Jul

4

Ah, the 4th of July, Independence Day is upon us once again. The smell of charcoal will waft across the nation as back yards everywhere become a monument to man's eternal desire to cook meat over open flames while consuming malt beverages and yelling at the kids. The streets of our towns and cities will be bedecked in red white and blue. There will be parades and old soldiers will suck in that gut and wear their uniform proudly down Main Street once again. High school bands will march sharply and play badly and politicians will wave at the crowd. There will be fireworks all over the country form NY harbor to Armpit Alabama, there will be pyrotechnic celebrations of our nations founding. I'll be right there with pride as always. I have a bunch of firecrackers in the closet, a few roman candles and bottle rockets to shoot up the neighborhood on Thursday. We are into gin and tonic season and I'll have a few of those as I celebrate my PETA (people eating tasty animals) membership by grilling up the largest steaks I can find. There will be friends and family, boats and fireworks and all the trimmings as we celebrate the 4th Kent Island style. I will, as I always do, stop and think of all that has gone into our 232 years of existence as a nation. So many have given so much to make and keep us a great nation. One of course think of the military, the soldiers, sailors and marines who have fought ot preserve our cherished freedoms. From the scared citizens who stood on Concord green, hearts beating wildly beneath buckskin as they held a musket in sweaty hand, to the scared GI who mutters a quick Hail Mary before leaving the green zone, the commitment and sacrifice they have given our country is staggering. I talked to a friend who returned today from visiting Normandy. He talked of the raw powerful emotion he felt looking at the beaches and cliffs those young men assaulted and took. He wept at the cemetery where so many of those young men found their final resting place. Our military won our independence form Britain over 200 years ago and has protected and preserved our status and place in the world ever since. There is no thank you large enough. Without them, there is no us.

I have written before of the contributions of businessmen to our nation. These are often overlooked as men of business are too often vilified and perceived as bad, or even evil. But the contributions of Thomas Edison, Henry Ford, The Rockefellers, the Bill Gates and even the Warren Buffetts [Ed.: this may be going too far] to our society cannot be ignored. In the name of profit and gain they have spurred technological innovation and industrial revolution. They bought light into our homes and automobiles into our garages. Because of them we can fly across the globe, have microsecond access to just about anything form a laptop computer. They have provided jobs and contributed generously to build schools, libraries and cultural centers across the United States. Again, without them, there is no us. Then there is the other businessman who makes our nation great. The little guy. Maybe he owns a tire shop and repair center that provides 7 or 8 jobs. He keeps his customers cars maintained and safe, saving them money and possibly their lives. Perhaps she owns a small accounting service helping others deal with intricate financial and tax problems. Or a restaurant that serves thousands of people a year good food at decent prices. Dozens of people will be employed at such a place, form youngsters with their first job to the middle aged waitress who is raising a couple of kids and works hard to give you the best possible service and dining experience. Small business owners have ink stained hands form their printing press, grease under their fingernails that will never come out entirely, they have sunburn from long days providing landscaping and yard services. They have eye strain from late nights reviewing budgets and payrolls. They live on a curious mix of Mylanta , hope and energy. They make our communities better places to live; they provide countless jobs, pay endless taxes and are the financial support for thousands of local charitable and cultural organizations. Without them, there is no US.

Then there are the so called average men and women. They go to work at a variety of jobs each day. They manufacture the products we use, they provide services to make out lives better. They raise their kids to be better educated than they are and hopefully have an even better life. They spend the money that supports business and industry. They pay the taxes that make the country function. They go to church and pray for a better world. They socialize with friends and neighbors and share each others burdens and joys. They may live in Wheatfield, Mo. or the upper east side of New York City. They are us. Their daily efforts to make their own lives better is what makes the country a little better and a little stronger as the years go by.
 
I know we are far from perfect. There is no perfect man and no perfect nation. I know that the rest of the world is not that fond of us at times. We are perceived as arrogant and materialistic, spreading the gospel of hip hop and coca cola around the globe. Of course, if the citizens of the governments that despise US did not want  hip hop and Coke, we would not be successful at this. There are more people who are free on this planet because of us. Without us Europe would be either a German Dictatorship or a Soviet colony. Here would be no communist China, they would be part of the Japanese Prosperity Zone. Latin America would be Spanish America and Portuguese America. We have never gone to war over territory. We have never annexed a defeated foe. We have taken the sons and daughters castoff by ther nations and turned them into Americans who have given the world far more than the world has given the United States. Perhaps we are not perfect, but I will take our imperfections over dictatorships and theocracies that still dominate many of the governments of the world.

Many decry our culture. Yes, I am afraid we did give you McDonalds and MTV. We also gave you jazz and Ernest Hemingway. From our lands came Faulkner, Twain, Updike, Kerouac and Mailer. Yes, Brittany Spears is our fault. But we made up for it with Bogart, Sinatra and Katherine Hepburn. From the American soul came the blues and rock and roll. Elvis, Dylan and Robert Johnson all are cut from American cloth. Charlie Parker, count Basie and Miles Davis may be well loved across Europe but they are form the United Sates and their sound and culture was born and thrived here. True we are responsible for the genetic cesspool that is the NBA, but we also give you baseball with Babe Ruth, Mickey Mantle, Joe DiMaggio and Cal Ripken. Our sports are not reserved to the upper classes. A baseball game can be enjoyed by anyone with a ticket, or on a radio while changing the oil or a local tavern television while enjoying a cold adult beverage with a few friends. The good and the great that has come out of our nation far exceeds the average or bad.

The United States of America. Born of a desire to be free to govern, worship, think and live the way each wished. Expanded by the speculations of Thomas Jefferson and the explorers who sought knowledge and land. A land where risk taking and speculation to better one's life is encouraged and supported, where an uneducated immigrant can someday see his sons and daughters attend world class universities. A country where you can, through your own vision and hard work, be who you want and live how you want to live. A place where you are responsible for you own life, but your neighbors are quick to help. A nation that is always first to respond to a disaster whether at home or in a far off land.

We are not perfect. But I still have not seen anything better. The single most important export of the US has been our concepts of freedom and principles of Liberty. It is a nation founded built and protected by the individual efforts of its citizens. It is the land of the free and Home of the brave because of the men and women who are born here, immigrate here and live here. They are US.

So be it the backyard grilling burgers and hollering at little Johnny to stop squirting the damn hose all over everybody; or on a terrace in Manhattan; by the lake in Chicago, in the wastelands of Wisconsin with a G&T in hand and gleam in your eye; a boat on the Chesapeake with beer and bikinis in great abundance; or wherever this 4th of July finds you. Remember for a moment to raise a glass in honor of all those who served, who lived, who built, learned, worked, raised kids and strived for a better life. In their strivings, we have found a better nation.

Jul

3

Better: A Surgeon's Notes on Performance by Atul Gawande is another great Riz recommendation about performance in the medical profession, but which applies to all professions. Gawande asks of a profession that seems to eschew empirical performance criteria, what does it take to be good where failure is so easy, so effortless. Like trading, medicine involves risk and responsibility. There are three elements for success: Diligence,morality, and ingenuity. The first and third are especially important for traders. Diligence seems easy, but it is central to performance and fiendishly hard. Even the simplest things for a trader like sitting and doing nothing becomes almost impossible at times. Doing the right thing trading day in and day out while the devils try to derail your plans takes Herculean effort which few can muster everyday, every hour. The balance also seems that an overly structured diligence might stifle ingenuity.

What is diligence for traders? It could be simple mechanical things like back up computers, feed, power. It could be simple sleep. It could be checking the data, the data entry, and the studies. Checking the announcement calendar to see what time market moving announcement might mar the tape like this morning's 20 point lobogola. The list goes on and I ask for supplement from others.

Jul

3

I'm not quite sure how to quantify the following, but  I wonder to what extent Crude Oil and other commodities ETFs  (In particular Agricultural) are putting upside pressure on cash and futures markets. In my younger days few were the players in these markets, but today's easily accessible commodities markets could mean more investors are hedging their positions via etfs. In turn the banks that manage the etfs are compelled to hedge the funds by "covering" purchases and sales of the investors. As an old banker once told me (a real banker of the old school, not one of these clowns that have managed to disrupt the world financial markets) as I was reporting to him some excellent stats on money inflows in US mutual funds : "Imagine what will happen when instead of inflows we will face outflows". It was then late 1999.

Jul

3

Andy Murray's defeat against Nadal today reminded me of the final battle scene in film 'The Last Samurai', and of dying with honour.

It was evident early on that Murray hadn't fully recovered from his four hour marathon battle against Gasquet. His tiredness showed through and he was not his usual dynamic self. In contrast, Nadal was firing on all cylinders and then some. He just didn't let Murray into the game. Nadal's grass court play has come leaps and bounds this year and - from the perspective of my armchair - he doesn't have an obvious weakness that can be readily exploited. His backhand shots can't be differentiated from his forehand shots, and he certainly can't be relied on to trip himself up. Indeed, I think Nadal produced a mere ten unforced errors in the entire three sets. We are not there yet, but it looks like the championship is shaping up for another Nadal-Federer face-off, which will be a true test of finesse versus physicality. I think Nadal has what it takes at least to make Roger Federer produce a bead of sweat, something I haven't seen from him so far in this competition.

Getting back to Murray's defeat, I believe there are a few things we can take away from this. In the middle of the match, Murray won a point but it was called wrongly 'out' by a line judge. The umpire immediately over-ruled and the point was called 'let' and played again. Murray complained about the poor line call, but he got straight back to business. In the bad old days, this would have sent Murray into a spiral of agitation, where he would project blame externally and allow this negativity to feed on itself. Not this time. I was impressed. The world is not against us. We accept responsibility not only for our actions, but also for events that are outside of our control. It is not personal. We get on with it.

Leading on from this, because Murray succeeded in keeping his mental game in check, there was very little psychological noise, or interference, in the match, and Murray will be able to watch the tape and compare his true game against Nadal's. He will be able to see the weaknesses in his game play far more clearly, which will give him something to work on in future. It's simply more productive. Okay, so Murray may never be 'the' best, but he will certainly get closer to achieving 'his' best, which is what it is all about. In the world of amateur trading, many traders who produce losses believe these losses are not due to their trading game/strategy, but that they are a result of psychological weaknesses. Their self-talk says, 'I can still pick 'em, I just need to cut my losses earlier'. Personally, I believe most people are fooling themselves by thinking that the person (mental approach) is weak, when it is their trading game (strategy) that is weak, and they really have no edge in the business of trading. The idea that 'I should have held on for longer', or 'if only I had sold these stocks more quickly' is false, because it is working backwards, a bit like saying 'if only I had picked the right lottery numbers'. If you have a strictly quantitative, or automated trading approach, there is no need to try and disentangle the psychological element from one's trading strategy because it isn't a feature. However, because I use a qualitative approach, I wanted to try and separate my mental game from my trading game. For a long time, I would jot down a 'behavioural score' when I opened and closed a trade. It's was a simple 'marks out ten' scoring system, with a low score for doubling up, lowering stops, etc, and a high score for trading rationally, with a well thought out plan. Over time, I realised that the correlation between profits and a high behavioural score was surprisingly weak, but the point was not the correlation, but that a low score had a higher chance of producing those, rare, extreme losses. The simple act of keeping a behavioural score has led to greater self-control, and I now believe I have a clearer image of my true game. I relate to Murray in that being 'my best' is a far cry from being 'the best'. There is no 'I should have been less greedy', or any other such excuse. My game is simply not strong enough. But that's okay, because the journey has been one of self-discovery, and it has been a success of sorts, irrespective of my what the ledger says!

Jul

2

A MurrayAndy Murray's centre court, 'Rocky' style comeback against Gasquet has given the audience something to remember for a long, long time. It was the finest piece of tennis from a British player in years. Only a couple of years ago, I remember Murray's game being absolutely horrible to watch. Because he doesn't try to hide his emotions one bit, you could read Murray's face and demeanour and pinpoint the exact pivotal moment in the game when he would break down and effectively lose the game. The story would usually involve a good start, the opponent outperforming Murray on a series of shots, Murray getting frustrated, Murray complaining on all the contentious shots as if the world was against him, and finally Murray losing. He had no mental maturity.

What really struck me in Murray's game against Gasquet was not just that he came back from two sets down to win, but that even when Murray was firmly against the ropes, he kept his composure firmly in check and played with a winner's confidence even though he was losing. This is a quality I adore. In tennis, golf, and other such games, the mental part of the game is a crucial part of the winning puzzle. I imagine some traders will succeed with little confidence, simply because the role of luck is arguably a lot higher in trading than in many sports. However, on balance, I believe a confident attitude of the sort seen in sportsmen competing at their best but from a losing position is a valuable and honourable trait, well worth trying to develop in onself.

Murray is up against Nadal tomorrow, which is a lucky career move. Since Andy Murray is probably the only person who thinks he can beat Nadal, this means that if Murray loses to Rafa, there should be no collective sigh from the British public of the sort we used to get when Tim Henman used to lose to potentially conquerable opponents.

Jul

1

V N Today was a perfect Market Mistress kind of day. New lows for the year at the open. Requiting of bear market. Retreat below the open to scare out the complacent. Oil at the high to make everyone bearish. VIX above 25 intraday. Bad news all over. Beginning of month exactly the same as January 1, 2008 but this time completely opposite. Also opposite from June 1. Down a googol at end of day yesterday and up that same googol today. Total bearish news all around. Many other things.

Jul

1

This weekend we went to the southern part of the island where the lava is flowing into the sea. We launched the boat through moderate breakers and headed south to where the lava was flowing. The lava poured into the sea creating a huge cloud of steam a thousand feet tall that billowed up in mushroom formations sending off small tornadoes from the heat. The ocean was literally boiling and the heat from the lava spread out hundreds of feet or more. Explosions of molten lava send red glowing cascades of molten lava through the air. The strangest thing were football size chunks of lava floating in the ocean. One of the guys had welding gloves and picked up the floating lava chunk, broke it open revealing red hot molten lava inside the chunk! It was crazy and beyond belief. Its not at all what you would think could occur, floating lava. Go figure. But there it was. There are things in nature that defy belief. Almost like today's market. Mind boggling.

Jul

1

This is in from the "just when you think you have seen it all" department.

Last evening, I watched one of my favorite shows on the Discovery Channel , "Dirty Jobs" with host and celebrity Mike Rowe. I say celebrity because I saw his status verified by a stint on The O'Reilly Factor and that I was in a card game last week and every sweaty and unshaven man at the table knew who Mike Rowe is. The women were less informed. By watching the show you are introduced to some of the most disgusting jobs imaginable. Here are some of the bad ones:

Chick separator. Separating female chicks from rooster chicks.
Noodling. Hand fishing for catfish in rivers.
Chumming for shark
Crawfishing, in the bayou in Louisiana
Cleaning up a house after a flood. This is too disgusting to describe.
Cow inseminator

Last evening I saw one that reminded me of this market. Snake catcher. Catching a snake was not too bad, but the downside is that you tend to get bitten by the snake. Hopefully by only non-venomous ones. But afterward was the sick part. They made the snake vomit to discern what it had eaten recently to determine its dietary habits and the ecosystem that it was in.

I felt that this is my new description of a bear market. What would make a snake vomit? Dow down seven of eight months. Worst June since 1930. GM's lowest price in 50 years. Market back to where it was at the start of the century. Merrill at 34, Citigroup at 17. Bear Stearns out of business. Residential real estate prices falling every month. Oil up 40% this year. Foreclosures reaching all-time records. Guy Ritchie and Madonna split. Those are some real house of pain facts. And some real snake vomit numbers.

So the questions abound and the nabobs quack, when will we see the turnaround that is hoped for and what will impel the market to right itself and go forward?

Jun

29

VNThere are many reasons everyone should read and study "The Enzyme Factor" by Hiromi Shinya. The first is that he promises a cure for cancer and an extension of lifespan. The second is that it will dispel a hundred myths about what is good for your health. The third is that it will teach you about the digestive system, providing knowledge that will help you in all aspects of your life. The fourth is that the book is like that written by a seasoned and very successful chartist. Instead of examining 300,000 charts, he's examined 300,000 stomachs, and based on the outcome not of price moves, but on subsequent relapse into cancer or death, he's formed a theory of what causes disease and come up with a method of preventing it. The fifth is that the book has sold two million copies in Japan, and presumably will affect the world in many ways for the good.

Dr. Shinya is best known as the inventor of colonoscopic surgery. He maintains the largest endoscopic practice in the world, delivering, with his team of three other doctors, in his 45 years of practice more than 300,000 colonoscopies. He practices in Japan and on E. 55 St. in New York, and regularly treats US Presidents, English Prime Ministers, and Japan's Royals. I was one of the 300,000 he treated and I have never seen a more efficient operation from start to finish in any field. He shocked me a bit by giving me a diagnosis on two occasions without a biopsy, but as he said like many chartists I know "I've seen more than 300,000 of these so I know without any tests or numbers." His book makes the unusual claim that he's treated thousands of patients for cancer and never had a relapse. This is like the chartist who tells you he's never recommended a stock that has not gone in the direction he predicted. Presumably a patient he's treated who did have such a relapse would complain in one form or another if the statement weren't true, with the inevitable other consequences. And since the normal death rate from such diseases is 25% or more, the actual observed number is 20 standard errors or more below expectation, truly a lower probability than the spare parts in a junk yard assembling themselves magically and spontaneously into an ocean liner.

Dr. Shinya has a Galtonian personality in many respects. Like Galton, he never recommends a procedure or medication without trying it out on himself. He takes a dose of every medication he recommends for his patients, but had to stop when he took some Viagra-like substance as it almost killed him in recent years.

The book is replete with side facts that will change your life. He recommends that hospitals immediately start feeding surgical patients a full diet of solid food, not the bland mush and cereals usually given. He recommeds that babies give up bottles at one year old. He recommends all adults should refrain from ingesting any dairy products. He recommends that no water or any foods be eaten for 5 hours before going to bed. He has a patented method for making all dogs love him— rubbing saliva on his hand ( the same saliva so important because of its rich enzymes   for proper digestion), and then letting the dog eat it

The essence of Dr. Shinya's recommendations is that you eliminate all dairy and meat from your diet, and maintain a diet of 85% vegetables and fruits, and 15% protein from fish. He recommends the elimination of coffee, tea, snacks, alcohol, chocolate, and fats and oil, and advises adding sea vegetables to the brown rice, beans and root vegetables that are the staples of most vegetarian diets.

He advises an active sex life, moderate exercise, and above all much good water, which he recommends as Alkaline Kangan water.

Like most books of this nature written by a clinician and not a statistician, there are a myriad of untested theories and single factor causes of disease that are singled out without any testing or documentation. He believes that since he's examined more stomachs and intestines than anyone else that if he sees a problem there, and notes a diet that seems to correspond to it over time or between countries, or between healthy and unhealthy patients, that is enough for him to tell without examining "worthless studies where the numbers don't mean anything because the researchers can get them to say whatever they want." This is the same defect that I find with charting and almost all of technical analysis, although in this field the problem is deeper because the cycles change much quicker than they do, for example, in Japan where Dr. Shinya attributes the 25-fold increase in stomach cancer there to the inclusion of milk in school lunch programs starting in the post-war years.

The problem with such clinical observations is that you can't differentiate the valid science from the anecdotal which is not valid. You just don't know without further study which of his recommendations have any validity.

The essence of the theory behind his recommendations is that enzymes are the key to health.That there is a single source enzyme that controls all the others, and that this is used up by ingesting foods that have free radicals that use up good enzymes, and by eating improper foods that use up the good enzymes, which are contained mainly in fruits and vegetables.

The theory itself is unproven. There is no evidence that it prolongs life or prevents disease. And it is hard to differentiate its recommendations from many other theories that recommend similar diets.

Because of the importance of the subject to all, I have followed up all of Dr. Shinya's recommendations and examined all the scientific studies that might provide valid evidence concerning the merits of his recommendations.

This is a difficult field, because most of the studies compare two different groups at the same time, and then follow them up, or are retrospective in nature, looking at the characteristics of diseased persons versus healthy. Also, there is observer bias, the placebo effect, the problem of self interest, fantastic high cost of a proper longitudinal study, lack of double blind outcomes in most studies, and the lack of incentive to test anything but patentable drugs that can be used on a large proportion of the population.The problems are the same as in our field, where you don't expect a practicioner to set forth his recommendations, and then follow them up for 10 years before accepting them as valid. But in our field as soon as such recommendations are made, the form changes, making it even more difficult.

Nevertheless, some excellent longitudinal studies exist, including a 50,000 patient dietary study, a Harvard-Dana Farber study of diseased people, a Baltimore longitudinal study, and a nurses' study. Also, an Italian study of elderly patients, and various Scandinavian studies and Seventh Day Adventist studies exist. It would be too tedious for me to review each of these studies and comment on their merits and demerits and how they affect my estimate of the validity of Dr. Shinya's conclusions. However, there is near unanimity in all the studies that a diet without meat extends life span and reduces disease. Many of the studies are contradictory on the merits of dairy products and poultry but a good working hypothesis seems to be that fermented dairy products are healthy for you and unfermented products such as milk are unhealthful. I find no evidence that drinking tea or coffee is bad. However there is much evidence that drinking much liquid in your diet is very healthful, and Dr . Shinya's recommendations of eight 12 eight ounce glasses of water a day seems to fit in with beneficial effects in all the studies I have seen. As for the value of Fletcherizing food, coffee enemas, eating uncooked foods, and deep breathing, and the removal of all desserts from your diet, I find no evidence either way. I have shown all the studies that support or infirm his theories to him, but with a practice that involves administering 40 colonoscopies a day, as well as the thousands of diseased patients he claims to have treated over the years without a relapse, I was not surprised when he rejected my offer to elucidate all the statistics to him. He commented that he can understand them on his own but he doesn't believe in statistics anyway.

I have sent copies of his book to all in my family and believe that despite the many defects and gaps in his theories, that if one does not mind "giving up pleasure in eating but eating for health," as he recommended to me, that following the gist of his recommendations will do much to put you in a much better frame of mind for living and trading.

Ken Womack adds:

This is a fascinating topic and the book is one that I find intriguing. About a year ago I began a vegetarian diet but encountered difficulty transitioning my new diet into the household kitchen lexicon. What I found immediately was that I gained a moderate amount of weight as I inadvertently mixed in too many carbohydrates. Once that was under control I noticed that I was more alert, that I didn't become as drowsy after eating, and that pH began to shift to a more alkaline composition.

In the end the pressures of carnivorous life and the human weakness bested me. Vegetarian lifestyle is demanding, especially at first. However, I plan on giving it a go again - this time better prepared.

I think that there are ways to overcome the amino acid deficiencies of the diet. Fish-eating vegetarians are even better equipped to handle the nutrient battle.

The idea of portion control too has merit. There is most assuredly a battle taking place within us all. Unlike some markets, however, I think we affect the volatility rather than react to it. The lows are certainly consistent in their emotional impact, though.

Jun

29

Predictably Irrational, by Ariely, (hat-tip to Riz Din for cite!) was a great read and has provided some deep insights into personal trading and many common everyday situations in the days after reading the book. It also provides a good basis for testable hypotheses of a quantitative nature in trading.

Behavioral economics is popular and most traders are familiar with Kahneman and Tversky's works. Some of the ideas were discussed in the Black Swan directly or indirectly. The idea is that people are not rational agents as posited by traditional economics, but rather are influenced by unexpected and rather random cues in their environment and lead them to make decisions which are not rational, and which the author asserts are predictable. We see this in other traders (but not us, of course) everyday. It is this element of predictability which he does not go into in detail and which give some ideas to the trader using quantitative methods to predict the path of prices and provide a laboratory of data. The author has documents many interest anecdotes with experiments conducted on subjects that seem to support his ideas. Presumably, but not documented, the underlying statistics of the experimental data lent support to his hypotheses.

Some of the random cues that influence people's decisions are:

  1. Relativity, where experiments show that choices tend to be made between relative values rather than absolute values. One example is where people tend to choose the middle of three choices, when on an absolute basis, the cheapest might have been the best value. We see this in the circumnocution of market prices. This effect is seen in dating where a girl with an ugly friend looks much better than she might standing alone. This might be seen in the comparison of two companies in the same sector.
  2. Anchoring is the tendency of agents to choose a price close to a price randomly presented to them earlier which has not rational connection with absolute value. Again we see this in market action with the tendency to revert to the opening prices.
  3. The issue of the illusion ownership which makes the agent tend to place an excessive premium on things he owns or is bidding on, even to his detriment. This makes it harder for people to get out of trades. This also might suck a trader in deeper than he wants to be having entered into an undesirable trade when it might just be better to wait.
  4. The ownership effect makes people tend to cling to trying to keep options open, even when its more advantageous to close the door and choose one alternative.

These effects occur every day in personal lives, and in the markets. The traders trick is to find those irrational behaviors that cause losses to other traders and exploit their predictability.

The observer effect might be seen in the market in the tendency of prices to revert to or near a prior observed price such as open or prior close.

Jun

28

A nice, clear definition: "a bear market is a 20 percent drop from an all-time high." We'll know when we've had one. Nigel Davies.

Like we used to ask, what about numbers on the table?

Using DJIA 1950-2008 monthly data (skipping the Depression because it can't happen again), a bear was defined as this month's close < 20% below the high of any of the prior 24 months. Comparing the mean return of months following bear months with all months in the series shows they are actually higher - though not significantly:

Note that at least some of the insignificance is stemming from the higher volatility of 'after bear market' months:

The higher volatility is quite statistically significant.
—–

Speaking of numbers on the table, here's a reminder to budding real estate moguls just how pricey bubbles can get Homeowner offers her house and her 'love' for sale

Jun

28

Ayn RandFinally I could invest the time to start reading Atlas Shrugged. I have chosen the word invest advisedly here; I have finished reading Part I and decided to take a pause at the end of page 312.

Bearing fully in mind the introduction by Leonard Peikoff that begins by stating that Ayn Rand held that art is a “re-creation of reality according to an artist’s metaphysical value judgments”, it strikes me very hard to seek your opinion if really in the America of the last century there indeed were characters such as Jim Taggart, Orren Boyle and the sort of hoi polloi that has been described continuously in these 312 pages. I have no doubt that there were a lot of Dagny Taggarts, Hank Reardens, Ellis Wyatts who helped (re)build modern America further, but it beats me if really there was a time when the over-riding thought and action of the day was being shaped by Jim Taggart and Orren Boyle types as well. What do you think? Has the author erred in stretching the shadows far longer to produce the effect or was there really an America like that also?

Alex Castaldo attempts a reply:

You are not the first non-US reader of Ayn Rand to be puzzled by this question. As a foreign-born American I was surprised that her books were set in the US when you could easily come up with better examples of government/business connivance from other countries. Americans can consider themselves lucky that they are better off in this respect than some others. Indeed I have often asked myself where is the Italian Ayn Rand who would speak up about how some of Italy's wealthiest people have made their fortune largely through political connections and improper operations, and explain the difference between this and true entrepreneurship. Sadly he/she does not seem to exist (possibly for lack of readers).

Part of the answer may be that Ayn Rand was most familiar with Russia and the US, so of course she chose to write about these countries. Also, she was concerned about trends and developments rather than the immediate situation; the US in her books is perhaps the model of what could happen to any country if the disturbing developments she saw around her were to continue. Her books are, among other things, a plea for the US to retain (and improve) its traditional values and not adopt those of the then ruling class in Soviet Russia.

Jun

26

PitcherI wonder why tennis serves are not more similar to baseball pitchers'. I have tried to revamp my serve and am picking the left leg up high and following through with the right, the way all the right hand pitchers do, and it increased my speed and accuracy. Is there a flaw in this approach or analysis? I remember from squash the fastest serves I ever saw came from baseball pitchers.

Bill Humbert replies:

I remember Pat Cash reflecting that he felt he would have had a better serve landing on his left foot. Other great servers like Becker and Laver landed on the dominant (right) foot also. I switched from this style to the modern style while still in juniors — I found it easier to control, and easier to reposition myself at the baseline. But it would seem to suit a serve-volleyer to land on the dominant. Speaking of tennis, here is a little essay I wrote: Looking in The Mirror.

Players often go through long periods with their confidence low (I am in one now, both in my tennis and my investing). I believe that I am a good tennis player, capable of a certain standard of play, while my body is able ( which at the moment is not! ). I believe that with planning, practice, hard work I can get myself out of this rut, even though this is one of my worst. However that belief is not there when it comes to my trading and investing. Last year I blew up, losing too large a chunk of what I'd accumulated ( and spent ) over the years, and I've not traded since. I've gone back to work after having semi-retired, literally starting over. Not only that, I look in the mirror and ask whether those ten years of success and wealth accumulation were due to in large part luck - I'm starting to believe they were, and with that loss of belief there is no way I can apply the same principles I'm applying to the tennis court to get my mojo back. If you see a failure in the mirror, you will fail time after time. Here are some of the simple but expensive lessons I've learnt since watching Federer beat Nadal last year at Wimbledon.

1. Know your strengths and nurture them. We are all built with a particular strength, it's there to be nurtured. The right mentor might enlighten us, or sometimes even friendly opponents. Most improvement in a player's game comes from recognizing this strength and finding the opportunity to apply it over and over. Hide and protect your weaknesses, apply your strengths. You'll win more than you lose. Do you know yours?

2. Imitation leads to elimination. Much time is wasted by players trying to be what they are not, and giving away what they are best at in the process. Create your own style - that way you'll know its not been seen before.

3. Accept your shortcomings. Every player has holes in their game. A big step is made in accepting this. A player can then make better judgments on which balls to attack. This nurtures a more patient approach as the player realises he cannot hit every ball for a winner, cannot win every point.

4. Keep it simple. You do not have to be able to do know everything or do everything well to be successful. Success and winning is as much about getting the basic stuff right over and over again.

5. Know your next move. Rule 1 in grasscourt tennis: volley to the open court. With this rule in mind, you are applying an edge over and over without having to think about it. Your opponent may start anticipating, but he will be at a disadvantage more often than not. Having a set of moves from basic court positions simplifies your game. The task is then to execute. A good plan is very hard to beat even when they know what your are doing.

6. Don't play if you are injured. There nothing to gain. Injury means less practice, hesitancy during play, losses, and a spiral of falling confidence. Much like a depleted trading account which isn't letting you play as you would.

7. Do what it takes to restore your confidence. Any trick will do. Sports and trading are confidence games, and you are a useless player without it.

8. Know when it's time to hang up the racquets.

Steve Leslie writes:

I don’t follow tennis much any more but I have been researching some of the greatest players. As I suspected, on the men’s side Federer and Sampras are both 6′1″ according to Wikipedia. Becker is 6′4″. The women Lindsey Davenport and Venus Williams both go over 6′ and Sharapova is 6′2″. So compound their height and the high tech racquets that can withstand immense tightening of the strings and this in all likelihood are concomitant reasons why the serves are so fast today.

Basic physics dictates that to get greater velocity on the ball, the racquet head speed must be high. How you get there is up to you. Roscoe Tanner had a very compact swing as I recall. He was a striker. Becker would get there through a very long arc on his serve. He was more of a sweeper.

I do think that there is a corollary to the elbow problems that pitchers face and that is tennis elbow. Most likely due to the snap that the tennis player tries to get through the ball to obtain a little more velocity and the stress they put on the joint itself.

I know in golf that high clubhead speed is attained through shaft length, flexibility of shaft and acceleration through the strike zone. There is also a trampoline effect that is realized through the composite material used on the face and the design of the actual clubhead itself. In his day, Greg Norman was probably the greatest driver of the ball, which is a combination of accuracy and distance. He is considered a sweeper. Hank Kuehne and Daly are more strikers.

I still will never understand how or why Bryant played with a broken leg. Hacksaw Reynolds also allegedly played with a broken leg. A word of caution here. Bryant also had half his team quit at Texas A&M during his boot camp and according to the show on ESPN one almost died from heat exhaustion. Kerry Wood may have been permanently ruined because of abuse and pitching hurt and before he was sufficiently healed. And my all time hero, Dave Dravecky pitched after receiving treatment for bone cancer and broke his arm forcing amputation of his arm. These are two stark examples. I could also mention Mike Ditka, Joe Namath, Dick Butkus Dan Marino who walk like 80 year old men. There is a big difference in playing with pain and playing when really physically damaged.

Jun

26

Woody'sI really don't know why I go to Woody's BBQ [menu pdf] so much. Perhaps the convenient location, consistent food, and great sweet tea have something to do with it. Maybe it's just that I happen to drive by their location most Saturdays when I'm hungry, or have some Pavolvian response that I'm unaware of. Whatever it is, Woody's is my default BBQ place here in town, when I don't feel like driving over to Arcadia . Woody's is a chain of BBQ places in Florida that serves good, but not great BBQ. Their portions are ample, the meat is tender, and the prices are rock bottom. Their sauce, which comes in three varieties, is really delicious. Woody's likes to baste their meat and chicken wet, and then smoke it while continuously basting with sauce. I usually go there for their sliced pork sandwich, which is a huge pile of thin sliced pork, served on a large toasted garlic bun. There's a good 10 oz of pork on the sandwich, and plenty of sauce at the table in which to dress it up according to tas te. The sandwich is quite tasty, and is a meal in itself. My experience with their BBQ ribs has been uneven, sometimes great, usually OK. Whenever I go there, I avoid the fries, which tend towards being soggy, and dive right into the BBQ beans. Simply put, Woody's BBQ beans are world class, with plenty of bits of crispy salt pork in each serving. Their beans are well cooked, with just the right amount of BBQ sauce added, without overpowering the flavor of the beans. Woody's also serves a creamy cole slaw that's delicious if one adds some pepper and Louisiana hot sauce to it at the table and mix it in. One thing I never fail to eat when I'm there is the deep fried garlic mushrooms. The batter they use is sort of a tempera batter, and the mushrooms are first rate in quality. The contrast of the crisp batter with the perfectly cooked mushrooms creates a perfect balance, and satisfies my taste buds. I've tried other things on the menu such as their fried catfish and chicken fried steak, and found them to be good, but not memorable. Woody's decor can be best described as faux Western kitsch. Although the decor isn't very inviting, the place is always very crowded, with a 10 minute wait being the norm. Woody's isn't world class BBQ and makes no pretensions as to being the best. They are good, not great, but are a must stop if one happens to be driving by one of their locations and is hungry. Woody's purpose in the world is to serve ample portions of hearty BBQ to the working man, and for that, the world is a little better place.

Jun

26

Someone I met recently told me that in about seven years time each and every atom is replaced in our bodies. Then how come the much analyzed chemical reactions of the body and brain retain memories and learning acquired across years? Irrespective of the proverbial seven year itch arising in the 7th, 6th or 8th is it then about revisiting the premises left now only in memories upon which the original pleasance of the relationship rests still upon?

Like in a computer where one keeps on upgrading each and every component and on average ending up replacing every part in about seven years when nothing existing today was in the original computer the data, the feel of the desktop remain the same and we still call it the same computer. Is life and the kind of computing the human brain does more similar to network computing? What else might a social process be similar to from the world of computing? Can principles of computer networking be applied to find valid applications in a social process called the stock market?

Is life using more of google spreadsheets kind of structures than using the locally resident ex*el type utilities? How come across generations within family trees certain patterns of thought, action and being are ingrained? What then is the reason for a flapping of a butterfly's wings in one nook of the Earth bringing about a typhoon in another corner of this planet if life being a seamless network of information and matter is really incidental to its carriage?

Would a market be over N years not replacing each and everything that existed before that period and still be the same market? DJIA has just one original stock for an example. It is still the same market. It is the same stories and folklores. What is the value of that N for each different security, each different market sector etc. etc. Will the differences in N reveal any differences about the markets, assuming measurement of such an N will be feasible somehow?

Is reality, in the markets and otherwise, just a continuum of information while matter keeps getting replaced, regurgitated, re-structured, re-invented etc. etc.? Why does then someone as successful as the Sage proffer wisdom that one ought to own companies that do the same routine thing that we would require all our lives? The coke is the same as it was twenty years ago? It perhaps is getting different again at its own pace. In the same vein then why is there only one company such as 3M yet that persists on achieving not less than 60% of its sales from products that did not exist three years ago?

May be a good point to begin on this trail is to first imagine and find which variable(s) from the characteristics of securities or companies can be those that which change completely in N years across a set of securities, value of N being then the next variable to study?

Jun

25

Google strikes again. With its huge computing power it is changing the way science is done, according to The End of Theory: The Data Deluge Makes the Scientific Method Obsolete, an article by Chris Anderson in Wired magazine.

Some excerpts:

"All models are wrong, but some are useful." So proclaimed statistician George Box 30 years ago. […] Speaking at the O'Reilly Emerging Technology Conference this past March, Peter Norvig, Google's research director, offered an update to George Box's maxim: "All models are wrong, and increasingly you can succeed without them."

[…]

Scientists are trained to recognize that correlation is not causation, that no conclusions should be drawn simply on the basis of correlation between X and Y (it could just be a coincidence). Instead, you must understand the underlying mechanisms that connect the two. Once you have a model, you can connect the data sets with confidence. Data without a model is just noise. But faced with massive data, this approach to science — hypothesize, model, test — is becoming obsolete.

[…]

There is now a better way. Petabytes allow us to say: "Correlation is enough." We can stop looking for models. We can analyze the data without hypotheses about what it might show. We can throw the numbers into the biggest computing clusters the world has ever seen and let statistical algorithms find patterns where science cannot.

Dylan Distasio replies:

I didn't see any compelling argument in that article that the scientific method is on the verge of becoming obsolete.

While cloud computing can be a great tool for analyzing protein folding or looking for extraterrestrial signals, I don't see how throwing "the numbers into the biggest computing clusters the world has ever seen and let statistical algorithms find patterns where science cannot" is a viable approach.

This sounds like the ultimate in overfitting data (although I guess there is no model!). Venter may have come up with a brilliant software tool for rapidly sequencing DNA, but it's only useful within the context of a genomic model that was built using the scientific method.

I still see noise without a framework to hang the data on, and a testable (i.e., potentially refutable) hypothesis. 

William Smith relates his experiences:

StatsI work with large amounts of data all the time. Failure to understand the mechanism and specify the model form based on the mechanism leads one to make worthless models that fail miserably.

The noise level is very high in these types of datasets. Many "patterns" are just random but algorithms will treat them as real. The "kitchen sink" approach of throwing many algorithms on a cluster of processors at a large set of data is guaranteed to find something. If all that's there is noise, they fit the noise. When tested on new data it had never been exposed to before, the model won't work. I have seen even the most sophisticated machine learning algorithms fail, support vector machines, for example.

I have worked with many modelers who have tried the automated brute force approach and they have never once managed to solve the problem they were working on.

I have built models in the field of chemometrics that I patented which use only two variables because I understood the mechanism. It was an iterative process, and I certainly didn't get it all correct in the first cycle. In fact, I have had some outstandingly stupid ideas. But the process of testing, refining, discarding, and generating ideas is hypothesis driven science, and that is a process which hypster computer scientists cannot perform. Never seen one of those guys capable of doing it in the last 15 years. If this is where Google is going, they are in deep kimchee and wasting a lot of money. Looking for patterns in the hay does not find the needle.

Jun

24

The latest piece by mar