June - 2013
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 S&P +15.30
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 S&P +11.50
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Copyright Dailyspeculations.com

Jun

18

This is an update to my first article about the Heston Recipe on the site.

The Heston model is a mathematical formula for the call price. Similar to the Black-Scholes formula, it requires a set of observable inputs such as the spot price and strike price, the risk free rate, and the time to expiry. In place of the single parameter 'sigma' in  Black-Scholes, however, the Heston model requires a number of parameters that must be estimated from market data. These parameters drive the shape of the implied volatility surface extracted from call prices generated with the model. This surface is simply a three-dimensional plot of  implied volatility as it varies according to strike and to maturity.

In FX markets the implied volatility is usually symmetric in the strike direction and the pattern is often referred to as a "smile". In equities markets, however, the implied volatility is usually asymmetric and is referred to as a "smirk" or "sneer." A number of explanations have been proposed for the asymmetrical smirk, but one of the most plausible is "crash-o-phobia." According to this explanation, following the October 1987 crash, investors in equity options have been willing to pay relatively more for downside protection than for upside speculation. Consequently, out-of-the-money (OTM) puts are relatively more expensive than OTM calls. Since there is a one-to-one, monotonic, relationship between the option price and its implied volatility, the smirk is simply a reflection of this price mismatching. The Heston model is a convenient way to capture the smirk and other features of implied volatility, along a continuum of strikes and maturities.


The most common way to estimate the parameters of the model is to construct a function that calculates the distance between implied volatilities observed in the market, and implied volatilities generated by the model and matched by strike and maturity. The distance is often chosen as the squared difference between the model and market implied volatilities, and the function is the sum of all the squared differences. The parameter set is chosen as that which leads to the smallest sum, and consequently, which provides the closest fit of market implied volatilities to their model counterparts. The figure illustrates the implied volatility surface for a subset of SPY options on April 13, 2012. The market implied volatilities are represented by black dots, and the implied volatility surface generated by the Heston model, by the colored mesh. The Heston model is able to fit the smirk, and to account for the mitigation of the smirk at long maturities.

Jun

17

Who is this ubiquitous "public" of which we all speak?

You must know who I mean. The one that Bacon thinks the form always shifts against at the race track. The one that allegedly always loses in physical stock markets. The famed 'Mrs. Watanabe' in the JPY Carry Trade. The 'Belgian Dentist' (what the ???) in Fixed income Securities. Well, I think, in the modern world, the concept of a "Public", as commonly classified, is absolutely redundant.

1. Holdings of Physical Stocks by the 'Public' is now circa. ~ 20% (Excluding Mutual Fund Holdings)

2. Therefore, the public to which we refer (in stock markets) is actually an MBA from a Big Ten business school in the United States or Oxbridge/Insead in UK/Europe. These guys are the ones buying and selling.

Now I am not saying that these are better or worse investors than the "public" we all allegedly copper. It's just that their behaviour is different — more institutional.

The ecology of the market has changed substantially, even in the past 25 years since I have been involved. I read somewhere recently that BlackRock owned or controlled ~ 20% or 1 in 5 stocks… Now figuring out how they move volume and why might be better than focusing on the public.

I find it hard to even dignify the 'Mrs. Watanabe' classification. The allegation that investors and speculators in Japan are in some way more trend following in nature or more likely to "buy the high" than any other classification of investors/speculators is laughable.

In all fairness, there are one off anecdotes about large purchases at the highs of trophy items by Japanese investors but that has more to do with who has the money and when. The last five years have seen the G.C.C. countries & China buy everything way through the highs for trophy assets…They too shall sell the low in times to come…

Ed Stewart writes: 

I disagree.

You are only considering it from the viewpoint of time-weighted returns. The problem is that time weighted returns are make-believe from a actual IRR perspective. Money weighted returns are where the public's poor outcomes become most apparent. Investors underperform their own mutual funds by something like 2% a year or more, if I recall correctly. Significant under-performance even occurs in index funds. People also time their 401k contributions, etc. I would love to see data on how much contributions dipped or were canceled in late 2008 early 2009, only to be turned on 2 or 3 years later after the tremendous rally re-instilled confidence. There were undoubtedly a tremendous, outrageous losses during this period relative to the time weighted returns, which seem to suggest that "everyone has been made whole" which is far from accurate.

Jun

16

I have recently had a lot of pain related to a problematic tooth. It is a tooth that has been giving me trouble on and off for years and I have no idea why. Dentists have suggested it suffered some type of trauma when I was younger, but if that was It I don't remember the event.

Went to the emergency room last January (weekend, regular doctor closed) because I was in massive pain over the holiday weekend.

It turns out that it had become infected and was putting pressure on the nerve in the Jaw. Since that time I have had a root canal on the tooth, but that did not solve the problem. I have had two other procedures, the last one this morning because the prior one did not heal properly and got infected again. Really aggravating experience, no need to go in to details. Today I am holed up recovering, jaw aching on a beautiful day.

The thing is, back in January, I had a gut reaction that the best thing to do would be to just forget all the treatments and have the problematic tooth yanked out. Based on the trouble it had caused me to that point, it just seemed to be the solution that made sense — likely to be final and just "end" the problem.

Yet, I was told that was too extreme and "the tooth could be saved" etc. No professional I spoke with thought it was a good idea, in fact they seemed astonished that I suggested it. And today, after treatments and quite a bit of discomfort, things not going right, etc, I am inclined to think my initial hunch was correct. Forget treatment. Just get rid of the problem.

I wonder how often this happens.

A clear cut solution to a problem exists, but a bunch of complex alternatives are presented and the resolve to do what is likely required to the end the problem with certainty is dampened. Not to push the analogy to far, but does this not also happen in trades, businesses, and relationships that are going wrong. Rather than end a problem trade, it is easy to tinker with it, look for hedges, "scalp" around the position, etc. but instead of a resolution only more pain is created. Or a relationship that has stopped working — "keep fixing it" but only more delays for the inevitable split which is more painful than a clean break.

It is hard to tell what is hindsight quarterbacking, and what is a life lesson. In this case I am still not sure which it is. I wonder if there are any general rules or ideas that can be applied to these situations to give better outcomes.

anonymous writes:

Absolutely, the best case is to always treat (your tooth or a losing trade), like it was bad meat and spit it out. Deal with it immediately, no messing around, just take the hit and get over it. Bad trades, like bad relationships, have a way of metastasizing into something worse, and the old cliche comes to mind, "Your first loss is the least."

Personally I remember once having a relationship with a nice gal that went south (but as a guy I was totally oblivious to the whole thing and didn't see the obvious signs). I was out with the lady in question in public at a restaurant and she gave me "the blow-off speech." I was so confused that I didn't even see it coming (One could make a case that infatuation is insanity). In retrospect, I should have gotten up, picked up the check, paid her carfare, bid her adieu, and walked out, never to see or communicate with her again…..like one exits a bad trade. Instead I lingered for months in an emotional limbo, like a sick puppy, suffering great humiliation and many bad feelings. In retrospect, like a bad trade, that relationship wasn't worth it and there was no bargaining, hedging, covering it with options that was going to save it. It had to be pitched immediately, and I broke my cardinal rule by not pitching it (emotions again).

Bad trades, like bad relationships can teach one many lessons in life and trading if one listens to what the situation (market) is telling you. If only, when dealing with that person, I had used my trading persona instead of my emotional side, I would have not lingered in emotional limbo for months.

This supports a great case for dispassion, and a big part of the Masonic obligation is to "learn to subdue your passions." But like the ying and yang, good things happened out of that debacle and I ended up seeing a very cultured, erudite, successful, powerful, and beautiful woman that I married a few months ago. I'm happy for the first time in five years, and that's what's important. Bad teeth, bad trades, bad relationships…..get rid of them, they are just nuisances that get in the way of life.

A commenter adds: 

But that thinking of could have, would have, should have is very deadly in the markets. Although hindsight is always 20/20, my eyesight of 20/100 does not allow such indulgences and my defensive game does not allow for such risk. I'm trying to make money, not keep my finger in the dike like the little Dutch boy. The Dutch boy was wasting his time. 

Gary Rogan writes: 

Bad women and bad teeth rarely get better by themselves, although some teeth that seem to need a root canal sometimes do. Equities do it a lot more frequently, so to this day I don't know how to reliably tell when a bad equity trade needs to be spit out. "Your first loss is the least" obviously applies to some situations, but for instance I still own a stock that lost me 20% two days after I bought it, 50% three months after I bought it, but now two years later it's up 70%, having been up 120%. Rocky talked a lot about his thoughtful decision to exit HPQ back when it was relentlessly moving south, but it's back. What used to be RIMM is still in the dump, but someone who bought it in September doubled their money. If you could always make a wise decision by just getting out of a (currently) losing trade, everyone would be a lot richer than they are.

Rocky Humbert responds: 

Mr. Rogan,

Indeed HPQ has been inexorably working its way back and may keep climbing. Who knows? What we do know is what  the S&P index has done subsequent to my exiting HPQ. And we also know what  other alternative investments (gold, real estate, etc) have done over the same period of time. Taking the hit and putting the (remaining) capital into the alternatives would have been better than suffering. Hence in these matters, one must consider not only the ongoing pain, but also the opportunity cost. To the extent that one is monogamous, the analogy holds for personal relationships.

Is there an opportunity cost for teeth? Not sure.

Gary Rogan replies: 

Sure, there is always the opportunity cost. The question is, how well do we know it in advance? My point was that if say you bet all your money leveraged 10 to 1 on wheat, and your position is down 10% you may want to exit, but if you own 100 stocks and one is down 10% or 50% or even 90% what to do at that point outside of any tax considerations and without any additional information isn't exactly clear. Given my preference for 52 week lows in the absence of any other information it may make sense to buy more or do nothing. If the sudden move lower really attracted your attention, and upon further study you conclude that this is only the beginning, of course you may want to sell. But then a sudden move up or a long period of flatlining or something you happen to read or hear may attract your attention as well.

A commenter writes: 

The key phrase that piqued my interest was when you said, "you bet all your money leveraged 10 to 1 on wheat." Why would you "bet" all your money? Wouldn't you want to just "bet" a small part of it, and keep the rest of your powder dry? Anyways, betting signifies gambling, and gambling is wrong.

Gibbons Burke writes: 

Anonymous, I am like you—I don't see any value in pissing my money away in a known negative expectation game, so I sympathize with your view. I have never found enjoyment in gambling, personally. But I can't extrapolate from my subjective view and experience onto the world because everyone's utility and entertainment functions are different.

Gambling in the United States has several positive social functions… State lotteries support education of children… Gambling on Native American reservations is a voluntary form of reparations to that people… and, it gets money out of mattresses and back into economic circulation, transferring capital from those who are not prudent in their stewardship of that capital (otherwise they wouldn't be gambling, would they) and putting it into hands where it will be more efficiently employed.

Part of the freedoms cherished in this Constitutional Democratic Republic is the freedom to act the fool, on occasion, as long as you don't infringe upon the rights of others, or forsake the duties to yourself or those in your charge. 

Kim Zussman adds: 

You would not have regretted your decision to accept professional opinion / treatment had everything gone well.

The mistake is assuming you could have made a better decision - to extract the tooth - simply because in hindsight the treatments have not worked.

For any decision there is a range of outcomes. Perhaps your treatment had 80% chance of success (defined as rapid pain reduction, elimination of infection, and saving the tooth). But so far you are in the 20%, and for you the failure feels like 100%. "If only I'd extracted"

Do you expect portfolio managers or sound strategies to never lose, or abandon them only when they do? (Buy high / sell low)

Dentist and physician success rates are mostly unknowable but patients use cues to evaluate them. Cues such as trusted referral, reputation, diplomas, demeanor, looks, office decor, exhibited technology, etc.

Your treating dentists are simultaneously incentivized to obtain good results (reputation, future referrals) as well as make money (perform treatment). Those with consistently poor results have trouble competing with those with good results, and you are less likely to wind up there. 

Jun

16

MAN OF STEEL

Actually Stalin meant steely man, too. Would his mild-mannered alter ego wreak more impressive havoc today than the muscled one-man wonder?

Directed by Zach Snyder

Superman was created in 1938 by Jerome Siegel and Joe Shuster, designed as an adolescent anodyne and savior, in large part, from the hitlerian juggernaut that had sent so many surviving graphic artists and novelists over the oceans for succor.

For fact-chasers, this year marks the 62nd anniversary of the first Superman movie, Superman and the Mole Men—but not many will recall that first go-round of the man of steel franchise. The first Superman most of us recall or can see on late-night TV was the impressive Christopher Reeve, whose looming physique and chiseled good looks combined with his Juilliard-trained acting technique to generate the most paradigmatic Superman to grace the screen for the 5-issue franchise beginning in 1978.

The Brit Henry Cavill, who plays American Man of Steel without a lapse back into English (joke intended), is certainly handsome enough, but lacks the smooth, seamless facial planes and hauteur of his predecessor. Certainly, Cavill's physique is peerless, but he seems querulous and even hesitant onscreen as often as he seems commanding. It does not fill one with confidence. He seems a bit weather-worn, in a way that Reeve did not. Also lacking from this man of steel is much of a personality, or that naughty glimpse of sly humor that delighted audiences as it trickled out when Supe dealt with Margot Kidder's Lois—especially in those close-ups with chemistry evident between the two leads. Amy Adams, always competent, talented and pert-nosed cute, does not resonate any of the heat that you hope to see, especially as so few of these moments are visible onscreen altogether in MoS. She is a spunky, responsible reporter, refusing to reveal Superman's whereabouts to Zod or his people. But no frissons.

The Krypton mega-villain, the re-enlivened comeback Zod, played by a face familiar from innumerable mob pics, Michael Shannon, does not measure up to MoS villains of the past–Terence Stamp, Jack O'Halloran, Kevin Spacey, or the slightly buffoonish but clever Gene Hackman as Lex Luthor (whose solid chops as a tough guy, G-man and outlaw before this character stood him in good stead when the part as written could have defenestrated a lesser actor–and his diction slips into thugdom's unwonted dese, dem and dose from time to time. Krypton did not have a canton of Brooklyn to school such a pronunciation.

Jor-El, chief Kryptonite scientist [and father of Kal-El] played by sturdy Russell Crowe, sports a beard; one person, at least, who doesn't have a dimpled chin, as almost every major character seems to. It seems almost a cast member on its own, these dimples everywhere. (Is there something about dimpled kids that hurtles them into acting? It would seem so.)

This absence of chemistry between Lois and Supe may have been a choice of the writers, who figured people would go for the effects (yes) and the escapism (ditto), not necessarily for the romance (wrong).

Harking back to the innate value of the story (if that is what you unconsciously expect at base), the plot points are artificial, as nothing is at stake—the bad guys are just bad. There's no "On the other hand…" The earth is imperiled, OK, but that's SOP. We don't really worry about Metropolis and the violated and punctured mountain tops or glacial vistas. We watch the screen, zonked by the amazing effects that seem impossible. Thirty five years in advancing SFX have made a discernible difference. But viewers don't feel invested in either the characters or the outcome.

As a counterpoint to the pure evil, we can say, of the Reich and its übercommandos, Superman was conceived as a polar opposite. You know the drill: Dedicated to truth, justice and the American way. (Had the comic geniuses that poured into the US to escape nazism fled to the steppes, we would have had a different and less fortunate motto: Truth, justice and the Really Red Cape Way.)

For lovers of complexity, Clark/Kal El is hard to get, one would think. An übermensch too loaded with powers and too innately good to be a source of much dramatic tension. Except in our day, when goodness and power are not often a matched set, a character exemplifying these traits may seem obvious for the child primed by a constant stream of fiction fodder. For the sager adult knowing the shades of complexity and gradual moral elasticity/atavism of the world we inhabit now, the dramatic tension shifts not to this avatar of goodness and ethicism, but to our shifting relationship and accommodation to compromise.

One could argue that we adjust to evil and a full-spectrum response in hellholes, say, Sudan, Iraq under Saddam, North Korea, Uganda under Amin, Chechnya, Romania under Ceaușescu, under their absolute tyrannical heirarchs, more easily than we do to the obverse scenarios. We idealize Shangri-La, but would soon grow irritated and restless under its unfailing puffy white cumulus and imperturbable smiling sun. Nothing but free golf and chicken croquettes.

Though Superhero Kal-El (in Hebrew, where the preponderance of comic book ethos originated: Vessel of G-d) is supposed to be uncomplicated, in reality, this generation of consumers of the myth sees a character fighting against his better instincts, as instructed by his earthly parents (Kevin Costner, Diane Lane). The battle is maintaining the goodness in the face of vast cynicism and normalized unwholesome. Young Clark wants to vent his anger when taunted, pestered by school colleagues—but holds back. We are taught now not to suppress our wishes or desires or instincts (other than murderous rage, perhaps, or the male lusts to have every passing female on the average American street). Superman must squelch his natural desire to pay back bullies so as not to raise fear among his little schoolmates and community. Thus there is a reverse dramatic tension: We would not hold back. We'd smash their faces into the electric fence, knock the bejezzus out of the drunken jerk in the bar. But Clark doesn't, even when his own father (Kevin Costner) is at risk.

Risen out of adolescent escapism, Supe had, critics had it, nothing much to say about the human condition other than to indicate by his existence and responses to threat or calamity that salvation was possible, and that goodness could be sustained in the world of constant unpleasant surprises. Today that optimistic template reads as revolutionary. We've largely forgotten optimism.

After devouring Superman and his Action Comics supercolleagues as a child—I often ascribe my relatively commodious vocabulary to the thousands of comic panels I consumed after buying them with my tiny allowance—during my teen years I came to apotheosize him as the ideal boyfriend. Not someone I could hope to locate, but someone to aim for—he was a goody two -boots in the primary colors with all the Jewish values: Decency, charity, openness to others, helpfulness, sobriety and zero dark mishugas. Unlike American friends, I was brought up British-strict, and he represented my salvation from a personal raging tyrant. As it turned out, the boyfriend I had was probably better than Superman, because he was smarter, funnier, and clued me into many of the clandestine realities my family never imparted.

Superman makes broad-brush discriminations: These are good people. These, bad. We have many more dubious opponents, however, than were dreamt of in that Shuster and Siegel cosmogony. Most baddies today would not fall easily into either definitive camp. Superman and his cohort followers Batman, Wonder Woman, Flash, Aquaman et al., never dealt with the latter-day scourges of Communism or, more immediately, terrorism and radical islam. The seeping result of infiltration that imperils the free world with its encroaching ooze into all segments of society is not amenable to flying thrusts and grunting, lifting pounds per square foot. A man as rigorously physical as Superman has less impact on such foes than would, in fact, the meeker, milder spectacled version, Clark Kent. Kent's métier, as a reporter/journalist, unmasker of evil schemes and unholy plots, would today be effective in subtler ways, by informing the public and helping to dismantle terror networks. Clark is a crusader without a cape, a pen-in-hand counterweight to the forces tripping us up.

The film disappointed in its conscientious product placement of restaurant chains, camera brands, electronics and a variety of stuff we don't want to see any more in prominent Look-At-Me locations in our films. The flurry of product placement roused a counter-reaction that made such deliberate "subliminal sales" efforts embarrassingly gauche. Bad enough to have to cope with banner ads and customized computer–generated product sells on our laptops. No doubt the producers lowered the staggering costs of the film by selling rights to these commercial interests. (They have reputedly already netted $150 million before the film officially opens.) The authors of the hero, by the way, got the princely sum of $130 when they sold their strip in 1938, and until their dying days (1992, 1996) fought court battles to a fairer remuneration for the titan that is the Man of Steel. Using a dedicated lawyer and comic maven, Marc Toberoff, their heirs recovered some millions after epic battles in succeeding decades. $130!

For the alert, the film features a number of homages to films before it: Field of Dreams (Costner's 1989 baseball fable), Orson Welles' immaculate Citizen Kane, and a host of other swift visual refs. Most unsettling are the subtle but iterated Christ-like iconic shots of the Man of Steel as he stands still in the sky above citizens, erect and crucifix-like. Created by Jewish artists, about a largely idealized reverse-Dybbuk-figure of idolatrous [Jewish] beneficence, Christ imagery comes as a bit of a startle. There is no end of pertinent applications of Christian imagery in myriads of books and tales; this is not one.

It does damage to the well-worn legend of the destruction of the planet Krypton, a planet peopled by extra-uterine birth (but for our man Kal, who is the only normally birthed child, on screen, according to Jor-El, "in centuries"). The fellow next to me whispered: "First time I knew Jor-El was an Ob-Gyn!"

That pointed to another problem in the movie. There were too many scenes where if the audience was not so rapt on the special effects and blam-blam, they would have laughed at the silliness and unsubtle goings-on. Amy Adams scoots around the North Pole in her kicky parka and cute booties, no face mask, no earmuffs, all solo, crawling on rock faces jagged with ancient glacial formations. Really? I mean, really? The guy playing Zod, Shannon, is this side of over-exposed, a bad guy we have seen in one too many gangster flicks. His elocution is hardly Richard Burtonesque, when it needs to be, frankly, better. The guy next to me: "Burton wasn't available." Other reviewers, mind you, loved Shannon's performance.

Superman himself was slightly weathered in a way Chris Reeve was not, the planes of his face being more indented and chiseled than we are used to. He is immensely well-built, of course, so perhaps most people won't mind his indented look. The exuberance of diving up and clomping down on mountaintops, however, wears thin: Why just showcase wanton destruction of ice-faces, berms, earth forms?—We know what he can do. We miss the scene of the complicated Krypton baby-pod (hat-tip to Alien) landing in a Kansan field. But the liberties this sequel/prequel/he-quel takes with the cherished Superman tale (the film runs 143 minutes) get under the skin, even if viewers don't notice the feebler elements of the script, or the occasional silliness overall. Did anyone notice that all major characters except Diane Lane and bearded Russell Crowe had chin dimples? Even the bad-guy generals. What were the producers trying to say?

The time-honored red cape and red, blue and yellow body-leotard and tights worn by the toothsome but not quite right Superguy has been darkened here to deep navy, ruby wine red, and ochre yellow. It is a magnificent textured suit, a more mature palette, with a marvelous cape that you can tell at a glance has a lovely "hand," drapes beautifully as he walks or flies. Superman appears, from a distance, slightly colorized pewter.

But you'll go to see it no matter what the criticisms listed.

Best advice: Go with a witty companion. And note that the reporter actually has more impact against true evil today than the mighty Superman ever could. One serious op-ed, a stomping journalistic call-out, and Boom go the bad guys entrenched and doing their utmost damage in our upper echelons.

Jun

16

Is there ANY reason on earth why bank free reserves would be up over 25 percent since the beginning of the year?

The last time we saw such acceleration was to stem meltdown.

What in the world is this about now?

Jun

16

"Infinite Potential: The Life and Times of David Bohm": 

Faced with explaining gyroscopic motion, most physics students learn the various formulae, involving conservation of angular momentum, and produce an explanation in a relatively mechanical and formulaic fashion; but Bohm needed a direct perception of the inner nature of this motion. Once he was walking in the country, he imagined himself as a gyroscope, and through some form of muscular interiorization, he was able to understand the nature of its motion. In this way he worked out, within his own body, the behaviour of gyroscopes. The formulae and the mathematics would come later, as a formal way of explaining his insight.

From very early on in his scientific career, Bohm trusted this interior, intuitive display as a more reliable way of arriving at solutions. Later, when he met Einstein, he learned that he too experienced subtle, internal muscular sensations that appeared to lie much deeper than ordinary rational and discursive thought.

Without explictly knowing it at the time, Bohm had returned to that ancient maxim "as above, so below", the medieval teaching that each individual is the microcosm of the macrocosm. Bohm himself strongly believed himself part of the universe and that, by giving attention to his own feelings and sensations, he should be able to arrive at a deeper understanding of the nature of the universe

This particular skill remained with Bohm throughout his professional life. His colleague at Birckbeck College, Basil Hiley, once remarked, "Dave always arrives at the right conclusions, but his mathematics is terrible. I take it home and find all sorts of errors and then have to spend the night trying to develop the correct proof. But in the end, the result is always exactly the same as the one Dave saw directly".

Pitt T. Maner III adds: 

I found this excellent interview with the gentleman in which he presents his views on perception and the necessity of incorporating many viewpoints in order to gain greater understanding.  

Jun

14

The Nikkei entered a bear market sliding 20% from its peak.

"Stock gains accelerated after the S&P 500 recovered from a brief dip below its average price in the past 50 days. A measure that's watched by some analysts to gauge the markets trend, the S&P 500 has closed above the threshold on all trading days so far this year except for April 18". Bianco said that market volatility will continue "until the taper tantrum stops".

A WSJ news report said that the Fed may "push back on market expectations of higher interest rates. The market fell earlier on a world bank report that growth will be 2.2 % this year, less than its Jan forecast of 2.4 %".

A round number was broken for the second time in the S&P 500 at 1600 intra day and rejected. That was a weight on scale also.

Okay. Those are the weight on the balance scale that tilted the market and caused its quantum jumps today, the pitches in the pinch of Christy Mathewson.

Let us all join Willie Sutton and turn oursevles into headquarters for being such fools to succomb to churning over such things.

Jun

14

My home office adjoins my daughter's room. Her last day of high school (and therefore public school) was today, and now that she's finished it, she's home finally clearing out her room of the school year's detritus. It's amazing how much "stuff" she managed to keep in her bedroom. Walking by that room's door brings to mind the scene in A Night at the Opera of the ship's storage locker holding something like 10-15 people. Tomorrow, she will join her class at graduation; at some time, she and some of her peers will be saluted for academic achievement. I'm told that that's the top 5% of the class. Given the nature of the high school, that's a better result than my wife and I had expected. Her high school is rigorous–almost to a fault. During spring break, some of her friends now freshmen at MIT and Cal Tech came by for some pizza. The frosh from both schools kept commenting on how much they were enjoying college. It was easier, for some courses much easier, than high school. Both my wife and I were shocked, but perhaps these kids aren't aberrant in their assessments.

That my daughter, our youngest child, will be graduating within 24 hours brought to mind my graduation. For my daughter, the biggest graduation in her life thus far will be the one tomorrow; for me, it was 29 years ago when I graduated from medical school. It's not that it was the last graduation I would share with my father, though it was–or even the last time I would see him, though it was that as well. It's not that I thrived in medical school. Hardly, having bombed in biochemistry (I think it's psychological moreso than the material, but that's for another thread) and having a simply awful experience with one medical resident (I nearly dropped out of school in my third year–almost unheard of; on hearing of my interest, the Dean inquired as to what was my reason, and when I explained, she promptly called in that year's class of 2nd year residents in medicine and read them the riot act about abusing the 3rd year medical students. My classmates were aware of the situation, and when the abuses stopped-at least for my rotation–many thanked me, though I told them it wasn't altruistic on my part, it was survival), I saw my graduation from medical school as a triumph. It's not the degree of which I am most proud–that would be my MSEngineering, and it's not the one I worked hardest for–that would be my MBA in marketing, nor even the degree which most of my peers associate me with–that would my MPH in epidemiology. It is, however, the degree with which I most identify, the one most enmeshed in my identity.

There are parts of medical school I would dearly love to forget–but I can't, though I have no doubt that I am a better physician for having lived through them. Telling the mother of a 3 month old kicking and screaming with a 103 degree fever a few hours later that her son had died, being told of the attempted suicide of a pregnant 15 year old girl I had attended to at clinic three days before and diagnosed her pregnancy (she wanted an abortion and was terrified of what her parents–both alcoholic drug users (they were also "practicing" Catholics–at least that's what they said–who later informed me they wouldn't have consented to an abortion for their "slutty daughter"–might do to her if she asked for their permission), digging elbows deep into someone perforated bowels at 3 AM and dealing with seeming endless human waste–yes it's life saving, but that doesn't mitigate the stench and it doesn't stop the waves of nausea or the multiple re-gownings and re-glovings, the 17 year old who decided to take on a tree while riding his snowmobile during a blizzard–the tree won and he sustained multiple organ failure, including a closed head wound that left him in a vegetative state even as he recovered from a severed liver that a decade earlier would have rendered the head injury meaningless as he would have died of the hepatic damage, my first patient during my medical rotation–Mr. B–who had classic hypothyroidism–the confirmatory lab test had to be sent to the VA central lab in Ohio instead of the local lab and the results weren't due back until Monday; unfortunately, Mr. B developed a pneumonia, becoming septic, and dying on the Sunday before, and the too many meetings of the Baltimore Knife and Gun Club on Friday and, especially, Saturday nights. As bad as telling the mom about her dead baby (threw up afterwards, and my attending, cued in by my resident, had the good grace to sit down and talk with me about it; I asked her how she managed to deal with such things, and she responded that you don't, and that if you did, it was time to leave medicine. That may seem a bit harsh, I realize, but I've come to understand what she meant.

In medical school, during the first year intro to clinical diagnosis, there's much effort expended on trying to get med students to empathize with patients, though not sympathizing with them. I began to understand the idea much better after talking with my attending what was meant by the empathic physician that we strive to be, that our patients need if we are to be effective in helping them maintain or improve their health.

Among the "ghosts" in my memory is the 20 year old man who presented at surgery clinic with his partner. He came from a religious family out west and had come to Baltimore when he was 16 to get as far away from his family as after he came out to his parents, they told him he would burn in hell, that he should forget that he was a member of their family, that his brother and sister were to be told he had died and that they should forget him, and requested that, as they kicked him out of the house without so much as a change of clothing, he change his name so no one would associate him with their family. He had met his partner while homeless on the street, and the two bonded. He managed to put his life together enough to gain admission one of the local colleges on full scholarship as his partner became got a job on a construction crew digging ditches (also a story for a different thread). He presented to surgery clinic with groin swellings. It was the fall of 1983, the AIDS epidemic was in full swing with every sign indicating that it was a infectious disease. (At that time, I doubt that the 2/3s of gay men resident in San Francisco in 1981 realized that they would die from HIV infection.) Understandably, he and his partner were terrified about these swellings. We biopsied them–it's the only time I've quadruple-gloved. He had a lymphoma, and in short order, developed pneumocystis carinii. Long story short, he had AIDS. I wasn't on the medical team treating him but I kept up with what was happening to him in hospital and I managed to stop in and talk with him a few times. He was a bright guy, witty too. He was thinking of becoming an engineer–he enjoyed math and dreamt of using that knowledge to change the world. He was dead within 6 months. I don't know what happened to his partner.

Those experiences contrast with some of the other ones, perhaps less emotionally challenging, perhaps not, such as my first appendectomy (not holding the retractors but doing the surgery; what should have been 30 minutes under anesthesia for the patient became 60 minutes for me–not unusual, I'm told), trying not to cut too deeply, hoping to pick up the peritoneum, all of 4 cells in thickness, sweat pouring out of my brow (and being attended to by a fortunately doting circulating nurse) even as the temperature in the OR stayed a steady 63 degrees. The patient came through the procedure OK. For many medical students, their surgery rotation, while grueling, is also the most fun one. One gets to see the pathology present, instead of surmising it the way an internist would. At the same time, one comes to appreciate that being a surgeon takes a certain personality–not just bravado or ego but also perspective on the role of a physician in the treatment of a patient. A surgeon is cutting on a patient to help the patient therapeutically. She cuts on living flesh seemingly on a daily basis. Granted, it's with anesthesia, but even so, it is a concept which in the abstract may not seem challenging, or even when one's encounters with the surgeon are infrequent. Seeing surgery daily, though, is different, whether it's the surgeon, the surgical nurses, or the anesthesiologist. I think the former two have the most challenge. It's one thing to nick someone's skin for a biopsy, it's another to open a chest to transplant a lung. There's the old joke about the surgical resident at the poker game tossing $20 into the pot with an ace-high hand, while the medical resident hems and haws about whether to raise a nickel with a full house. It fits better than most might appreciate.

Graduating from medical school meant a change not merely in life but in me as a person, in my identity. I don't know that that was true for all of my classmates, at least not that they were willing to say come reunion time. It was for me.

As my daughter graduates, so will my wife and I. Empty-nester syndrome may hit, hopefully not. My daughter will move on to the next phase of her life, to begin adulthood. Both my wife and I wish that she comes through her college experience as enriched as she has her high school one.

In 24 hours, her world will change in ways she won't appreciate for years to come. Perhaps her mother's and father's will do so too?

Jun

13

Most traders are intimately familiar the implied volatilities of equity options. These implied volatilities are often smoothed to avoid the temporary spikes in the strike/maturity surface that can lead to butterfly and calendar arbitrage. Many trading desks and market makers use the Heston stochastic volatility model for smoothing.

To understand the genesis behind Heston model, and why it is so important, we must revisit an event that shook financial markets around the world: the stock market crash of October 1987. The consequence on the options market was an exacerbation of smiles and skews in the implied volatility surface which has persisted to this day. This brought into question the restrictive assumptions behind the Black-Scholes option pricing model, the most tenuous of which is that continuously compounded stock returns be normally distributed with constant volatility. A number of researchers since then have sought to eliminate the constant volatility assumption in their models, by allowing volatility to be time-varying.

One popular time-varying approach is to allow volatility to be stochastic. The Heston model, developed in 1993, was not the first stochastic volatility model for pricing equity options, but for mathematical and practical reasons it is by far the most popular and the most successful. It is used throughout the world by option trading desks and market makers, banks, hedge funds, and academics. It forms a crucial part of the options curriculum of financial engineering programs offered by universities across the world. The model has been refined and extended in many ways, to overcome some of the shortcomings of its original formulation. The top option valuation software companies, such as Numerix, SuperDerivatives, and Fincad, all incorporate the model into their pricing routines. My forthcoming book is devoted entirely to the model.

In short, the Heston model is one of the great success stories of mathematical finance, yet most financial professionals have never heard of it. The next time someone mentions the Heston model, you won't be wondering whether it refers to Charlton Heston, the late American actor, or Heston Blumenthal, the quirky British chef, but to Steve Heston, one of the most influential financial engineers of the modern era.

Fabrice Rouah is the author of the forthcoming book "The Heston Model in Matlab
and C#" from John Wiley & Sons.and a consultant on option pricing models.

Jun

12

An edge can last a long time, but when a paper is published outlining a system with an edge, sagacious people note the edge and start trading that system and natural market forces move that edge to zero. We all know people who have shared their systems and their edge. Regrettably, I've given away a few myself. Once they're shared, in my personal experience, they tend to disappear quickly and may not reappear for a very long time. That's why I would no more give details of my methods than I would give perfect strangers a glimpse into the most private areas of my life. The only consistent edge is to pay the price to have exchange privileges, able to buy at the bid and sell at offers on the inside market. You won't get rich but probably won't get killed either. But then again, I should be talking…….Ceres decided to give me an auto da fe today, with musical accompaniment, and she used a cat of nine tails in 7/8 time.

Jordan Neuman writes: 

Hi Jeff,

Interesting note. I have found that edges go away even when I don't give them away — if I am paranoid, I would think I am in a Truman show. Others start talking about what I discovered eventually, and I also wonder if I discovered it because of what others have talked about previously. Thus, I am not sure if edges go away faster if you discuss them versus the null of not doing anything. I think it also depends on what the edge is…some like the January effect will last a long time because of tax arbitrage while others might fade to equity-like risk/reward and then lack the "natural market forces" to fade further.

Regards,

Jordan

Jun

11

Endgame by Frank Brady, the excellent biography of the rise and fall of Bobby Fisher, perhaps the greatest chess player of all time, and a man not unlike Beethoven who thought the whole world owed him deference, shows Bobby at 9 playing chess in a bathtub like Alan Greenspan at 80, for five hours at a time, the only way his mother Regina could get him to take a bath. His mother spoke 9 languages and was a stenographer for Hermann Muller who won a Nobel Prize in genetics. She was a devoted though impoverished mother and professional protester throughout Bobby's life. Bobby's biological father was reputed to be an eminent physicist, Paul Nemenyi, who sent modest support payments throughout Bobby's childhood. Bobby's normal day from the time he was introduced to chess at the age of 8, until he won the world championships 20 year later consisted of 15 hours of study of chess, reading every chess book in all the book stores and libraries in all the original languages. He was given a scholarship to to the progressive Community Woodward school at the age of 10 with the idea that he'd teach the kids chess, and his IQ of 180 would take care of the rest of his education. He dropped out of Erasmus at the age of 14 so he could play in chess tournaments as he was the youngest Grandmaster in history, and already the US junior and Amateur Champion. Thus, as in almost every other case a combination of immersion in his field, environment and genetics led to his genius.

At the age of 9 he developed his central ideas of chess–rapid development of the officers, occupying or controlling the central squares at the equator, and mobility-giving maximum scope to the pieces. The ideas might be likened to following the opening range breakout, building a solid foundation whenever a movement against the breakout occurred, and insuring that there was enough liquidity in the position at all times to add and subtract without undue friction. I liked the numerous little touches that Bobby used to improve his changes like wearing a visor during his matches so that his opponent wouldn't see what pieces on the board was looking at, and his invention of a clock with an overhead push button that would not make noise like the spring pushed versions, and his insistence on the spectators sitting 65 feet away from him.

He had numerous mentors throughout his career starting with Camine Nigro, a music teacher who introduced him to the Brooklyn Chess club at 9, and Jack Collins who became a second father to him and took him to the chess clubs of New York, especially the Manhattan and Marshall clubs. Bobby renounced all contact with these and all other mentors for infractions such as taking a photograph of him, or asking for him to write an introduction to their books of experiences.

The book opens with one of the three times Bobby was imprisoned, this time in Japan for 15 months, a very good prison to avoid, and then transports the reader back in time to the beginning and end of his tragic life. As is well known, Bobby was snatched by a religious group that believed in impending apocalypse in the world, and recommended against medical treatment for its million + believers. He added to this total belief in the conspiracy of the elders of Zion to take over the world. As part of this he refused to sit at a chess table, or eat any foods that came from Israel, and loudly broadcast his views on this subject and the deserving retribution of 9-11 on radio. An arrest warrant from the US was issued and this was the reason he was arrested in Japan. Eventually he was granted citizenship in Iceland, and the book movingly describes the last 4 years of his life in Iceland as he wasted away, almost friendless, and without family as he refused hospital treatment for the kidney ailments that eventually killed him.

There are many great set pieces in the book that show the development of a paranoid genius. Almost all his friends were excommunicated by him for the slightest bit of self interest on their part. A typical incident came with Walter Brown, a Berkeley friend, who showed him hospitality and room and board for four months but dared to note that Bobby was eating him out of house and home with his 4 hour long distance phone calls. As soon as he mentioned it, Bobby walked out of the home and never spoke to Walter again. He repeated the same excommunication with every friend that had mentored him throughout his life.

He spent 25 years after winning the world championships in Iceland without playing a competitive match. His belief was that if there were any chips that were on the table from his play, that 100% or more had to devolve to Fisher. Frequently whatever the offer was, and it could be 10 million to play in Zaire or Manila or Yugoslavia, he would have to have double, and if anyone else were to make a profit on it, then the deal was off. Thus, he believed in the socialist idea that life was a zero sum game and that whatever chips someone else made from a mutually beneficial exchange came out of his pocket. This view, doubtless devolved from his mother's pro Russian views, was the source of his ruin as well as his lack of education and common sense.

In one of his humorous remarks, Bobby noted that after he won the championships from Spassky, the US newspapers had chess on the front page and the Russians had it on their back page for the first time in history. He believed that the Russians were always conspiring to cheat him out of the world championships and that they contrived in all their matches to do him in. He also believed that they were so hurt by his winning the championships that they were apt to try to kill him. Apparently, as documented in the book, there is truth to both of these fears. 

The author is a great historian with empathy for Bobby. He describes how while Bobby went through what he does to prepare for a match over dinner they were having, he started crying because he could see he was in the presence of genius. Out of the Head of Zeus came Bobby Fisher. Of course romance is always a factor. And Brady gives a very even handed and complete recounting of Bobby's courtship and marriage proposals to a chess playing fan 30 years his junior and his attempts to father a child with a worthy receptacle of his genes and genius in the Philippines.

It is sad to think about the 37 years of Bobby's life after his championships that went without any published or competitive games except for his anticlimatic re-match with Spaasky in 1992. That match did make Fisher a milionaire, and the book contains a nice epitaph describing the legal battle over the $3 million estate he left. There is much for all speculators and parents to learn from this great book about the tragic life of Bobby Fisher and it is highly recommended.

P.S. I became aware of this book when I enrolled Ob. as the youngest member of the Marshall chess club. The book sat atop a table where Fisher player the game of the century at the club where Fisher sacrificed a queen at the age of 13 against Robert Byrne, a grandmaster and won. Strangely, I knew many of the persons described in the book including Art Bisguier who was his second in many tournaments and broke up a fight with another grandmaster, and Jackie Beers who is described as having a great temper which he showed frequently at Brighton Beach Baths where I knew him well, and Walter Browne who I had the pleasure of playing poker against.

I was born in the same year in Brooklyn as Bobby and achieved many of the realms of excellence that he did in another sport, squash. We took the same tests in high school at the same time, but he was in Erasmus where Artie went to school and I in Lincoln. 8 miles to the South. It was interesting for me to note that Bobby was an avid tennis player and swimmer and baseball player, like myself. (It is an interesting irony to me that like Bobby , I took a five year sabbatical from my sports career when I was at my peak at the age of 20. but for opposite reasons to Bobby's. The irony is that I stopped playing because they wouldn't allow any Jews in all the clubs in Chicago where squash was played ( except for one reputed to be a bagman). I didn't wish to demean myself by playing where I couldn't bring a guest, have a locker or order a coke. ( I was able to play for free). Bobby quit the game because he feared that there was a conspiracy among the Jews to grab all power and do him in). Instead of becoming a tennis bum, my parents were able to edge me into Harvard–albeit to my discredit or possibly credit, eventually I became a micro speculator. Bobby who had no contact with his legal or biological father undoubtedly could have achieved untold extra greatness had he been reared by a strong and loving father and mother the way I was. One hopes that Ob. and I and others will learn from the highways and byways of the life of Bobby and will be able to avoid the pitfalls while ascending the summits.

Jun

11

A quote from an interesting article follows below that refutes the conventional images of drowning. Closest I have come to drowning as a kid was at the Y when a smaller child, playing around, jumped on my back and put me in a choke hold while I was swimming underwater. It was quite a tussle to get him off and make it back to the surface–the nearby lifeguard didn't see it.

The Instinctive Drowning Response – so named by Francesco A. Pia, Ph.D., is what people do to avoid actual or perceived suffocation in the water. And it does not look like most people expect. There is very little splashing, no waving, and no yelling or calls for help of any kind. To get an idea of just how quiet and undramatic from the surface drowning can be, consider this: It is the number two cause of accidental death in children, age 15 and under (just behind vehicle accidents) – of the approximately 750 children who will drown next year, about 375 of them will do so within 25 yards of a parent or other adult. In ten percent of those drownings, the adult will actually watch them do it, having no idea it is happening (source: CDC). Drowning does not look like drowning…

Full article here, "Drowning Doesn't Look Like Drowning"

Jeff Watson adds:

As a surfer, I have saved more than a few people from drowning. Every instance was with them getting caught in the rip and trying to get out by swimming against the current and becoming exhausted. I would paddle over to them and insist that I tow them in to shore. Often, people would refuse my assistance, not realizing their danger. I sat on my board nearby, waiting for them until they changed their mind, or started to swallow water or go under. My Senior Lifesaving teacher once told me that one needs to get control of the victim before you can make the rescue. My own technique is jabbing my thumb as hard as I can into the side of their rib cage (between the ribs) which makes them submit. And you're right, drowning does not look like drowning. Fellow dailyspec-er, George Parkanyi should recount his heroic life saving experience. 

Jun

10

"The great fighting men who graduated from the ranks of the army that fought the Moors will disappear. The politicians and the courtiers will take over – the gentle ones, the conniving ones! They will rook the fighters out of all they have won. Men like Cortez, Pizarro, Alvarado, and DeSoto will disappear, and in their place the weak ones, the ones grown fat on easy wealth, will come to power."

-Louis L'amour

Jun

7

In the last 4 days we have seen every colour on our calendar (see above).

Tueday June 4 Red - Stocks and Bonds down

June 5 Blue - Stocks down and Bonds up

June 6 Green day - Both Stocks and Bonds up

June 7 (today) Yellow - Stocks up and Bonds down

Interesting, but what does it portend?

Jun

7

I was washing the dishes today and thinking about the plumbing in my house. When we bought this place seven or eight years ago, it was a dump. Cracks in the foundation, termites, even rats (yes — hard to believe, but true). There were small trees growing in the gutters. The previous owners left crap everywhere. The light fixture in my daughters room consisted of a single bulb in a socket with the wires simply hooked over and dangling from the wires in the ceiling box. Every single drain in the house leaked — when I removed the p-trap under the kitchen sink it crumbled in my hand. The sheet rock on the soffit over the kitchen sink had been removed, exposing the horizontal cast iron drain pipes that had visible and botched patching attempts that leaked onto the kitchen counter. Christ.

The main soil stack had a ten foot long crack that you could slide your hand into — there were signs of raw sewage on the basement floor. The yard…well, let's just not go there.

Before I could get a contractor in to do the renovation, I had to make the place safe to live in — because we were going to have to be there during the process. I was discussing the litany of problems with a coworker who did construction on the side, telling him I needed a plumber immediately. He smiled and said "No, no, no. No you don't. Drain plumbing is easy. Go rent a chain pipe cutter and remove the cast iron yourself - -it's simple, just make the pieces small because its heavy stuff. Then buy a how-to book on PVC plumbing. Again, it's simple and MUCH cheaper than a plumber. Map out what you need, buy extra elbows and fittings and when you screw up, cut it out with a hack saw and do it again. Simple. I promise."

Now I had a mentor years ago — still a good friend, but far away now, who somehow managed to instill in me a willingness to find out how to fix things. I'm a curious cat anyway so maybe easier for me then most. He owned a small business and did all of the maintenance and repairs on his vehicles himself. Big trucks, not semis, but big enough. Replaced the engine on one of them in a parking lot in the middle of a knock down, drag out Oklahoma rain like God is pissed at you personally storm. The guy had work to do and he needed the damned truck. There was something about that that I just loved. No freakin' excuses. If it had to be done, it got done.

So when we moved into this dump, I mean place, we put most of our stuff in storage and I shipped the wife and kids off to her mother's for three days and prepared to get dirty. Removing the old cast iron was, in fact, easier than I could have imagined — and fun too. It was very satisfying to hear it snap with a resounding CRACK! Don't get me wrong, it was disgusting in a way that is hard to imagine, but I'm not afraid of filth. So, good, done in about an hour, and I cut the remaining soil stack straight and pretty as you please five feet above the slab in the basement.

I pulled all the toilets up and began by setting the closet flanges (the first piece of plumbing under the toilet that connects to the drain pipe). From below I then mapped out what pipe and fittings I needed to get to the stack, fiddled and tinkered, cemented, joined and plumbed my way all the way up through the roof and down to the basement and joined the whole thing to the remaining iron stack with a rubber Fernco coupling. I only botched two or three joints and it was not a problem to cut 'em out and do 'em again. It took me three days — most of that time looking up, rubbing my chin and thinking — maybe four or five hours of actual labor. I was so damned happy with myself that I didn't want the real plumber to come replace it when the time came to move the soil stack into the exterior wall (it was in the way of the new kitchen).

I tackled several jobs — dug down to the footing and repaired the crack in the foundation wall with a hammer and chisel and hydraulic cement inside and out and on the exterior set a 4' x 4' sheet of cardboard whose flutes were filled with pelletized bentonite to make a water impermeable barrier. (Think clumping cat litter.) Basement has been dry as a bone ever since. I sistered the rotten floor joists with 3/4" plywood and some heavy bolts, cut out and replaced portions of the mud sill and plate, replaced the water heater and learned how to sweat copper pipe from a book. The list goes on and on.

The point of all of this, is that when I tell most people, they are simply amazed. "How could you do all that?", "How come you know so much about plumbing and electrical stuff?", "Aren't you scared to mess with the wiring? What if something goes wrong?" And I can see their points, what do you do if you get in over your head? And the answer is to do the thing that I was trying to avoid in the first place, pay a professional to come set things right. Yes, sometimes the only alternative is real, hard earned, specialized experience or skill.

The thing is — people are afraid to fiddle with stuff they don't know about or understand. Okay, I get that. But the thing that really bothers me, the thing that Robert Pirsig so eloquently expressed in Zen and the Art of Motorcycle Maintenance is that when you press people a little about that, the awful truth is that most of them don't WANT to know or understand. They really just don't wanna know. Or can't be bothered. That bugs the crap out of me. (This book, by the way, is not about motorcycle maintenance, it's a deep philosophical exploration of values — and it reads like an adventure story.)

Look, if you need brakes on the car and don't want to pay someone an arm and a leg to do them, then you have to acquire some basic knowledge — absolutely — if you screw up badly enough you could kill someone. But brakes are simple. They are SIMPLE to replace. But you have to get dirty, gain a little knowledge, maybe even THINK for a few minutes and then DO THE DAMNED WORK. And most folks just can't abide that. It's too much trouble. What if I screw it up? I don't like using a jack, what if the car falls? It's too dirty. It's tooo much work.

In Zen and the Art, Pirsig tells a tale about his companion's motorcycle. The thing has some valve chatter and, as was common on bike engines back then, the valves needed shimming. Not that hard at all, and look, here's an empty soda can — the aluminum is EXACTLY the right thickness to make shims — I'll take care of it here and now. But his companion would have none of it — he was afraid something would get messed up. Afraid. Just afraid. Pirsig goes into this in a very deep way that I can't hold a candle to and I cannot recommend this book highly enough to anyone involved in any endeavor that requires peeking under the hood, a little rolling up of the sleeves and some elbow grease. Perhaps trading especially.

Now get back to work.

(Some quotes from Zen and the Art)

Jun

7

Everyone loves a good story and I try to read to my children every night. The current market narrative is that the last 6 month rally is entirely Fed driven and without Fed support equity markets are doomed. I'd argue stocks have gained on an improving economy and corporate profits. Real rates have gone up for the same reason as seen in TIPS ( though still negative). But as long as this narrative is floating around there will disparate opinions which is what makes a market.

I think this will be the summer theme. Then one day, rates and stocks will have gone up enough for this narrative to be dismissed entirely and we will be on to a new story. And, with any luck we will all live happily ever after.

Jun

7

Short, short stories are a specialty of Lydia Davis, this year's Man Booker International Prize Winner. Perhaps it is a sign of the times given the stresses of modern life and lessening attention spans. Davis also has translated Proust for more patient readers.

"Lydia Davis Wins " :

Literary critic and scholar Sir Christopher Ricks, chair of the judges, said: "Lydia Davis' writings fling their lithe arms wide to embrace many a kind. Just how to categorise them? Should we simply concur with the official title and dub them stories? Or perhaps miniatures? Anecdotes? Essays? Jokes? Parables? Fables? Texts? Aphorisms, or even apophthegms? Prayers, or perhaps wisdom literature? Or might we settle for observations? "There is vigilance to her stories, and great imaginative attention. Vigilance as how to realize things down to the very word or syllable; vigilance as to everybody's impure motives and illusions of feeling."

Here is a sample from The Collected Stories of Lydia Davis:

The Fish Tank

I stare at four fish in a tank in a supermarket. They are swimming in parallel formation against a small current created by a jet of water, and they are opening and closing their mouths and staring off into the distance with the one eye, each, that I can see. As I watch them through the glass, thinking how fresh they would be to eat, still alive now, and calculating whether I might buy one to cook for dinner, I also see, as though behind or through them, a larger, shadowy form darkening their tank, what there is of me on the glass, their predator.

Jun

7

The Fortune Global Forum 2013 is being held at the Shangri-La Hotel in Chengdu between June 6th and 8th.

Someone has started a new campaign to name Chengdu (a 2,500 year old name, which literally means "becoming a capital") City of Fortune and Capital of Success.

The participants in the forum are listed here and the agenda is here.

From Xinhuanet: "This is the 12th annual forum held by Fortune magazine. It's also the first one hosted by a western Chinese city, following Shanghai, Hong Kong and Beijing. Chengdu is the capital of Sichuan Province and is a rising economic engine in China's "West Development Strategy". Last year, Sichuan Province ranked in the top 10 in terms of foreign direct investment utilization."

From China Daily's article "Chengdu gains from Fortune Global Forum":

More than 600 state leaders, CEOs of world-class companies and economists from around the world have registered for this year's event under the theme "China's New Future".

The city will enrich the forum, as it is pertinent to its theme and this year's core topics: sustainable development, innovation and technology.

The city's good infrastructure, convenient transport links and logistic systems, comparatively low labor costs and efficient administration system have attracted 238 companies out of the world's top 500 to the city. Chengdu's GDP was 800 billion yuan ($127 billion) in 2012, accounting for one third of Sichuan province's economy and 8 percent of western China's GDP.

Jun

5

Things Are Seldom What They Seem

Another bit of topsy turvy, a double negative, is the meme. It used to be that when the economy was weak, the stock market would go down and bonds would go up. Or when the economy was strong the stock market would go up and bonds go down. That's been the idea for at least five years. But now, when the economy is weak, the idea is that the Fed will continue buying weak assets of banks longer, so that stocks go up and bonds go down. When the economy is strong according to the latest random economic number, the idea is that the qe2 will not be prolonged, so the stocks do down and bonds go up.

This is a rather loathsome state of affairs that only Gilbert and Sullivan or Voltaire could have seen. It all stems from the abysmal buying of weak assets by the centrals. Okay. They've bought 2 trillion of assets. The bonds are down about 5 or 10%. That's means to me that 100 or 200 billion has been transferred from the portfolios of banks to the Fed, and this 150 billion has an opportunity cost. One opportunity cost is that instead of enhancing the colleagues and clients, it could have gone to the common man—- even in the form of lump sum payments or a reduction in, dare we say it—- no we don't. 

Addendum:

What's the appropriate response to this topsy turvy. The old idea was crazy because when the economy is strong, then inflation is less by the quantity theory of money, mv = pt and t is higher. So bonds should go up not down. But this is even worse. The economy is strong, so stocks go down because the Good one will not buy the weak assets for as long as hoped. What's the world coming to. Which is appropriate. The Willie Sutton thing—- he wanted to turn himself in after Thomson hit the home run. The cricket thing, it ain't cricket. Or my squash opponent who would always say, "this isn't squash, mate" when I moved in to volley a few instead of waiting.  

Jun

4

John Mackey (CEO of Whole Foods) will be the next speaker at the Junto on Thursday, June 6th at the Mechanics Institute at 20 W 44th St in NYC. His talk on the social and profit responsibilities of business will start at 8 pm. Regular Junto Franklinian thing will begin at 7:15. Please come early if you wish a seat.

Jun

4

Ross Miller died, unexpectedly but peacefully, in his sleep at his home in Niskayuna on May 20, 2013, leaving behind his wife of almost 34 years, Mary O'Keeffe, two daughters, Alison and Catherine Miller, a sister, Dr. Dinah Miller of Baltimore, and a large extended family, many friends, colleagues, students, and mentors.

A pioneer in the fields of experimental economics, artificial intelligence, and computer-aided financial analysis, he worked in both industry and academia, winning awards for his innovative teaching and financial research inventions from Boston University, General Electric R&D, and the University at Albany. Since 2004, he has been Clinical Professor of Finance at UAlbany, where he taught students in the MBA and Financial Analyst Honors programs. Fascinated by the inner workings of financial markets from an early age, he investigated financial frauds and deceptive practices and analyzed alternative market trading rules to avoid speculative bubbles and financial disasters.

His book What Went Wrong at Enron spent months on the New York Times business paperback best seller list in 2002. Other books, Computer-Aided Financial Analysis and Paving Wall Street: Experimental Economics and the Quest for the Perfect Market received praise from both academics and industry practitioners, and have been translated into Chinese, French, Italian, Japanese, and Korean. His research articles since 2005 have shined a light on excessive hidden fees charged by financial institutions. The Wall Street Journal, Money Magazine, CNBC, and the New York Times have highlighted his work, which has contributed to some industry reforms.

Born January 6, 1954 in Greenville, South Carolina, Ross was the son of the late Rabbi Milton Gerald ("Jerry") and Sara Stein Miller. Following a few years in Greenville and in Memphis, Tennessee, where his father was active in the civil rights movement, the family moved to Elizabeth, New Jersey. After graduating from Elizabeth public schools, he studied math, computer science, and economics at Caltech and Harvard, working with many distinguished scholars, especially Charles Plott and Vernon Smith, his lifelong mentors and collaborators in his seminal undergraduate research project. While at Harvard, he met his future wife, with whom he founded a consulting side business, Miller Risk Advisors, which they ran together.

Throughout his 59 years, he was a lover of learning and a creative and tenacious problem solver with a wonderful sense of humor, filling the family home with joy and laughter. His gift for cheerleading and inspiring others to believe in themselves and not to give up in the face of daunting challenges–whether his students, his wife, or their two homeschooled daughters–has left a remarkable legacy.

Memorial Celebrations will be held in July. Memorial contributions can be made to the Summer Program in Mathematical Problem Solving or to the YWCA of Northeastern NY More information will be shared at RossMillerMemorial.blogspot.com.

What is written above is the obituary that appeared in the print editions of the Albany Times Union and Daily Gazette on June 3. I am trying to preserve and piece together as many memories as possible, by going through photos and documents left behind and reading some of his prolific writings, especially his occasional commentary series, which you can find at this link.

I am writing a series of essays with photos about his life. There is a draft of a first one about his early years in this post. There will be more on later years on this blog. I am grateful for anyone who would like share memories. You can comment on this blog or reach me to share privately at mathcircle@gmail.com.

Ross was the love of my life. We met in September 1975, at the beginning of graduate school, both of us age 21. We married in July 1979. We were not just husband and wife, but partners in virtually everything we did together. I miss him more than words can say. 

Rossmillermemorial.blogspot.com

Jun

4

Gerry Lopez, might not be the best surfer ever, but his style approaches sublime. No other surfer, ever, had the natural style of Lopez. I wonder whose style in the world of speculation is similar to his. 

It's his flow, the way he glides along the face, always on the best part of the wave, gets tubed, and casually stands up fully erect, shakes some water out of his hair, little smile on his face, then kicks out of the wave and starts over again. He is totally relaxed, zen-like, despite the conditions being really hairy.

What you never see with Lopez is the horrible wipeouts that he took as the cost of doing business. He was brutalized by the reefs under the waves, yet he always kept riding. Lopez's style is something a trader would want to emulate but on a different plane.

Richard Owen writes:

An equivalent investor would be Crispin Odey.

The only man in town with enough style, accrued wealth, and know how to swing a book that actually looks like a hedge fund of old.

Able to turn gracefully on a wave before it engulfs him. Who pulls out the longboard, the quad, etc. dependent upon conditions. And who is likely as fascinating off the water as on.

Jun

4

Blackjack tables seem to be the major profit centers in Vegas, and I don't see them going away anytime soon. The house has the edge when you're playing a "perfect game." Make one or two mistakes or deviations from the perfect game and the house vig goes to ~18%.

At the Riviera, if they suspect you are counting, that shoe gets reshuffled every other hand. On those non-regulated offshore gambling boats, they either put in a mechanic or a gaffed shoe to bury you. Blackjack, roulette, slots, lotto, keno, etc are way too tough for me.

Steve Ellison writes:

I had three fraternity brothers on the team referenced in the below article. The most obvious parallel with trading is that casinos won't tolerate any player who consistently wins. Casinos have rules against card counting, but the principle applies in other games, too. My wife knows a guy who has won big at video poker and is banned from several casinos.

"Aces Return to Vegas for Gaming Panel"


"Blackjack is the 'minor leagues,' said John Chang '85, one of three alums from the notorious MIT blackjack team who returned to Caesar's Palace in Las Vegas May 28 for a panel discussion at the 15th International Conference on Gambling and Risk Taking.


The Las Vegas Sun reported on the panel, at which Chang joined Houh '89, SM '91, PhD '98 and Andrew Bloch '91 for a frank discussion of the years-long streak that MIT students enjoyed, putting their math skills to practice.

Chang had to join the panel remotely, answering questions in a prerecorded session, since his ban from Caesar's (among other casinos) is still in effect. …"

Jun

4

Always something to learn when Federer is clearly beaten which can be applied to markets, especially in a market like today:

1. He was out of position, or better put, poorly positioned for all of the match.
2. Up early in the opening of the match, he failed to hold and close his early lead when he had clear opportunities.
3. He made errors in pivot points early in the second and third sets - giving away every chance to get back into the match.
4. He was a consummate professional in defeat in the post match - the opponent was better, played better, and deserved to win.

The pundits will like to call this another sign of his decline, etc. I'm not so sure. Particular in that his inability to hoist another championship trophy is now nearly fully priced in.

Jun

4

I recently came across this interesting article:

"Hurricane Drones: Tiny airplanes and subs from University of Florida laboratory could be next hurricane hunters"

I would think that similar devices could be used for tornadoes and many types of remote sensing (with obvious military applications given "swarm intelligence" features).

'Kamran Mohseni envisions a day when the unmanned vehicles in his laboratory at the University of Florida will swarm over, under and through hurricanes to help predict the strength and path of the storms.

The tiny, autonomous craft — some fly, others dart under the waves — can spy on hurricanes at close range without getting blown willy-nilly, while sensors onboard collect and send in real time the data scientists need to predict the intensity and trajectory of storms: pressure, temperature, humidity, location and time.

Mohseni said people always ask him how the miniature flying machines — just 6 inches long and about the weight of an iPod Nano — can take on one of the monster storms.

"Our vehicles don't fight the hurricane; we use the hurricane to take us places," said Mohseni, the W.P. Bushnell Endowed Professor in the department of mechanical and aerospace engineering and the department of electrical and computer engineering.'

Jun

4

The ratio of crew to tonnage is changing again. In Nelson's Navy a 3500-ton ship of the line needed a crew of nearly a thousand sailors. ("Needed" but rarely got.) The dreadnoughts that started the industrial arms race in the last quarter of the 19th century (the race that the world is still running) were 4 times as large but had slightly smaller crews. The switch from wood and sail to steel and steam meant that countries could spend more of their wealth accumulating weapons and less paying for meat puppets in uniform. (The popularity of mobilization/conscription was that it allowed armies to keep up with navies; if serving was a duty rather than a job, then the Navy's enviable stuff to payroll ratio could be emulated.)

But, after WW I the switch to steam and steel stopped having any effect on crew ratios. The current U.S. nuclear carriers have 57 sailors per thousand tons of ship, very little change from the dreadnoughts' ratio of 62 sailors/ton. This is a problem. Sailors in the modern Navy cost $100,000 a year; a carrier crew runs a tab of half a billion dollars a year. And that figure does not include the tail costs of military retirement, including VA medical care. Something will have to change. The present hope is that packaged weaponry can somehow bring the container revolution to the Navy (McLean's magic boxes have reduced crew and longshoreman staffing levels per ton of cargo by more than a hundred-fold since the 1950s). The new LCS type is supposed to require only 25 sailors/ton; the hope is, according to StrategyPage, that "advances in automation, as well as the introduction of the combat UAVs in the next decade" will allow carriers to operate with only 20% of their present crews. That would be a ratio of 10/ton. If that happens, then we will see the same kind of explosion in ship-building that produced naval wars in South America and the Panama Canal.

Jun

4

King Me, a film from ThinkMedia Studios of Cleveland, mirrors its subject. Like checkers, the film is filled with subtlety and punctuated with explosive moments.

Checkers is no simple game, and King Me is no simple movie. Humorous and serious, compelling and moving, writer/director Geoff Yaw has made a work of significance out of a game that few adults ever think is more than something for kids or old folks.

After watching King Me you'll never think about checkers the same way again. You'll experience a story about hope, courage, triumph and loss. It's Rocky and Cinderella and maybe even a little Chariots of Fire.

On one level, the movie tells the story of Lubabalo Kondlo, a black man from an impoverished South African township. Kondlo plays checkers at the grandmaster level, but due to disputes with white-dominated Mind Sports South Africa (MSSA), the national governing body for games such as checkers, he was blocked from competition on the international level.

Is the leader of MSSA racist? Or did Kondlo flout MSSA's rules? King Me strives to present a balanced picture, and herein lies one of the movie's subtle touches: you'll draw your own inevitable conclusions, but you'll draw them from the facts, not from a skewed or agenda-driven presentation.

Alan Millhone, President of the American Checker Federation, managed to pull international strings, line up sponsors, and break through bureaucratic roadblocks. Kondlo came to America to compete, and ere long he was the challenger for the world championship of what's known as "Go As You Please" (GAYP) checkers. This is the version of checkers that we all grew up with.

Enter Ron "Suki" King, reigning GAYP champion since the 1990s, a superstar in his home, the island nation of Barbados. King's personality looms large on camera; he's flamboyant and more than a little egotistical. But he's also very, very good. Challenger Kondlo was facing an uphill battle.

It's the classical underdog vs. establishment scenario. Kondlo is poor, short on resources, and struggling. King enjoys tremendous support from both government and business in Barbados. He's wealthy and confident.

Director Yaw makes real drama out of the 24 game King vs. Kondlo match. Can checkers keep you on the edge of your seat? You bet it can, and the emotional content in the match sequences is high. You'll find yourself cheering for the challenger, and you'll share his feelings when the match is ended.

Yaw and crew traveled to both South Africa and Barbados to film on location. The poverty of the South African townships and the lingering after-effects of apartheid come through all too clearly. The contrast with the sequences shot in Barbados is another of the film's subtleties. Barbados is hardly a wealthy place but Yaw captures the differences in a way that you can't help but notice.

There's a lot of color content about checkers, of course. Many of the "big names" in American checkers appear in the movie, although unfortunately a number of them aren't identified by name. Yaw portrays them as a largely eccentric lot. While there is certainly truth in this characterization, it seems overemphasized. Checker players, unlike chess players, tend to be of the man-in-the-street variety.

If you're a checker fan, King Me is an obvious must-see. If you know a little about checkers and want to learn what it's all about at the uppermost levels of play, watch this movie. Even if you're not especially interested in the game, but you enjoy real-life drama and are moved by the heights to which the human spirit can soar, there is much here for you.

Geoff Yaw has done extraordinary and unexpected things with King Me. A documentary about checkers? You're going to be amazed.

King Me can be rented or purchased from Amazon, iTunes, and VUDU.

Jun

4

"Sell in May. Go away" -Wall Street lore

"Rough winds do shake the darling buds of May" - Sonnet 18, Shakespeare

Like many of the Wall Street adages, there is always a bit of truth along with some misdirection. Looking recently since 1998 (n) buying at the end of May, the next four months are -10,-6,-12, -9 SP points on average, roughly 50% of these months are down with a few large negative moves. So the summer months are negative on average but not impressive on the downside. Also, if the holding period is a modest 12 months the effect becomes very muted compared to the profits of buying after most of the other months, shown in average SP points. (jan)15, (feb)18, (mar)14,(apr)15,(may)-5, (jun)-2,(jul)1, (aug)11, (sep)14, (oct)8, (nov)-4, (dec)-2

Maybe the advice should be "buy pretty much after any month if you can hold a year or more". But that is hard to rhyme.

Jun

3

A shocking decline in S&P of 28 points occurred in the last 2 hours of trading on Friday, the largest since 9/21/2011. The present countist inquires whether any of the following have descriptive or predictive significance.

1. It was preceded on Tuesday by a 3 1/4 point decline on Tuesday in bonds, the largest since 11/1/2011. Was it causal?

2. As of 2 pm on Friday, the bonds were down 9 points since the beginning of the month, the worst decline since may/27/2009. Did it cause the decline?

3. The ratio of stocks to bonds at 118 as of 2pm was the highest in at least 10 years. Did it trip the wire?

4. Are the moves in 4 day weeks significantly more volatile than those in 5 days weeks?

5. Ends of months in the past have traditionally been times for those who don't trust business and believe in fairy tales to sell stocks on the grounds that they're bearish. This has vanished for a few years as they licked their wounds. Did they come out of the closet once again?

6. Gold had receded by 30 bucks by 2pm on Friday, hitting 1388 below the round of 1400. Was it a harbinger?

7. Japan dropped 4% on wed overnight, with no apparent impact on Europe and North America. Was it a pilot fish?

8. A tweet by The Upside Down Man that he was no longer bearish on 5 year and 10 years came at exactly the time of the devastating decline and managed to pick bonds up by a point in the subsequent 1/2 hour before the denouement from 3 m to 4 pm in SPU.

9. It was the end of the month and those who sold puts and bought calls had been having a field day for 18 months. Were they complacent and did they get their due.

10. Did margin calls in bonds and gold especially for those who banks were closed in the Mideast and those who can be sold out with 1 second notice from their internet accounts exacerbate the final deluge?

A commenter adds:

Looking at SP500 index sectors, the lowest return for the past month was utilities -7.85%. The highest financials +5.25%

Seems the expectation is that as bonds decline banks will make out and people will get out of utilities.

Jun

3

When I was a 9 year old kid, my parents told me that a diamond was the hardest thing on the planet, virtually indestructible. A friend came over, and we were talking about Superman and indestructibility and I told him that Superman was fiction, but a diamond was impossible to be damaged, since it was the hardest thing in the world. He said, prove it, and I said OK, and even made a huge bet of all my baseball cards on the outcome. I sneaked into my mother's jewelery box and filched a 1.5-2 ct loose diamond she had. Brought it downstairs into the basement where my dad had a small anvil. I put the diamond on the flat surface of the anvil, grabbed a 5 lb hammer, took a swing, and came down really hard on the diamond. I thought it would just bounce off, but imagine my surprise when all I found that the diamond had turned to dust. Later on that afternoon, my sister ratted me out, and I got that "Go up to your room and wait until your father comes home" speech. My dad came home, went upstairs to my room and wanted to know why I would destroy a very expensive diamond. I told him that both he and my mother told me that diamonds were the hardest thing on earth, virtually indestructible, and I was just proving what they told me to a disbeliever. After all, my own parents wouldn't lie to me or give me unscientific facts.

I thought that my explanation would suffice, reason would prevail, and I'd be in the clear, but I was still grounded for a week, had to do all the dishes, polish all the silver, wash floors, plus I lost a my entire baseball card collection when I paid off the bet.

This was the first experience I had as a kid that taught me that adults were just as full of crap as kids and to not take their word as gospel. That lesson alone, when applied to markets and gambling, gave me more than a few million % return over the years. It took me the rest of the summer to win all my cards back as I had mastered the trick of flipping for cards. Learning the mastery of flipping cards was another story in itself and was the result of losing all my cards the year before to a big kid in the neighborhood. It takes hours and hours of practice, practice, practice to learn how to flip cards to give you an edge.

Jun

3

I thought the Dailyspec should know that there is 50% off MIT press books till early June.

Jun

3

Inspired by the concept of burnout from the medical world, it might it be useful for traders to review every once in a while as a tool for when to take a break.

Or conversely take out the cane.

Jun

3

The value of a reference text can be measured by how the reader applies or adapts the knowledge therein. The following work is regularly very helpful and a highly practical assistance to my speculations: Runs and Scans with Applications by N. Balakrishnan and Markos V. Koutras. (First published by Wiley in2002) 

I am ashamed to say that I bought the book just from the picture on the front cover (take a look — those interested in counting will understand what I mean) It hooked me immediately. Some of the chapter headings say it all: Chapter 2: Waiting for the first run Occurrence; Chapter 4: Waiting for Multiple Run Occurrences; Chapter 5: Number of Run Occurrences; Chapter 6: Multivariate run related Distributions, and so on.

Some of the things in the book are not relevant to financial time series analysis but much of it is. There are some fascinating real world applications also that can be adapted to transformed price data. Section 12.7 was particularly helpful and fascinating amongst so much else.

May

31

This spectacular photo of a super cell that spawned a tornado about a minute later that touched down in Broken Arrow, OK was taken last night with an iphone from beneath a car with no special lighting or effects. Photo by Brian Ring (He gave explicit permission to use this photo on Daily Spec as long as he is properly credited)

The well formed wall cloud is quite spectacular. The photo is indicative of the defining characteristic of super cell thunderstorms - a Mesocyclone or rotating vortex of upwardly flowing air which can be detected using algorithms in Doppler Weather Radar which search for a Hook Echo.

Unlike the devastating F5 tornado that struck Moore, OK last week, the tornado produced by this cell less than a minute after the picture was taken was only an F1 and caused very little damage.

May

31

For the most part on this site, we discuss the big picture and large important markets. We discuss their stats, their trends and their probabilities.

By focusing only on these large markets (usually indexes and their derivatives) we can lose sight of the smaller markets and often we forget those markets even exist.

By focusing only the large, we not only miss out on "alternative" opportunities, we miss out excitement and ready made profits.

Therefore, I would like to point out to the list some alternative markets in baseball.

As I'm sure everyone on this knows, there are really only 3 teams in baseball. The Yankees, Red Sox and Orioles which trade in the AL East market. The Trinity of Baseball, if you will.

Now, most people who follow these team know that there are also at least two other teams in called the Devil Rays and Blue Jays. This is known because every once in a while, either the Yankees, Red Sox or Orioles has to play one of these teams. Of course, there are "lesser markets out there that occasionally pop up and as a result the only three teams that really exist have to go trade (errrr….I mean…..play) in those markets as well.

Many of the anointed traders (fans) might be confused by these other markets, and not only not know anything about them, but may not even be sure they really exist. Because, they are in what Dr. Zaius refers to as "The Forbidden Zone", or as some of our anointed betters refer to it: Fly over country.

These alternative markets are commonly referred to as the AL West and the AL Central.

Now, I need you all to buckle up because I'm gonna tell you all something that will rock you at the core of your belief system. I'm gonna challenge your belief in the existence of the Trinity. For even beyond the rumors you hear of the AL Central and the AL West and the almost credible reports of citings you hear about teams existing in "The Forbidden Zone", I am going to tell you that even more than you can imagine is in the Forbidden Zone…..

You see, a little know alternative market actually does exist. It is called "The National League"….I know, I know, stay with me here. I hear your gasp and your cries of "HERESY, HERESY". But if you will stay with me, I will lead you closer to the truth.

You see, there is market out there right now that you can trade in that will bring you much pleasure. It is market based on teams that are built on fundamentals, coaching and training in the minors.

You see, not all teams are bought on the free agent market. Some teams have only a fraction of the budgets that the Trinity of Baseball has.

And these teams are doing quite well right now.

For instance, if you were to google "MLB NL Central", you would find that there are three teams that dominating. And the third best of those teams, as of yesterday, would be in FIRST PLACE in every other division in MLB.

One of those teams, a mid-market team, has a long storied history of success. A history of growing their talent internally on the farm, and making wise free agent acquisitions to lead the nucleus of home grown talent. They are so good at this, that they have won the second most championships in the history of the game, second only to the head of the Trinity, the Yankees.

And if one were to compare the money spent in reference to winning championships, the Yankees aren't even a close second to this team.

What team am I talking about?

Well, the St. Louis Cardinals, of course.

Now, I know that many of your may not know about this market, let alone have ever even bothered trading in it (or following it).

But this is a market that is worth following as there are many life and trading lessons associated with how this market works, how the team works and how they consistently build championships teams and teams that contend year after year after year.

Throw away your belief system realize that great teams are not spontaneously bought and magically appear over a few days. The late George Steinbrenner may put together championship teams in 7 Days, but there are a lot of teams out there, like the St. Louis Cardinals, that grow their teams over time….teams that evolve into Champions.

And that is your snarky lesson for the day.

One of those teams, a mid-market team, has a long storied history of success. A history of growing their talent internally on the farm, and making wise free agent acquisitions to lead the nucleus of home grown talent. They are so good at this, that they have won the second most championships in the history of the game, second only to the head of the Trinity, the Yankees.

And if one were to compare the money spent in reference to winning championships, the Yankess aren't even a close second to this team.

What team am I talking about?

Well, the St. Louis Cardinals, of course.

Now, I know that many of your may not know about this market, let alone have ever even bothered trading in it (or following it).

But this is a market that is worth following as there are many life and trading lessons associated with how this market works, how the team works and how they consistently build championships teams and teams that contend year after year after year.

Throw away your belief system realize that great teams are not spontaneosly bought and magically appear over a few days. The late George Steinbrenner may put together championship teams in 7 Days, but there are a lot of teams out there, like the St. Louis Cardinals, that grow their teams over time….teams that evolve into Champions.

And that is your snarky lesson for the day.

Jeff Watson adds:

Gibson, 1968, greatest season of pitching in baseball? What about 1968 when Denny McClain won 30 games? Who's done that since?

May

30

The Census released its 2011 non employer business statistics today.

The average annual intake before expenses ("receipts") for the people unable to hold down a job was $44K.

The bell in the curve has cracked.

May

29

Glass ContainerDailyspeculations.com is pleased to announce that our co-founder Laurel Kenner has opened her new business Glassery.com purveying useful, beautiful, and safe glass products, many of her own design.

I have used many of these products and found them functional, attractive, and benevolent.

May

29

ES up overnight, as if many anticipating another up Tuesday…but then ES down Open-Close (ditto oil)…and for the real twist of the knife, T10yrs down almost a point, too…and not to mention gold trying to bullwhip the weak hands…ouch! 

May

28

Anyone who appreciates the scientific study of finance will recognize the name of MFM Osborne as a pioneer, visionary, and creator of our field. He was the first to discover Brownian Motion in Stock Prices, the first to study technical analysis scientifically, the first to note the lognormal nature of prices, the first econophysicist, the creator of automated market making algorithms 50 years before they became common place, the creator of market microstructure, and the discoverer of clustering of prices among other things.

They might also know that he was an eminent physicist whose work on sound and electricity led to his discoveries in finance. Yet despite his renown, he is somewhat of an unsung hero having done his work mainly in the 1960s when our field was in its infancy and many of his contributions have languished in such journals as Econometrics, Operations Research and Journal of the American Statistical Association from that period.

I had the pleasure of knowing him fairly well during the 1960s when he did much of his work in finance. And indeed we collaborated on some papers, we had an extensive correspondence, and he served as one of the original directors of my firm Niederhoffer, Cross and Zeckhauser, Inc., the original name of the current firm of Manchester, Inc. I also had the pleasure of meeting and befriending one of his astronomical colleagues, Harold Weaver at the Univ of Cal, Berkeley, who audited my classes there, and we exchanged many a story about the astounding trajectory of Osborne's scientific career.

During the time I knew Osborne, I was aware that he was the most creative and competent eye in the world of finance, far surpassing in that respect all my teachers at the University of Chicago, of that period, many of whom are widely known, revered, and honored. And I always wondered, where did it all come from, how did a man of such genius arise, and how did his scientific work in physics, astronomy, entomology and oceanography lead to his contributions to finance.

Out of the clear blue sky, I recently found the book "Autobiographical Recollections of M.F Maury Osborne", transcribed by Melita Osborne Carter from a series of cassette recordings in 1987. Attached to the autobiography was a hand written note from MFM Osborne: "You have often asked about the path I took in life. Well here it is. And as you can see my upbringing and path was diametrically different from yours."

It is a pleasure, honor and duty to review this book, as I believe we can all learn from it. And a man of such great accomplishment should receive his due. The book reminds me of what Tom Sawyer would have been like if Tom had trained to be a scientist rather than a detective, and if he had been raised by genteel Southern Scientists rather than a house aunt. It's divided into 34 sections: Early Childhood, Mrs. John's School, Public School, Games and Other Activities, Kites and Model Airplanes, The effects of Personal experience, My House on Westoer Wenue, Summer Camp, Scouts High School, Eoodberry Forest, Mother's Influence, Incidents in Norfolk, University of Virginia Sophomore Year, With Hrdicka in the Aleutions, University of Virginia Other Activities, Mrs. Rose's Farm, American Student Union, Jail– Right and Wrong, University of Cal at Berkley, Lick Observatory, Student of Oppenheimer, Operations of the Naval Research Laboratory, Life in Forest Heights, Non-nrl Research Eddington Studies.

Maury was born on December 1916 and passed away in early 2003 at the age of 86. He has two daughters and two sons. During his life he published 47 scientific papers, received his PhD from the University of Maryland in biology in 1952, served as the Mayor of Forest Heights, and was a gadfly for all the physicists working in the fields of relativity, and all the early believers in the random walk theory.

Like most greats, his life was shaped by a combination of inheritance from eminent predecessors and a fortunate environment that enabled his inherited talents to prosper. He was the proud grandson of Matthew Fontaine Maury, a famed astronomer, oceanographer and meteorologist who was known as the Pathfinder of the Seas and the Scientist of the Seas "because of his seminal work" The Physical Geography of the Seas, 1955. After great efforts to eradicate slavery in the South, as a proud resident of Virginia, Maury resigned his commission as Superintendent of the US Naval Observatory and joined the confederacy. 

He then devoted a good deal of the remainder of his life to the commercial possibilities of discovering and extracting minerals in the South as a way of rebuilding the fortunes of Southerners. MFM Osborne was very proud of his heritage from Matthew Fontaine Maury and followed in many ways in the highways and byways of his grandfather's career.

It was always hilarious to read in the autobiography that despite MFM Osborne's positions in highly classified government research, he always refused to sign any loyalty oaths because he would have had to deny that he was descended from a grandfather who had sworn to overthrow the US government with the outbreak of the civil war.

Here comes the scientist, MFM Osborne. What was his life like? What were the major influences on him? The significant events? How did he reproduce and eat? To get a flavor for his ecology, let's consider several of the typical events described in his autobiography. Osborne never accepted anything without proof. When he found an error in some respected authorities work he liked to say something like, "Someone's going to eat crow, raw squawking and fully feathered, by the time I correct his errors." He applied the same approach to life situations. He noted many people being sent to jail. But why were they sent? The answer would teach him what a society regarded as right and wrong. "No one is surprised if people want for no other reason than to explore mountain tops or caves or jungles. Well, the same is true in society. There are segments of society that one layer does not know anything about or very little about, and you can explore it with the idea of learning about it or improving it." So Osborne decided to spend a few months of his summer vacation from the University of Virginia in jail. He went about it by hoboing across the country until he was picked up by a plain clothes sheriff in Vanceburg, Kentucky. The Jail was a pre-Civil War masonry cell with two rooms with a cage on the outside with masonry walls three feet thick with 30 people inside. What did he conclude from his months in jail? "These people were not bad so much as they were just amoral in just the same way as primitive societies… Looking back I can say it enlightened me as to what constitutes right and wrong. Very much depends on arbitrary standards which change with time." He applied these insights into his study of the Constitution, the Bible, and his scientific pursuits. "It contributed to my understandings of the limitations of truth and falsity — of right and wrong. My experiences in Vanceburg, Kentucky were consonant ultimately with what I learned in many other parts of my life, and in many other circumstances." He applied this learning to question and correct the conclusions of science in many fields, particularly astronomy where he concluded that the errors of measurement were so great that separate investigators were liable to come to completely different conclusions concerning such fundamental questions as the truth of Einstein's hypotheses about the movements of the planets and satellites during eclipses, to the world of finance where he concluded that the students of the random walk were completely on the wrong track because they didn't take account of the influence of the bid asked spread, and the relation between volume and price.

It should be mentioned here that Osborne was a can do person. He was a boy scout and a fix it person. He built model airplanes, boats and kites while in his teens. "If you flew one of these airplanes at night and hung on it a thin wire in which there was a rubber band attached hanging down below the airplane, and the put a match to the rubber band, the rubber band would burn and melt and drop little flaming balls"— The unsympathetic police soon put a stop to that. "I told my children that I had taken a trash can and made a huge catapult out of old inner tubes and shot one of the smallest boys in the neighborhood in the trash can as a space capsule". He liked to hobo and hitchhike across America. He took a year off from school to work on a farm to improve his physical conditioning. He enjoyed pushing a wheelbarrow around, and hauling dirt and using a shovel. Eventually he used these skills to become the main hand on an archeological expedition with Professor Hrdlicka to explore the antiquity of man.

Time and again he used the knowledge he gained of how to get and improve his bearings to get out of life threatening experiences. On one of them however, hauling a car up to the observatory in Mr. Lick while he was studying at Berkeley, he managed to fall off a cliff and spent 1 month prostrate on his back in a hospital which time, he characteristically used to improve his knowledge of tensor calculus.

One of his typical chores there was to rake manure. He used his experiences there to come up with his solution to the problem of why the bee can fly or some insects can travel at 500 miles per hour, or how salmon can swim upstream 500 miles without eating. His conclusion: "Salmon are more efficient than the most efficient rigid body boat that humans can devise because they seek out and gain energy from the varying velocities of water that they navigate." When he performed archeological work, he had no compunction of diving 50 feet under water without deep sea equipment to recover a rake.

Another example of the Osborne way came when he was made mayor of Forest Heights. It was the first city outside of the city limits of Virginia. Anyone who moved tended to allow their dogs to run free. The dogs ran in packs and terrorized all the people of Forest Heights. Osborne concluded the solution was to have a dog day where every stray dog not on a leash that day would be shot. He became world infamous for that solution and received many a threat that he would be killed if he implemented it.

The path and conclusions of many of his scientific discoveries in astronomy, biology, entomology, finance, physics, optics, sound and especially Eddington's theory of relativity are detailed in the autobiography. His schooling at the University of Virginia, Berkeley, and Harvard provides a great window on the process of scientific education and discovery during the first half of the 20th century. His work at the Naval Research Laboratory provides insights into how large research institutions work, and the ins and outs of the bureaucratic process. His experiences with Oppenheimer, Feynman, and other great geniuses of physics and astronomy as well as the hum drum day to day of the kind of instruction provide a great foundation for the way science was carried out in practice rather than theory.

In view of the importance of Osborne's contributions to the world of finance and science, and the intrinsic interest of his autobiographical notes, I would be pleased to send a copy of his recollections to anyone sending me a self addressed envelope which you can send to Manchester at 101 Merritt 7 Corporate Park, 6th floor, Norwalk, CT, 06581.

May

28

Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.
 

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).

May

28

An article in the Guardian raises a few hackles and starts a debate about how and where science is best done. Meanwhile the theory draws interest.

1)

…'In Weinstein's theory, called Geometric Unity, he proposes a 14-dimensional "observerse" that has our familiar four-dimensional space-time continuum embedded within it. The interaction between the two is something like the relationship between the people in the stands and those on the pitch at a football stadium - the spectators (limited to their four-dimensional space) can see and are affected by the action on the pitch (representing all 14 dimensions) but are somewhat removed from it and cannot detect every detail.'

and

'Whatever happens, says Frenkel, Weinstein is an example of how science might change in future. "I find it remarkable that Eric was able to come up with such beautiful and original ideas even though he has been out of academia for so long (doing wonderful things in other areas, such as economics and finance). In the past week we have learned about an outstanding result about prime numbers proved by a mathematician who had been virtually unknown, and now comes Eric's lecture at Oxford.'

2) and from de Sautoy's Op-Ed:

'Weinstein begins the paper in which he explains his proposal with a quote from Einstein: "What really interests me is whether God had any choice in the creation of the world." Weinstein's theory answers this in spades. Very little in the universe is arbitrary. The mathematics explains why it should work the way it does. If this isn't a description of how our universe works then frankly I'd prefer to move to the universe where it does!'

3) Jennifer Ouellette at Scientific American in defense of academic science:

…"This is what truly free and open scientific discussion of brave/bold new ideas looks like. The tradition is alive and well in that stuffy old academic establishment. I'll let Pontzen have the last word: At what point during this long and difficult process does it become legitimate to proclaim a breakthrough? It's a line in shifting sands, but that line has certainly been crossed. Du Sautoy – the University of Oxford's professor of the public understanding of science, no less – has short-circuited science's basic checks and balances. Yesterday's shenanigans were anything but scientific. Preach it."

May

28

PJM capacity auctions for the post smokestack-era shows coal did not exit the market as many expected. Approximately 15,500 MWe more capacity show up than was needed (equivalent to 15 - 20 nuclear power plants). Of the 15,500 MW, 10,000 MW was coal.

In my opinion, this is huge. Power producers paid billions to upgrade their coal units to comply with EPA's new regulations effective 2015. Many of those units failed to clear the auction. Companies like Exelon gambled most these units would avoid the capex and exit the market. Companies like NRG Energy gambled ROI's on additional capex for older coal units would pay off. Both companies may have miscalculated, at least for 2016.

The aggregate loss in the PJM market is over $4 billion (when compared to the previous year). This loss is only for 2016. Subsequent years are unknown.

The President of the Old Speculator's Club, Jack Tierney, writes: 

Germany already has one of the highest per capita carbon footprints in the EU, largely driven by its use of coal. Phasing out nuclear will increase coal use significantly. Germany is building new lignite stations without prospect of carbon capture and storage (CCS). These are the worst possible policies from a climate change perspective.

German policy, with a nuclear moratorium and a move to more coal but without mitigating CCS, seems short-sighted and parochial. It undermines the EU position on climate change issues, already weakened by the shortcomings of its flagship emissions trading scheme.

A good article about it.

Additionally, CBI is supposedly lined up to do a significant amount of work in constructing new gas-to-LNG plants - a major reason it has moved up substantially this year.

May

26

They call to you this weekend. From Flanders Field, from Normandy, Khe San, Gettysburg, Concord and Lexington, the Chosin Reservoir, from the hull of the Arizona, and from all the hundreds of thousands of resting places marked and unmarked they call to you. The call to you from the depths of the Pacific and the jungle of Asia, from the deserts of the American Southwest, from the fields and cities of Europe, from Cuba, from around the world they call you with a request this weekend. Remember me.

Remember who I was and the hopes and dreams I willingly laid upon the altar of the great American experiment. Remember that like you I was once flesh and blood and I gave that up to secure a portion of the American Dream and secure essential liberties at home and even for people around the world. You may not have agreed with the rational for some of the conflicts we have ensnared ourselves in over the centuries and I am not even sure I fully understood it. But our nation called and I answered. Liberty carries a price tag and I paid it for you. Remember me.

War is an idiotic human endeavor and I wish we never had to go engage in such a wasteful exercise. But at times throughout history it has been necessary for good men to take up arms to secure our freedom from tyranny and defends ourselves against expressions of pure evil and hatred. When such times have arisen I have taken arms and defended the freedom and liberty in which I believed and for which all humanity years. Remember me.

Do not remember me with tears and sadness. Pray solemnly and shed tears if you must but that it is not my preference. Remember me in a violent celebration of all that is America. Take your families to the seashore and frolic as man has done since we merged from the sea. Go out on your boats and go as fast as you can over the waves with the winds of a free land and a free people blowing back your hair. Fire up your grill and invite the neighbors up for food, drink and laughter. This is why I laid down my life. Not so you would cry for me but so you could enjoy your life and your family, your loved ones and friends. Remember me in the laughter and joy of being alive.

Hear me in the sound of loud music coming from a dock bar. Hear me in the growling of a stock car engine taking a green flag or the whine of Indy car hitting 200 mph on the backstretch. Hear me in the laughter of a child skipping in the surf or running through the sprinkler in the back yard. Hear me in the chatter of friends around a BBQ pit. Hear me in the swell of an orchestral pop concert on a wide meadow as the sun settle over the land. In all the joyous raucous noises of being alive, hear me and remember me.

See me in the flag unwinding in the breeze. See me on the baseball diamond, the soccer pitch the basketball court. See me at the bar with my friends raining a glass to good times gone by and still to come. See me in the smile of your wife, your girlfriend or male equivalent thereof. See me in the hammock beneath the tree taking a slow summer nap. See me in all the moments and times of that make life special. See me and remember me.

Remember me best in living well. Think of me when you are passing around the steaks and steamed crabs. Remember me as you sip the cold gin and tonic in a sweaty solo cup under a shade tree. Think of me in the fisszt of a beer bottle opening, the fizzing of soda pop in a glass, the shaking of a martini, the pop of a cork, and the tinkle of ice. Remember me in the sounds of the party of life.

I do not want you to remember me in solemn sweaty ceremonies and pompous parades of politicians. You do not need to go to the cemetery to remember me for I am not there. I am at the beach, the ballgame and in the backyard. I am at the lake, on the boat and fishing on the riverbank. Do not remember me simply because I died. Forgetting to duck or being ordered to charge impregnable positions is a crappy legacy if you ask me. Remember me because I lived and I died protecting your right and ability to live and experience all the joys and madness that is life.

I am not merely a dead soldier who died in the service of his country. I am all the things that were made possible by freedom gained and protected. I am Mark Twain, William Faulkner and Hunter Thompson and all the words written by the geniuses spawned in the America. I am the music spawned among a free and talented people. I am Robert Johnson, Miles Davis Liberace and Ted Nugent. I'm all the great scientists and inventors that have graced this land. I am Edison, I am Feynman and I am Ford. I am all the great athletes born in the towns and cities of this nation. I am Mantle. I am Unitas. I am Jesse Owens and Jim Thorpe. I am every greatness achieved by this nation born in a sea of blood and protected by rivers of it over centuries. Do not mourn me for the time has past for that, but remember me.

Remember me for I am also the future of this great nation I died to build. Remember me as you live, as you build as you work and as your create. Remember me as youprotect my legacy from the charlatans, thieves and idiots who make up our political class. Remember me when you refuse to cede personal liberties I died for to those who have good intentions and bad ideas. Remember me when you take chances and reach for your dreams and ideal. Remember me when you refuse to participate in limiting freedom or opportunity based on skin color, sexual preference or genital make up. Remember me when you dream, when you achieve and when you celebrate. These are things for which I died and for which I would be remembered.

My voice calls to you today. Life, love, laugh dream, build achieve. Do this in remembrance of me.

Happy Memorial Day. Remember me.

Stefan Jovanovich writes: 

Memorial Day used to be Decoration Day — the day when the graves of soldiers were draped in flags — and there was no official Federal date. In Gettysburg it was held on November 19, the day the cemetery was dedicated. In the South it was on various dates in the Spring. It was never, ever a day for speeches until the official South decided that the soldiers graves should be part of a general uprising to justify the Rebellion — the same political movement that gave us official segregation; at that same time - the late 1880s — the states began legislating official holidays for Decoration Day, they also made Jefferson Davis' birthday a state holiday. What we now observe dates only from WW II, and the date itself was fixed in the 1960s. It is strictly a Cold War ritual that has been revived for the war against unspecified terrors.

I hope Tim finds an equilibrium somewhere between thinking that everyone who ever died in uniform as a hero and believing war is everywhere and always to be considered the worst of all things. I hope everyone enjoys the ceremonies today. If I don't, it is not out of disrespect for what people have done. I don't like official remembrances for the same reason Grant hated parades; they tend, by their very nature, to be organized lies.

They allow the people in the reviewing stands to preen and they present a picture of order that is the very last thing that wars ever are.

The truth is that some wars are worth their awfulness and some are completely stupid. The people best qualified to judge are the ones who have done the fighting; as with so many other things in life, those who know the most are the very ones who don't say much. There are exceptions, like Professor Sledge:

"War is brutish, inglorious, and a terrible waste… The only redeeming factors were my comrades' incredible bravery and their devotion to each other. Marine Corps training taught us to kill efficiently and to try to survive. But it also taught us loyalty to each other - and love. That espirit de corps sustained us."

"Until the millennium arrives and countries cease trying to enslave others, it will be necessary to accept one's responsibilities and be willing to make sacrifices for one's country - as my comrades did."

May

26

By tradition, in the United States, Memorial Day has come to mean the start of summer. Swimming pools open, schoolchildren begin to think of school being out (and the interminable playing of Alice Cooper to drive home the point), and for some (like my daughter), it's prom season, graduation and for others, a walk down the aisle and up to the alter. On Sunday, the Indy 500 will take place. There are all manner of other activities associated with this weekend.

But none of these activities relate to Memorial Day itself (except insofar as we can undertake these activities). As I look out my window and watch the cars coming out of Camp Pendleton onto i-5, it is hard not to be reminded about the meaning of this holiday, designated to remember those who "gave the last full measure of devotion" to ensure that we could continue to enjoy the freedoms provided by this nation. When I lived in the SF Bay area, we would go over to the national cemetery in San Bruno for the memorial service. Though there are national cemeteries in the San Diego area, we finally found one with such a service, and we will go there on Monday.

My grandfather used to tell my father that while, as an immigrant, he could not appreciate the liberties afforded by the United States as much as my father (born in the US) did, he could understand them better than my father could. He told my father that as someone who did not grow up enjoying those liberties, they were not inculcated into the engrams of his mind as they would be with my father's. Though I'm sure there may be those on this list who will take me to task for placing the issue in such terms, it nonetheless captures for me and my family the spirit of Memorial Day, not merely remembering the fallen, but also what they fell for. It matters.

As we have since my wife and I married back in 1989, we will play "Find the cost of freedom" on Monday evening. When our kids were born, they didn't understand why we put this song on the hifi (and then the CD player, and finally, iTunes). As they grew, they have come to understand the reasons. I can only hope that they impart that understanding to their children. I also hope that while many head off to the beaches or the backyards for BBQs and the like, they take a moment to remember. It matters.

Have a happy, safe, meaningful holiday–I am sure everyone will take a moment on Monday to remember.

May

26

I learned today there is an apparently relatively simple and practical option pricing formula for the case when the stock follows a (slightly extended) GARCH(1,1) process.

"Fast Analytic Option Valuation with GARCH" by Thomas Mazzoni, September 2008

I thought it might interest the option theorists on this site.

May

24

Relative to the Swedish Riots …

MFM Osborne reports in his biographical notes which I have the pleasure of reading, that it is much easier for an American to get published in a European Journal than an American one. His paper on the migratory behavior of salmon could not find a publisher in the US but it was gladly received in the Journal of Experimental Biology in England. Similarly for his seminal work on the flapping behavior of insects, and browning motion in stock prices. One believes it is part of a general tendency for the grass to be greener on the other side of the street. We are all taught to defer at once to those of discordant belief, especially if they believe in the idea that has the world in its grip, i.e. that the pursuit of happiness should be punished by death, or eschewed for a better world above. However, when we see it on the other side of the street, we are free to note it but have to cover it up and excuse it here, as in the confession of the three murders by the brothers before the bombing. 

Gibbons Burke writes: 

"But Jesus said to them: 'A prophet is not without honor, save in his own country, and in his own house.'" [Matthew 13:57]

May

24

Modern cockroaches have been around since the early Cretaceous period (about 150 million years ago) so they obviously have something going for them. I know at the University of Florida entomology school students were known in the 80s to take Madagascar Hissing Cockroaches home to study and appreciate –  But more recently we have the following:


1.

"For decades, people have been getting rid of cockroaches by setting out bait mixed with poison. But in the late 1980s, in an apartment test kitchen in Florida, something went very wrong.

A killer product stopped working. Cockroach populations there kept rising. Mystified researchers tested and discarded theory after theory until they finally hit on the explanation: In a remarkably rapid display of evolution at work, many of the cockroaches had lost their sweet tooth, rejecting the corn syrup meant to attract them."

2.

Dylan Grice, an analyst formerly with Societe Generale, has written about cockroaches and discussed a simple portfolio strategy (which may be similar to others) named after them. But even he may have underestimated the evolutionary aspects of the roach "algorithm" (and its ability to avoid deadly baits).

'But what I like best about cockroaches isn't just their physical hardiness, it's the simple algorithm they use to survive. According to Richard Bookstaber, that algorithm is "singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might signal an approaching predator." And that's it. Simple, suboptimal, but spectacularly robust…'

Craig Mee writes:

Very good point, Pitt. Defense. Defense above all else keeps you in the game. Floundering in volatility and leaving yourself exposed with no control is always a bad move. As in trading so in life.

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May

24

I read Power Foods for the Brain by Barnard, MD (not sure how accredited he is) over the weekend

He basically lauds a vegan diet–fruits, vegetables, grains, and legumes only.

Points of interest:

1. He says amyloid plaques rise and fall circadian style. Plaques drain from the brain into the cerebrospinal fluid when sleeping, allowing the brain to cleanse itself and recover. When we don't sleep properly, by watching the late show, late snacks, getting up to check the markets, thinking during the night, etc, we are allowing the plaques to stay up and active, basically doing damage to our brain and memory cells.

2. He says people are getting too many minerals in their bloodstreams. Patients have more iron, zinc, and copper levels than non–memory impacted patients. People should be getting minerals from vegetables over supplements. Minerals are in many fortified food products like Total cereal, and too many minerals should be considered as leading to memory loss.

3. All tastes are acquired, except for breast milk, therefore you can reprogram your tastes from unhealthy food to healthier fare. 

4. Exercise, eating less to no meat and dairy, and engaging your mind in learning activities helps your brain and memory to stay intact longer.

Overall not much new here, but a good book for reading by the pool.

An editor suggests:

I would suggest the book 80/10/10 by Dr. Doug Graham to anyone looking to improve their diet. It is a diet about eating fruits, vegetables, leafy greens, and a few nuts, avocados and fats. By following this for a week to a month (I was increasing fruits for about a month, but eating only fruits and greens for breakfast and lunch for about a week) I got rid of my cramps which had been getting worse for years. It was astounding. It is considered the be all and end all healthy diet book in vegan and raw food circles. 

May

22

Watching the game just now watched pitcher and catcher talking with their mouths covered ( carry over from bill belicheck lip reading )

Even when I am in trouble in a Checker game I try and remain calm and not give my opponent any signs I am on the ropes.

Market implications ?

May

22

It only took the bonds about 1/2 hour to conclude that continued expansion of the fed balance sheet and buying the bad assets of their colleagues and clients was inflationary.

Rocky Humbert replies:

I respectfully disagree with the Chair's interpretation of Mr. Market's belief. I am sitting here watching the TIP market … and it's not inflation expectations that are rising, rather it's the REAL YIELD. (An economist would say the real yield is a function of the real growth rate, the risk premium for default, and competition with other investments…. so it's Mr. Market saying growth is ahead, not inflation.)

Inflation expectations as measured by the TIPS market continue to tick downwards, not upwards…

(Am waiting for George Z. or someone else to say that the TIPS market is a BS market signal because ….blah blah blah)

Please wake me up when the real yield on the 10yr tips goes positive. Looks like it's at least 3 or 4 points away.

May

22

Ten Moments Of Market History That Are Completely False

1. A posthumous memo distributed by Steve Jobs to Apple stating "focus only upon on a recap" was accidentally addressed to the R&D department rather than Finance.

2. Ben Bernanke carries a full beard because he and the boys went too far with a drunken jape involving an Illuminati tattoo.

3. Bunker Hunt later regretted a spot of Bazaar shopping whilst on holiday in Egypt when, upon his return, he left a housekeeping note to his secretary stating "ensure market silver is moved into corner."

4. Bernard Madoff was framed by exchange executives for running a legit fund that implemented an early version of a high frequency trading strategy.

5. Ben Graham originally began his career as an options market maker and wrote a less successful book around the concept of investing based on Marginal Safety.

6. Andrew Mellon - a culinary enthusiast - later regretted a diary mix-up in which he believed himself to be giving the quote "liquidate stock" to Wisconsin Soup & Broth Enthusiast.

7. Mark Carney is a Manchurian Candidate sent to the UK by the Quebecois secret service to settle colonial wrongdoings.

8. Warren Buffett had originally bought the Washington Post with the intention of introducing Page 3 girls but was vetoed by Katherine Graham.

9. The Denise Rich song "We Walked Away From A Love Affair" is an allegory about OPEC and the spot oil market.

10. The Paris Peace Accord was deliberately botched by Henry Kissinger because he was running a large short swap spread with his broker and saw another twenty points in bonds.

May

21

David, you are obviously much more knowledgeable about the game of baseball than I, so I'd like to ask your opinion on Gibson and Koufax.

How do you think they would have fared in today's modern game and how would they have been used by their teams?

David Lilienfeld writes:

Thank you, but I doubt the premise of your question is true. Gibson and Koufax would likely still anchor their respective teams, but neither would likely get more than 25, maybe 26 starts, tops. I doubt that their arms would have been as strong–they wouldn't have developed to be, they would also throw only 100-110 pitches/game (sorry, having seen the great Orioles pitching staff of the late 1960s/early 1970s, I'm a big believer in strong arms that throw complete games). Their control would continue to have been outstanding. The thing about both Gibson and Koufax is that they pitched enough innings and in enough games that when they got tired and they knew the bullpen staff was pitched out arm sore, they would suck it up and make a go of it. They would change their set-ups, mix-up pitches more and so on. But a pitcher can only be that mature if given the opportunity to play–and that's something verboten today. So while both of these folks would have excelled, I doubt they would have been the dominant forces that they were in their day.

Take a look at their records, or throw in Jim Palmer and Denny McLain too, if you want. They routinely pitched more than 270 innings–good seasons and bad. It wasn't until Koufax started throwing more than 220 or so innings that he came into his own. Heck, even in his last season, when his elbow had been so threaded by arthritis that he needed to soak it in ice for 2 hours after each game, he threw 27 complete games. I guess you could say that his career would have lasted longer if he hadn't pitched as much as he did–except that that's how he found his groove.

It's not as though this was something that characterized only the greats of the day. Jim Kaat started 42 games one season–and he played for more than two decades. Never mind that he won 280 games and was never elected to the HoF. Take a look at Steve Carlton. These guys were good, sure, but I think that, like Koufax, part of their greatness was that they were worked hard.

I'm sure there are those on this list who will say everything's fine with how pitching staffs are managed today, that I'm a dinosaur for taking such a risk with someone's arm to let them pitch so many innings, start so many games–that that experiences really isn't necessary for pitching excellence, never mind greatness along the likes of Koufax and Gibson. Much as I think the days of someone as competitive as Frank Robinson are passed, so too are the days of the dominant pitcher. Consider Jim Lonborg, who pitched more than 270 innings in his CYA year (1967). During the World Series, he pitched game 7 on two days rest. Two days! Would any manager even think of doing that today? I doubt. it. I could hear the players union rep going to court about it violating some contract clause. His wife might complain that he's being asked to do the impossible–3 days rest is pushing it as it is. Nope, the days of the strong pitcher are done.

Koufax and Gibson: we likely won't see their likes again anytime soon. Probably not in my lifetime, at least. And I doubt that if they came up today, they wouldn't be nearly as dominant, good as they might be. They would never be given the chance in the first place. It's almost five decades since Koufax retired, and people still talk about the devastating Koufax curve. The same is true of Gibson and his fastball. You need someone with the insights of a Branch Rickey to go back to the four man rotation that produced a Koufax, a Gibson. Do you see a Branch Rickey around? Me neither.

All of which may not be surprising. 100 pitches isn't very many, after all.

(Sorry for the long-winded answer, but pitch counts are a tender topic for me. I don't like coddled arms–just a sign of a pussy-wussy approach to managing the bull pen.)

Stefan Jovanovich comments:

Koufax and Gibson would most certainly be stars no but so would Bob Feller and Christy Mathewson (Tom Glavine as a right-hander). What has changed in baseball is that starters can't start at 80% and then work up to full capacity the way they did in the good old days. Matt Cain's innings pitched have matched the old timers but what he and other top-line starters have painfully discovered is that they now have to pitch the first and second innings with intensity. The technology revolution has allowed all hitters to diagnose their own swings and pitchers deliveries the way only a genius like Ted Williams once could do with only his own eyes. Felipe Alou sat down with his son Moises when the Giants got their first screen analyzer; his comment was "I never understood my own swing". The pitch count is stupid because it is a hopelessly crude metric. 75 pitches at Coors is a solid performance; at AT&T the same effort should produce 95-100. But no one now can go as long as pitchers once did; hitters aided by video study won't let them.

http://en.wikipedia.org/wiki/Felipe_Alou

David Lilienfeld replies:

Respectfully, Cain doesn't have the innings pitched numbers of past cohorts. And I disagree on the "new" need for intensity. You don't pitch an ERA of 1.1 without that same intensity, and while analysis of one's swing is helpful, pitch selection is moreso. You could have an optimal swing, you still couldn't hit a Koufax curve. Palmer's slider wasn't quite so devastating, but if he was on his game, it didn't much matter how good a hitter you were, you weren't going to hit the ball.

The thinking these days seems to be that with all the money being paid to pitchers, no one wants to risk an injured arm from over use (!). Hence the five man rotation.

Maybe we're just going to have to agree to disagree.

May

21

Here is a deeply flawed article in Texas Monthly about BBQ, but the article contains an interesting (but somewhat inaccurate) map of BBQ across the South. The flaw is the essential conceit that Texans have by thinking their BBQ is the best in the world and every other BBQ is inferior. I've had some inedible BBQ in Texas and I have had some awesome BBQ in the North when Mr. Humbert was gracious enough to take me to a BBQ place in CT. That place was better than any Texas BBQ I ever had.

May

21

There is a market I am looking at to trade where supply is 100% controlled by a cartel and the same cartel can manipulate demand through marginal buying or selling, which they can store at zero cost for an unlimited period.  There are dealer firms that are approved by the cartel to buy at auction and resell in the secondary market.

There is an active futures market with electronic prices posted, but for the underlying cash market one has to pick up a phone and contact one of these dealers to get an accurate quote.

The cartel often hires its dealers to work for them directly and the opposite. These participants get relevant information in advance. The cartel wants the best prices available for the product it sells. However, at times they are willing to lose great amounts by bidding up prices to support the market.

The rhetorical question is, should I be trading this market?

Jeff Watson adds:

D. Humbert's query about trading an insider controlled market made me realize a very important rule that can be applied to trading. Never, ever play poker with someone who knows your hole card with 100% certainty.

May

21

When last I commented on CCL, it was once again in the Perils of Pauline mode, hoping that some Dudley Do-Right would appear and rescue it. As it turns out, CCL is hereby awarded the Tim Melvin Absolutely Horrific Luck Award after I came across this little item: Search Ends, Two Australians Lost . It's hard to promote a fun cruise and make some money when you can't keep the passengers on the ship. I was looking at Royal Caribbean, kept stumbling across Norwegian (which looks good if growth investing is your thing), and noticed that CCL can't get out of the way of its own two left feet. We'll see what problem surfaces next month, as it seems likely there will be something.

May

20

This chart of 10 Yr Treasuries reminds one of the very kind companionship that Mr. Pitt provided to Aubrey and myself up the lazy river in Disneyworld Orlando a year ago. One wonders whether there are any regularities in it. vic

Anatoly Veltman comments:

One may observe the consecutive higher lows throughout the multi-year uptrend. One concludes that any first lower low will serve to produce technical downtrend of significance; at that time get out. Easy money!

Jeff Watson adds:

I'll say it again, the mistress never gives away, "Easy Money," and there is no such thing as easy money for the non-Flexion.  One suspects that those who make "easy money" in the market have some kind of Faustian Bargain in effect. I have to fight  tooth and nail for every quarter cent.

John Netto says:

Jeff- start studying market positioning and how the market is structured before large Econ data releases and Fed announcements. Being aware of this will point out asymmetrical situations which tend to provide profits at a much higher  velocity.

Jeff replies:

John, thank you very much for the most enlightening market lesson I've had in 35 years of trading.

Vic Niederhoffer is skeptical:

One is content to eke out any profit let alone one at a higher velocity. When I can unravel the meaning of Mr. Netto's post, I mite be poised to become a wealthy man.

John Netto clarifies:

The Chairman has asked me to provide further detail on what specifically i'm referring to by putting oneself in trades where  the velocity of P and L can appreciate at a greater intensity based on identifying market asymmetries.  Take the most recent nonfarm payrolls number. During the beginning of the week we saw estimates around 150,000. The day before  we saw ADP miss … estimates were then lowered for the nonfarm payrolls number from 150,000 to 140,000 by the Street.

We saw a rally in the bond market and some weakness in equities with the S and P sitting around 1585. This was the first sign  of how the market was positioning for what was believed to be a weak jobs report.

The number beat consensus coming in at 165,000 and with the market surprised by the results and positioned the opposite way,  bonds sold dramatically and equities put in a gap up, go up day - with neither of those markets returning to the scene of the crime since. As a professional trader supporting myself from my trading P&L, understanding market positioning is one of the  big ways I generate P&L. The aforementioned example was particularly lucrative.

May

20

Robinhood Investment Corp. has named a top International Monetary Fund official its chief economist for emerging markets.

Lorenzo Giorgianni will join the $13 billion Connecticut hedge fund in October, the Financial Times reports. Giorgianni has served as deputy chief of the IMF's Strategy, Policy and Review Department, and will formally leave at the end of next month.

Giorgianni sought to head off concerns about his leap from a high-ranking public-sector post to a major hedge fund.

"I look forward to joining Robinhood and complementing my experience in policymaking by deepening my understanding of financial markets," he said. "I am following a protracted cooling-off period during which I have no access to confidential information and no involvement in any work that could give rise to a conflict of interest."

The explanation doesn't appear to appease everyone, with one former IMF official telling the FT, "It's terrible. A revolving door is fine, with an appropriate cooling-off period, but he should be [immediately] out of the building."

Giorgianni's cooling-off period began in March. He "is no longer involved in any work that could give rise to a conflict of interest before his departure. This is fully in line with the fund's ethics guidelines," an IMF spokeswoman said.

May

19

Woodson reminds me of the trader who holds a losing position 10 days in a row until it totally ruins him. He stays with Smith despite the fact that he's a loose cannon,loses the ball by relaxing on offense, goes 1 for 6 from floor continuing his usual shooting percentage,has Anthony giving up as he unbelievably notes Smiths bad play, gives a gratuitous technical foul, and generally tries to get his game back when the season is at a precipice. Yet Woodson stays with him regardless the way a trader holds a losing position until he goes broke. Its pathetic to see this stubbornness. The worst thing that happened to Knicks aside from the sullen Ewing resonance on the team and the three point holdover from Antoni is the lucky game winning shots that smith made at the beginning of the season. One remembers the winning shots he made, two, but he lost 10 or 20 games with the same shots later in the season.

Craig Mee adds:

The cowboy really doesn't have a place in this day and age of professional sport or markets. Players are way too fit and every part of their game is looked at and tested to expose any edge the opposition can utilise. The question now is how on earth are things going to evolve in the next 10 years as the last 10? For sport or the markets … and is there a way to foresee this and be better for it, in knowledge or profit.

May

18

The regularities in fixed income seem much less numerous than the regularities in stocks. What is the cause of this?

First one market goes down much in one week, then another market goes down the next week. Is it random or predictable ? Last week it was gold.

Is there an all seeing eye that looks for ways to inspire mish and churning in markets that learns from recent outcomes and paths of scores in vivid sports events?

The growth in the belief in the value and inevitability of the world state has preceded the decline in gold.

The gold is down 7 days in a row and this has happened only 4 times since the new millennium. But it is unlike other markets except bonds. Why?

number of runs of 7 or more
in new millenium

market      up runs         down runs

bonds       9                 3
sp         40                 7
bunds      11                16
dax        21                10
nas        41                13
gold       18                 4
crude      14                18
euro(fx)   15                10
yen        15                10

The number of bonds you could buy with one spu (i.e the stock to bond ratio) and the amount of gold you could buy with one spu (i.e. the stock to gold ratio), are at 5 year highs. What does this portend? Are there any other ratios of moment and are they predictive?

Why have central banks which used to be in general antithetical to big stock market rises become so favorable to them, to the extent that many of them are buying equities themselves?

What is the frequency of scandals as a function of the duration before and after major elections?

What are the seasonal tendencies of the outbreak of wars as a function of weather?

The nikkei to spu ratio was once 60 and fell to 7 and is now 9.5. Does it show trends? ( one must check these numbers).

The vix is at 12.5, and all who have sold puts on stocks have made fortunes since 2008. How will this situation be rectified?

The euro at $1.28 is in the lower half of its 1.60 to 1.20 range since 2005. Is the Troika getting an itchy finger? And do they like to see the US wealth prospering at their expense?

And just one more: Is there a point in life and markets, where all resistance to pressure to succumb ceases as in Beauty and the Beast or a market rise of a certain % in the case of stocks or a decline of a certain % in the case of bonds? The danger of relying on a equilibrium ratio comes to mind with the ratio of stocks to bonds at a 6 year high.
 

Veteran trader Anatoly Veltman adds:

You cite the same poignant reason for the recent Gold demise as was the Palindrome's predictive opinion voiced way before April 2013. Of course, the clincher was the fact of the relative over-valuation of Gold as a currency on its way to $1921 peak in 2011.

When Gold is high, i.e. over the latest decades' boiling points of 500-800 USD - it trades as a currency on a cross against other majors. The USD is still a premiere reserve currency, and EUR and JPY represent the next largest economies. Note that against the JPY, Gold is still holding near the all-time record!  

Now, there would be some change in Gold's complexion if it traded under its current marginal production cost of $1100. We might see producers' moves to shut down, hedge, finance, etc. The world average production cost is estimated anywhere in $550-800 range, and those levels are simply unimaginable given the growing distrust of the world's population toward fiat money. It's not impossible, however, to have a spike down there one day: under a scenario that world Central Banks were to reach a consensus - and lighten up. Curiously, such consensus could only come about if your current concept of the sudden universally found "belief" were to fall on hard times. I'm sure this logic is somewhat counter-intuitive.

Yet, in the near-term, a lot of back and forth trading is guaranteed to happen. Just like the May 6th of 2010 stupendous one-day range in stocks has basically contained the price discovery that followed over the next months and months -so may Gold be mired in a range not far exceeding it's mid-April spike. Gold's done exactly that for a full month already; and with allowance for a few currency spikes, we are likely to see Gold at current  levels again by summer's end.

May

18

Gauss's book on least squaresSam Eisenstadt has mentioned that he likes to use a potpourri of overlapping, multicollinear monthly changes in the S&P to predict future price changes.

It would be a good thing to see what predictivity there is in regression models of monthly changes that extends and augments, one thinks.

.

. 

May

18

Everything in the market is path dependent. You can have the best insights, the best trades, but if you do it this week versus next week the whole thing is different. Had I not done this or that when the adversaries were lined up against, I mite be flying and wealthy. Is there any doubt that if all these scandals had not been revealed a few months after the election, the outcome would have been different. Even the man who turned 10 thou into 50 million in his IRA could have won. vic

May

18

Isn't Flexionism part of human nature just like shouting from the rooftops to crave recognition when trade research and timing techniques pay off. People will always want to be the leading pack animal or drive the herd, under whatever or differing pretense . Does the way one speaks to his broker whether making money or not, under all market conditions tell the world really the type of person he intrisically is. Will we never be rid of the flexion, things are just more transparent now… and its just a itching parasite that begs to test us mentally…

May

17

Whenever a market I was long goes way against me and I sell at the market, (if one had a Xantippe for a wife - it would be her demanding one get out before the weekend — or else) , I have Tom Wiswell saying to me, " Now you're Thinking ". After he put me in a untenable position.

Now you're selling.

One believes that there will be many conservatives without romance this weekend. vic

Alex Castaldo adds:

I spoke to my mother today. Eighty four years old. "I read it in the paper a week ago that you shouldn't buy gold or bonds. They are going down".

May

17

To add to an already long list of differences between broadly who a speculator may be and who a gambler may be: the successful speculator generally leans onto the side of chance but an unsuccessful gambler is seeking chance to lean on his side.

Countless differences may exist and can be cited between who a speculator is and who a gambler is. When we cut it slightly finer, there are enough similarities between an amateur speculator and an amateur gambler. Same way, there are enough similarities between a professional speculator and a professional gambler.

To seek a generally acceptable set of common characteristics between successful gamblers and successful speculators, I often listen to "The Gambler " by Kenny Rogers [Youtube link].

May

16

Some back of the envelope numbers on S&P500  futures daily changes last 10years for your perusal: 

Year       %up       Max       Min        SDev

2003      55%       28           -29         10

2004      57%       18           -21         8

2005      54%       21           -21         8

2006      53%       26           -25         8

2007      52%       44           -57         14

2008      50%       127         -100         27

2009      56%       54           -42         14

2010      58%       48           -41         12

2011      51%       59           -85         18

2012      51%       42           -35         12

2013      65%       25           -38         11

Alex Castaldo ponders:

The standard deviation for a binomial is the famous sqrt(N p q) and the standard deviation for a proportion is sqrt(p q / N).  Assume p=0.54 q=0.46 and N=252 days per year. Then sd= 3.1%. The proportions for 2003 through 2012 are within usual confidence intervals.

But for the year 2013 we have only N=95 trading days so far. In that case sd= 5.1%.  So the observed 65% is about 2.16 standard deviations above the expected.  Yes, it is statistically significant but not hugely so.


	

	

    
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I just had a modern Finnigan happen to me. I got to sleep long a commodity that I had a profit on when I fell asleep but I left my limit orders to buy well below the current price in. I heard a computer ring tone 12 times waking me up. I am reluctant to get up because I know that means that I have a substantial loss and one limit order below after another must have been filled. But one must face the music. So I drag myself up, (I hadn't slept for two days as was long another commodity that refused to budge while I waited for the hoped for rally in it in vain.) So I get up finally, reluctantly, meanderingly, and walk outside my room. To my relieve I hear Toria shouting, "dad, I'm locked out, please let me in. Are you home?". The ring of the door bell is exactly like the ring of the computer. So with relief I make my way to the computer. Sure enough, the price has fallen to right above my limits and I have lost just as much as I would have if I had not mistakenly thoought the ring on the door bell was the ring on the computer. One hopes that I've made myself clear.

	

	

    
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The round numba is never a penumbra. Today's example: Gold.


 


	

	

    
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 One has to admit that Smith is the perfect exemplar of the regression fallacy with the luck being ephemeral and the skill a constant expectation. Whenever he plays and hits some lucky shots, the Knicks are sure to try to give it to him the next game and lose as the luck vanishes. What a terrible player he is, almost as bad as the other regression fallacy, Robinson, who at 4'10 likes to fight with all the bigs and is guaranteed to lose for Chicago. They should have special brands on people like that in Basketball and life so they could not cause continued damage. The forecaster who is hot is generally like that. The regression fallacy tintype should be distinguished from the useful idiot. People like Kaufman and "you know who" would be on this. I "got a little list".


Tyler Cowen writes:


I say Miami beats Memphis in six, which is OK for NBA ratings.


Smith simply isn't any good in the playoffs when others are playing real defense. The preferred model is that some individuals have zero or negative productivity in key situations.


Plus Jason Kidd woke up one morning and was 56 years old, all of a sudden.


Regards,


Tyler 


Scott Brooks writes: 


Looking at this strictly from the "what is best for the NBA" perspective:


What the NBA wants is a NY/Miami and OKC/SA semi-final.


Then a Miami/OKC final…..although SA would be alright too as they have Duncan. However, OKC has just a bit more star power right now, so I give OKC the edge.


And with all due respect to NY…….. Even though NY has the more attractive population base, Miami just has too much star power (and a pretty good population base).


A Memphis/Indiana final would be a disaster….but the good news is that even if Indy can get past NY (which is very possible), they ain't getting past Miami.

	

	

    
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 Two quality reference works I recommend reading for those interested in the substructure (hours & minutes) of price action (The books touch on the ultra high frequency microstructure also) are


1. Asset Price Dynamics, Volatility & Prediction  by Stephen J. Taylor


2. Introduction to High Frequency Finance  by Dacorogna, Gencay, Muller, Olsen & Pictet



At the time of their release both were somewhat controversial but the subsequent research findings have not destroyed the concepts put forth.What both books allow one to do is to take a framework for looking at markets - the so called 'stylised facts' and then start a series of tests around these theorems to see if prediction can come from description.


I have been applying derivative ideas that I have developed across the US futures markets for some time. A recent post on the site by Mr Zussman about overnight moves making up large proportions of total returns has made me revisit both the conditional heteroskedascity and time zone ideas raised by the authors.There are some morsels to be had by classifying overnight moves by both magnitude, geography and base country and applying the above.

	

	

    
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 The bonds are down about 6 points in the last two weeks. Worse yet, those who bought at the auction a week ago, actually have a loss. There's a famous incident where a great cricketeer was up by 1 run, and then on the last pitch, he rolled the pitch to the batter instead of hurling it. The epithet "it's not cricket" is appropriate to the temporary loss that the flexions and colleagues at the bank have. One would imagine that the upside down man is persona non grata. But more important, who was the player that did the dastardly deed. One believes it was in the mid 70s the last time that the bonds discommoded the colleagues, but what was the team and the player?  


Can you top that? What is the most disgusting incident in the history of (the market) relative to Trevor Chappell rolling the ball you can recall in the market? Was it the mingling of funds without retribution by the Governor? Or the flash crash before the French Inside trading before Leeson announced? To me it was being blindsided by a high bid for bonds that I took from Michael Lewis's firm right before the flow of funds man announced his bullishness. What's yours? 


Update: A kind correspondent says it was Ian Chappell. Worse yet it was a game among the colonies, New Zealand vs. Australia. One can only analogize it to the IMF not being paid back first on account of a bad debt or a country in the EC defaulting on its debt. "It's not cricket". The rain in Brussels might preclude taking the mistress out for a fish dinner.  


Craig Mee writes: 


Victor,


Ian would gasp at being associated with this (as well as most of the nation)… his equally talented brother Greg Captaino instructed the third brother Trevor to do the dastardly underarm deed to "prevent New Zealand scoring the sux they needed to tie"


wiki the "underarm bowling incident of 1981".


Anatoly Veltman writes: 


I'm afraid to say: buying a single lot of SP futures near October 16th, 1987 close. On that triple witching Friday, which followed the relentless two-week decline, the floor rumor had it that one Palindrome had accumulated an outsized long position (the whisper number I heard was over 10,000 lots). I traded Gold and Silver, which closed an hour and half before the SP. Feeling lucky from my metal profits, I decided to take my first plunge into stocks. I thought to myself: if a trading legend is compelled to accumulate that much into this close, then this must be an exceptional value. Still, the novelty of buying stocks and the discomfort of taking a Long position period, made me limit my experiment to a single lot.


Well, as history books will tell you — Black Monday's opening gap down was the largest in all of the preceding stock index futures history! And wouldn't you know it: a very rare opening signal developed by an exclusive research group of like-minded younger traders stared huge in my face that morning. The signal had three conditions, and that's why it would occur so rarely:


1. If a market dropped big into the close AND


2. If the sentiment survey diverged (I.e. went up) AND


3. If a market subsequently gapped down big against such bottom-picker sentiment


Then you must SHORT that gap-down opening!!!What made my one-lot Long the worst position I've ever taken in my trading career was that instead of executing this rare Shorting signal of mine on that Monday morning - I had to digest my damning stupidity of following somebody else's silly Long of Friday. Another younger trader, who was not burdened by any silly Long, did execute the Shorting signal and doubled his Short position once the SP opened down around 260.00 and proceeded to plunge lower. Lo'n' behold, that day ended up printing 190.00; and the younger trader has become the Robin Hood that the community admires today…


anonymous writes: 


I worked for the 'Robin Hood' you mention in your comment below for 3 years.


Although quantitative types such as I believe that he is an example of survivor bias I must say this — I have never witnessed such ferocity, focus and ability to cut losses with alacrity as I saw him demonstrate time after time. (In all fairness I was not fortunate enough to work alongside the Chair at NCZ back in the day….)


A genuine trading talent.


Anatoly Veltman replies: 


Yes, and therein another lesson: that the "survivor bias" is not entirely random. Were you part of that Liberty Plaza office that sported the sign: "Maximize size, minimize risk!"


That particular trade carried the trademark of the genius: nimble lightly to Short a potential bubble over 330.00; adding substantial Short that melted the 300.00 phantom support a month later; and finally doubling up below the 260.00 where the black hole of no bids guaranteed the break of 200.00 before the bell could save the day!

	

	

    
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 As the cost of a college education soars and the middle class finds itself struggling with paying for public university tuition, MOOCs  (Massive Open Online Courses) offer one possible way to lower the costs of a college degree. Lots of promise–and the potential for disrupting the American college, a bastion of the middle ages for the past two centuries–is meeting with lots of resistance, particularly from those with the most to lose from them.


Stefan Jovanovich writes: 


If David includes the Reformation and its Counter within the Middle Ages, then he is right. As Rocky can remind us, until very recently the avowed purpose of Yale was still for man to find God, preferably of the Congregationalist version. The land-grant schools were to be trade schools as Governor Perry's alma mater still is — as a proud "Ag" school. The modern university owes its corrupt origins entirely to WW II and the G.I. bill — as do our healthcare pricing and payment systems. If schools were truly medieval, it would be a good thing. Teachers were paid directly by the customers — the students; and there were no required prerequisite courses. You find echoes of that system as late as the mid-1950s when "name" professors still competed with one another to teach the introductory survey courses; without those butts in the seats the esteemed scholar had little chance of being the next big hit on the textbook circuit.

	

	

    
May

	
15

	

	

	
 I moved to Latvia, a former Soviet republic now in the EU, almost two years ago. Here's why I chose Latvia over Singapore, the US and my home country Norway.


First, ever since my teens - that's ten years ago - I realized that the world is full of new opportunities. With the internet, one can make a business and the income will be the same whether one lives in Nairobi or NYC.


Second, online trading has been my main occupation ever since. However in the last years I've been more into computer science and real estate as well.


I spent several months in Singapore. I liked it so much that I seriously considered moving there. It's a an ultra modern city with a mix of Chinese, Malay, Indian and Western cultures. The fact that capital gains and income from abroad are exempt from taxation does not hurt either. Reasons I did not choose Singapore are expensive rent, it's far away from my family, and its climate.


The US is a wonderful country in that anyone who moves there can feel like a real American within months. Unfortunately its tax rates and regulations make it a relatively unfriendly country for entrepreneurs.


Norway's credit bubble did not crash in 2008/2009, but has instead been fueled by oil money ever since. It will crash.


Latvia, or more generally the Baltic region, grew rapidly before the financial crisis, but excessive credit and foolish risk taking made for a terrible crash. It's a real human tragedy (without fiat currency and artificially low interest rates it would not have happened, or at least been much milder, in my opinion). The population is still very demoralized, and I sympathize with them, but from a rational perspective I believe the Baltic Tigers will bounce back - just as the Asians have since their crisis in the late nineties.


For individuals, capital gains are taxed at 15% and dividends at 10%. Small businesses can register a so-called micro company which pays 9% tax on turnover and normally no other taxes for the employer or employee. This seems like a low rate perhaps, but in reality it's not a "micro tax" but a smart way to collect taxes. I have my own micro company and each quarter I summarize all my revenues, collect all my receipts, hand them over to the accountant who sends a one page report to the authorities, and then I transfer the tax. Simple! However, my actual tax bill is much higher. All expenses are subject to 21% VAT. I can only pay myself 715 EUR without additional dividend tax. I also pay annual real estate tax and a 2% stamp duty on each real estate transaction.


The reason I chose Latvia was not because of low taxes. I estimate the various taxes add up to about 40 percent. The main economic reason is lower operating expenses, especially on housing. Other than that I like the culture. It's more old fashioned. One can buy organic food directly from the farmer. The level of pollution is low. Crime is low. Littering is rare. Achievements are encouraged, and it displays in the population. Most speak Latvian, Russian and English. Many have degrees is sciences. Obesity is rare and women put effort into looking their best.


The Baltic region is still quite poor. Employees generally make low salaries, and entrepreneurs can make a good living only through wise decisions and hard work. It will remain poor until it finds a good export - a niche in the world market. During Soviet times Latvia had the best factories in the union, or so they tell me. When communism collapsed, so did their factories.


Now they are in kind of a vacuum. Maybe they will use their proximity to Scandinavia, Germany, and Russia to attract multinationals, which in turn will grow it into a prosperous Singapore? Maybe Riga's port will become the bottleneck for a growing Moscow? Maybe it will become a new Silicon Valley? It can attract talents from both ex-USSR and EU/US. It even has one the world's best Internet infrastructures. Maybe they will stop exporting wood and instead ship out world class furniture?


The reason I chose Latvia was not because of low taxes. I estimate the various taxes add up to about 40 percent. The main economic reason is lower operating expenses, especially on housing. Other than that I like the culture. It's more old fashioned. One can buy organic food directly from the farmer. The level of pollution is low. Crime is low. Littering is rare. Achievements are encouraged, and it displays in the population. Most speak Latvian, Russian and English. Many have degrees is sciences. 



The Baltic region is still quite poor. Employees generally make low salaries, and entrepreneurs can make a good living only through wise decisions and hard work. It will remain poor until it finds a good export - a niche in the world market. During Soviet times Latvia had the best factories in the union, or so they tell me. When communism collapsed, so did their factories.


Now they are in kind of a vacuum. Maybe they will use their proximity to Scandinavia, Germany, and Russia to attract multinationals, which in turn will grow it into a prosperous Singapore? Maybe Riga's port will become the bottleneck for a growing Moscow? Maybe it will become a new Silicon Valley? It can attract talents from both ex-USSR and EU/US. It even has one the world's best Internet infrastructures. Maybe they will stop exporting wood and instead ship out world class furniture?

	

	

    
May

	
14

	

	

	
 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.



My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.


Probably another sleepless tonight tormented by that devil.


Gary Rogan asks: 


What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?


Tim Melvin writes: 


I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.



Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.


Gibbons Burke writes: 


 Here is something I posted here before on this distinction…


Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.


The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.


That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.


Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.


That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.


Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.


There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.


Kim Zussman writes:


One gambles that Ralph and/or Rocky will comment.


Leo Jia adds: 


From the perspective of entering trades, I wonder if one should think in this way:



speculators are willing losers who often win; gamblers are willing winners who often lose.


David Hillman adds: 


It is rare to find a successful drug lord who is also a junkie. 


Craig Mee writes: 


One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."


Bill Rafter comments: 


Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 


 Anton Johnson writes: 


A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.


Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.


Jeff Watson writes: 


I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 


anonymous writes: 


Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."


That's how a compulsive gambler responds.


Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.


Anton Johnson writes: 


It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.


Gibbons Burke writes: 


That's the essence of my distinction:


"gamblers are willing losers who occasionally win"


That is, gamblers risk their capital on propositions where the odds are either:


- unknown to them

- cannot be known


- which actual experience has shown to have negative expectation

- or which they know with mathematical precision to be negative


They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.


"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:


- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience


They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.



If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.


There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.


Duncan Coker writes: 


I found Trading & Exchanges  by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."


He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.

	

	

    
May

	
14

	

	

	
 


A warning in Latin from Jeff's son perhaps could serve as a motto for us in the future— a motto that one wishes one had hardwired in his being:


Aleatores Omnes Moriuntur Rupti


(all gamblers die broke)

	

	

    
May

	
14

	

	

	
 One walked past the Sherry Netherlands hotel tonight where the boy wonder, Jesse Livermore, took his life. The fact that The Reminiscences of a Stock Operator  is considered one of the best books on investments ever written is guaranteed to happen. Anyone who follows his advice and example is 100% certain to go broke. His pyramiding, leveraging and vig paid were each in themselves 100% certain to cause his entire stake to go to the stronger hands and flexions and top feeders like the "banks". Naturally the book is recommended as the bible for new traders to read. I am chagrined when people come up to me and say that aside from Reminiscences, their favorite book is edspec. Fortuitously, I believe that none of the other authors on this site have had that horrible experiences. Nevertheless, just walking by the hotel, and seeing the models from Fifth avenue that the boy wonder wined and dined on his yacht walk by, just as leggy and beautiful as in his day 100 years ago, made me shudder. I saw a balding man dressed in nautical attire and a top hat exiting the hotel and I whisked Aubrey away and changed my sweater as soon as I got home. 


	

	

	


	
	
	
	

	
	
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