness of the outcome.

Most stronger players tend not to try and blast their opponents off the board, instead going for a small advantage, refusing all offers of a draw and turning the screw. The outcomes tend to be much more favorable than the "all in" approach, it's rare to see the weaker player survive in a long game.

03-Jun-2006
Notes from a Day Trader, by James Lackey

This week reminded me of war. We had scuds landing on our heads in '91 and I saw sergeants and officers with 15 years in service freak out. Back then I was too young and stupid to care and I put on my gas mask and slept. All these years I always though the guys that cracked were just that way. These weeks I was in a similar position, bombs bursting, but I could not sleep. I guess it was like my old army commanders that had the responsibility of their kids. I now have that for my children.

The panics for seemingly little reason (crack in commodities, transfer of energy etc.) are so exciting as we look for them to profit. This time I was sleepless waiting for another shoe to drop, another push, one more bomb and I feared the worst.

The "hope" is the fear will continue, the market will move and I can profit off the daily foolishness. With summer just around the corner...that is seemingly much to hope for.

02-Jun-2006
Conundrum Redux, from George Zachar

The entire yield curve through 10-year notes is now under the current 5% fed funds rate. This willingness to accept a 4.9998 yield on a ten year treasury exists despite the market assigning no less than a 42% probability to a further 25 bp hike in funds to 5.25 at month end. Credit spreads are holding/narrowing today as well.

There had been some praise for Bernanke's seemingly successful effort to re-introduce uncertainty, risk and volatility to the capital markets. Expect folks to re-parse his paper trail, to ferret out the passages where he discusses (in the abstract) directing the Fed's trading desk to buy or sell long-dated treasuries to directly influence the shape of the yield curve.

While that remains a strategy for only the most extreme cases, it's a good bet that Bernanke, Kohn & Co. must be wondering what they need to do to re-steepen the curve as they must desire. A logical place to start would be the calendar of upcoming FOMC speaking engagements. (Last trade on cash 10s now 5.0038).

Stefan Jovanovich replies:

The conundrum for J. P. Morgan would have been a positively sloped yield curve. He would have been bewildered by the notion that investors should demand more interest for paper secured by the assets of businesses than for commercial paper backed only by the issuer's promise to pay. If one's answer was that the bondholders had to be compensated for future declines in the value of money, that notion would have seemed to him equally bizarre. Money was something tangible, to be measured on a physical scale - i.e. gold. It was something to be assayed, not valued. It was the promises to pay money that were to be valued by weighing their weights in gold. Money itself had no price.

I do not think Morgan would worry about the loss of the gold standard. He would have found the present world of ubiquitous financial information a reasonable proxy. The value of individual currencies would fluctuate, but the very competition between currencies and the relentless scrutiny of central bank watchers would make it very hard for the world as a whole to secretly manufacture significant amounts of money; and in that sense money as a whole would be independent of price. Individual banks and governments would, of course, be able to cheat, but that would have seemed to him no greater a risk than the gold standard's vulnerability to the ebbs and flows of mining discoveries.

What Morgan would have been dismayed by was the notion that things should value money, that a government measure of prices should affect how much money the central banks manufactured or destroyed. Price stability would have seemed to him the ultimate chimera. Booms and panics were both inevitable because people would be, by turns, credulous and paranoid. They would value promises too highly and then excessively discount even the word of the most solid citizens. Having a central bank try to moderate those fluctuations by alternately manufacturing and destroying money would only add to people's credulity and paranoia. He would have been bewildered by the idea that a central bank should be anything other than the clearinghouse for paper and, when needed, a lender of last resort.

02-Jun-2006
Overpricing Low Risk, from Gregory Van Kipnis

A speech by Glenn Stevens, Deputy Governor of Australia's central bank, offers an interesting perspective on risk and Frank Knight's distinction regarding uncertainty (the former has a 'known' statistical distribution, the later is unknown).

But, though risk may be fully (or over) priced, uncertainly (which we loosely call risk) is the relevant issue today. I think that is what most of us on the list should worry about. However, that makes counting difficult.

Are investors are being rewarded adequately for taking on risk, in almost any asset class, anywhere in the world? To which the obvious response is: they don't need to be -- the world is a much less risky place than it used to be.

On many measures that certainly seems to be the case. Exhibit 1 shows average growth, and the variability of that growth, in the US and OECD. Growth is now much more stable than it was in the 1970s and 1980s. The fall in inflation volatility has been even more pronounced.

02-Jun-2006
A Chess Player's Nightmare, from GM Nigel Davies

The Berlin Variation of the Ruy Lopez (a favorite of Art Bisguier's, by the way) was the knife Kramnik held to Kasparov's throat during their match. After 1.e4 e5 2.Nf3 Nc6 3.Bb5 Nf6 4.0-0 Nxe4 5.d4 Nd6 6.Bxc6 dxc6 7.dxe5 Nf5 8.Qxd8+ Kxd8 9.Nc3 Black is behind in development, cramped and has a misplaced king. In fact all the computers assess this position as very good for White, when in fact it is extremely complex and difficult.

Black's trump of the two bishops is known from the Exchange Variation (1.e4 e5 2.Nf3 Nc6 3.Bb5 a6 4.Bxc6) and because of his poor king the Berlin looks like a bad version. But the biggest factor is in fact the position of White's e-pawn. It has over-pressed to e5 where it inhibits the action of his bishop.

I have been considering this position quite carefully over the last few days, and this may be more than mere coincidence. For many chess players the nightmare scenario is when ones logical deductions do not add up, that a hidden clause lies at the heart of a position ready to overturn our judgment. We may be aware that something isn't right but can only detect the merest outline or shadow of what it is that we're missing. And when the denouncement comes it is already too late.

How does one avoid such pitfalls? Paranoia is a good start. Plus a healthy dash of self-doubt to go with the indispensable self-confidence. Plus a refined sense of danger. But still we're not immune.

02-June-2006
A Study in Terror, by Victor Niederhoffer

The moves after Fed announcements are always right out of a Poe story on terror. The bars are bigger, the swings are greater, the short-term momentum is greater, the volume is higher, the moves are lumpier, the swings to new highs and new lows are more prevalent. The best way to understand this is to study theories of terror. We generally deal with it by reducing our estimate of the likelihood of death, and placing the concept of death in a higher symbolic framework. It's that symbolic framework, centered on Papa Fed himself (perhaps now a religious icon?) that seems to operate around Fed days, and pity the poor trader who treats those days and those terrible swings the same way he treats other days and moves. The ability to reduce the likelihood of death for the longs and shorts comes from knowledge that on Fed days, like the last Open Market Committee meeting, or the romantic leak days or the CPI days, there were life-threatening moves.

It is the unnatural element that is the sine qua non of horror, as Stephen King and H. P. Lovecraft observed. The moves on Fed days suspend all the natural laws of normal swings and the gross abnormality of the moves in combination with the supernatural force of the Fed is what gives us that feeling of utter terror

I found this discussion of terror from a state correctional facility very instructive in understanding the terror that Fed moves cause and this, combined with some readings of the stories of Poe, should be a good training for the next Fed moves.

02-Jun-2006
Price Movement, from James Sogi

It's amazing what you can learn by just watching. I notice that many big orders tend to chase momentum. As price starts to break out or move in a direction, big orders start to pile after. Funny thing though mostly after the move started. Very few seem to be contrarian. I notice that at the end of the day, a large number of orders seems to pile in the direction of the day, and they don't care what the price is. It is like they have to get in or out no matter what or the boss will be on their case even if the price stinks. It tends to push the prices at the end of the day. With their identities being hidden, do you think that this is changing the action in the markets?

01-Jun-2006
Self-Respect and Decision Making, by GM Nigel Davies

An aspect of playing chess and trading that I haven't seen mentioned is the question of self respect. The ability to make decisions is more than having a pattern and confidence in one's method, it's more than just testing. Every decision we make is reflected through the prism of the soul, so if someone's spirit is broken they will make poor decisions regardless.

Stefan Jovanovich mentions:

There's an anecdote about J.P. Morgan's advice to someone who could not sleep because he was worried about his investments. Morgan is reported to have told the man, "Sell to the sleeping point."

If Morgan did tell an investment client to "sell to the sleeping point" (I have never found a verifiable reference that he did say such a thing), it was not "advice" but rather a pointed invitation for the customer to find another place to put his money. Morgan assumed that his customers came to his bank as depositors because they wanted the certainty that they could redeem their demand deposits in gold. If they came as investors, it was to buy bonds that the Morgan bank had underwritten. The bank's trading was limited to buying and selling those securities -- for its investment customers and for its own account. The Morgan bank's position was that it would make and lose money - like everyone else in the market - but it would never risk the loss of its own or its customers' capital. Accordingly, there was no more reason to be sleepless with worry when the market was tumbling than there was to be giddy with excitement when it was soaring. Morgan's bank was not snobbish about its deposits. They accepted funds from "working men" as well as millionaires, but the idea of opening trading accounts for individuals would have seemed to him absurd. Morgan assumed that securities trading was itself a business, and the notion that people could decide to go into it without training or connections to the trade would have seemed to him as ridiculous as someone who knew nothing about leather or horses deciding that they would go into the harness business.

John Lamberg offers:

Excerpts from: Trading, S-x & Dying, by Juel Anderson.

Most gamblers, if they have to fight the urge to chase money or losses, will eventually lose this fight. It's too big an opponent. Their mind becomes the enemy because it demands their participation in the rush to ruin. The mind, in anger, helplessness, despair and desperation says, "To hell with it." Discipline disappears and it's overpowered by the need and desire to strike out, to blindly fight back. ..When the mind of a gambler enters into this "rush to ruin" state, they are doomed.
An amazing thing happens. It can't be explained scientifically, yet it happens with deadly accuracy and frequency. A gambler who is chasing will always make decisions that are wrong the majority of the time. Murphy's Law becomes the supreme law. I think the mind has overloaded, and in it's confusion, it deliberately crashes the individual as an act of self-preservation. It's a tragic sight to observe a gambler desperately chasing in a last ditch effort to survive. The frightening part is to watch how every decision they make takes them to a lower and lower level.

01-Jun-2006
Stinging Lyrics, from Laurence Glazier

Just heard Sting's "Shape of my Heart." It includes these fine verses:

`He deals the cards as a meditationAnd those he plays never suspectHe doesn't play for the money he winsHe don't play for respectHe deals the cards to find the answerThe sacred geometry of chanceThe hidden law of a probable outcomeThe numbers lead a danceandWell, those who speak know nothin'And find out to their costLike those who curse their luck in too many placesAnd those who fear are lost`

01-Jun-2006
The Definition of Random, from Laurence Glazier

J. T. Holley wrote:

I came across a line from the writer Thomas Henry Huxley that said, "The great tragedy of Science - the slaying of a beautiful hypothesis by an ugly fact" and thought of myself and those on the Spec List that feel that we wear so proudly the hat of "Studies of Randomness" and its conclusions but forge on to answer another hypothesis.

This is one of the noblest aspects of trading, the financial aspect helps motivate us to look for truth in numbers, to look tirelessly for pattern even when our minds tell us it should not be there (this is the paradoxical definition of "random"). Looking at the S&P I cannot help but see a rhythm, almost a breathing of a vast organism, yet as a scientist I must resist acting on it, pursuing only logic of known phenomena like time decay and the intangible IV, the measure of emotion.

Though there are patterns of prime numbers clearly visible in Ulam's Spiral - as yet unexplained - so perhaps I should look at these rhythms more carefully.