October - 2014
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
1
 S&P -24.70
 USB +1.23
2
 S&P -2.20
 USB -0.20
3
 S&P +21.70
 USB +0.07
4
5
6
 S&P -4.30
 USB +0.05
7
 S&P -28.10
 USB +1.07
8
 S&P +33.90
 USB +0.02
9
 S&P -36.90
 USB +0.05
10
 S&P -30.60
 USB +0.15
11
12
13
 S&P -28.70
 USB +0.24
14
 S&P +9.20
 USB +0.21
15
 S&P -28.10
 USB +1.22
16
 S&P +3.90
 USB -0.31
17
 S&P +30.40
 USB -0.16
18
19
20
 S&P +18.90
 USB +0.06
21
 S&P +38.10
 USB -0.13
22
 S&P -12.90
 USB -0.09
23
 S&P +21.00
 USB -0.22
24
 S&P +13.60
 USB +0.01
25
26
27
 S&P -2.60
 USB +0.08
28
 S&P +23.00
 USB -0.14
29
 S&P -7.90
 USB -0.05
30
 S&P +16.40
 USB +0.06
31

Oct

30

 "Running out Red Tape is a Growing Industry":

What industry sector employs more Australians than construction, education or manufacturing, and three times as many as mining? What function costs private industry and government a combined $250 billion a year? Few would have guessed compliance – the red tape industry. And it's booming."However, a frightening report released this week by Deloitte Access Economics fingers the real red tape culprits – the private sector business community whose compliance costs leave the government looking like rank amateurs when it comes to creating and paying for what, in many cases, are unnecessary and unproductive self-imposed rules.The total private sector workforce grew by 10.4 per cent over that same five-year period; its compliance workers grew by 17.4 per cent.Ironically, the group that represents our very large companies, the Business Council of Australia, has been a flag-waver for the government's attempts to tackle red tape. The embarrassing reality is that it should be focusing on its own backyard.

Ed Stewart writes: 

The missing factor is that "private" compliance rules are motivated by government mandate. They are required in order to avoid fines, bad pr, or lawuits. For example in the USA we have EEOC and OSHA, which both create enormous private bureaucracies and consulting practices. The "private" workplace rules are most often attempts to fulfill the requirements of these mandates.

Consider the headache a company must go through to fire an employee, particularly if they are "of color". It is a long drawn out process of documenting "evidence" that is fraught with risk if done wrong. Then you have the seminars on avoiding offending others, how not to think with the little head and accidentally cost the company 10m, the lengthy questionnaires with many imbedded "tricks" to weed out those not "with the program". It all works to create an environment that actively stifles common sense and rewards bureaucracy-enforced sensitivity.

Mandated dead-weight employees who can't be fired have a compounding effect of non-productive complexity. Everyone is a "stake-holder" and all ideas must be treated equally - or else. This leads to three hour meetings with no defined objective, the purpose of which is to provide ample room for people with no task related to the corporations primary purpose to feel important.

In my opinion we would see allot less "offshoring" of jobs if large US corporations were allowed to operate, hire, and fire efficiently.

Oct

30

George Mason University economics professor Bryan Caplan will speak at the Junto next Thursday on his forthcoming book "The Case Against Education".

Junto will take place Thursday, November 6th at 20 West 44th street at 7:30 pm-10:00 pm.

All are welcome. 

Oct

30

 With the end of the baseball season last night, there is the chance to reflect on the off-season, a chance for signing free agents, a chance to consider the merits of such inanities as the challenges, a chance to consider the causes and implications for the uptrend in strikeouts and the downtrend in offense, a time to reread Walt Whitman, to see Field of Dreams and Bull Durham, a time to contemplate those sweet words, "Play ball!" The mysteries of spring will soon be here, but the emptiness of winter must first be negotiated.

The Great Voice of 2014 is now upon us.

Only 105 days til pitchers and catchers report. Thank God it's that soon.

anonymous writes: 

Football, basketball, hockey: professional, college and high school (high school games can be especially fun and inexpensive to watch).

If it must be baseball, go volunteer as a coach. You don't have to be very good or know very much. Yes, coaching "know-how" is very different than "knowing baseball", but it's not that hard to figure out.

Coaching can be so fulfilling!

105 day void filled (and the 260 other days just got more enjoyable).

Oct

30

The rises in markets last week, bringing many of them to within 2% of their all time high, has left the pessimists wringing their hands in disbelief saying that nothing has changed from the Corrections of the previous week. Of course, aside from shaking the weak out of their positions, the Corrections with such reasons as the beheadings, the viruses, the Rooshans, all with the stock markets at their lowest level to bonds in 2 years, nothing did change. That's the point. However, we need a new word for the almost 10% rises that many of these markets have achieved to counter and symmetrize with the word Correction. I would suggest as a starter the word Improvement or Elevation, or Enhancement.

anonymous writes: 

After an overdue "Correction" to overbought conditions, the market has undergone during the last week, a "Re-engagement"– advancing it close to its previous position in price. In other news…

Alston Mabry writes: 

You had a Drop, followed by a Pop. They ran all the Stops.

anonymous writes: 

So if the real purpose of the market is to transfer wealth from those who use stops to those who don't, why are stops still popular?

Ed Stewart writes: 

I don't think it has to technically be the use of stop orders, it is more the movement of prices to remove potential energy - forcing the weak side of the market out of the position, maximizing volume and order flow - If I recall a dynamic described very well in Practical Speculations in the chapter that wrote about potential energy.

However the technical use of stop orders is very important too. It allows the system to offer 20-1 or more leverage while minimizing the risk to brokers and clearing firms. The high leverage plus stops minimizes the number of says it takes the average customer's account to end up as part of the brokers revenue statement and other various transaction fees. The last thing a broker wants is a customer who takes a few all or nothing fliers, as it generates limited revenue and maximizes their risk.

I did think of a few names for the type of "rise" the market has had from the low point but they were a bit… inappropriate for mixed company.

anonymous writes: 

A good offensive player will always drive to his opponents weakness, and cheat to his strength on defense. the peremptory strength of the bull is often underestimated. given the inherent drift, inflation, and the asymmetric buying power, one should should always play for that tendency.

Jim Sogi writes: 

It is as if the market came back from the dead..so in honor of Halloween, how about calling it reincarnation, or zombie mash, or thriller. Like a zombie, even though dead, still has a lot of big moves.

anonymous writes:

That's it. Resuscitation. It's the literal meaning of the Japanese kanji of my name as well…resuscitated tree. 

Steve Ellison writes:

There is a premise in the use of this term that the "correct" price is lower, a premise that has been proven false most of the time in history. Why should the move back up not also be a correction, more likely to be "correct" than the move down?

Oct

30

 The best obituary I've read recently was of Kerry Packer the Australian news magnate and consummate gambler, who makes the sage and the palindrome look like angels, whose private plane was purposely grounded with "mechanical failure" for two hours after he won 10 big at bacarat, with Wynn knowing that Kerry would rush back to the casino to play some more and lose the 10 in the two hours et al.

Kerry was downed in a polo game and was clinically dead for 8 minutes, and revived. When he woke up he said, "the one thing I can tell you for sure is there is no Devil below".

Oct

30

 While walking through 25' tall grass in the jungle, I was put in mind of Sisyphus. I prefer a dry definition of work such as physics offers of a change in vertical distance, however Greek mythology offers an artful description. Sisyphus was punished for deceitfulness by being compelled to roll an immense boulder up a hill, only to watch it roll back down, and to repeat this action.

There are four types of Sisyphus work that I am familiar with, despite never having deceived anyone.

1. Digging a hole and filling it in. This was popular in poorly planned Michigan construction. Another example is the vet school instruction to spay Toms, and after the abdominal incision finding nothing to pull out. This type of activity is characterized by your work creating more.

2. Raking leaves in autumn. This is activity with immediate replacement of what was removed. It's worthless except for the workout.

3. Weeding a garden. The replacement item returns at a constant rate over time.

4. Shoveling snow. It is difficult to forecast when the work will be available again.

As for the jungle grass, the best is coming out again into the sunshine.

Oct

30

 A good way to look at diet is if it's white or dead, it will cause in most, long term volatility.

White Rice, white bread, tofu, white sugar are included in the if it's white and refined don't touch it category.

Alcohol, coffee, cigarettes, snacks, are in the dead filler or not of sufficient nutritional value category.

Working on these two alone ("if it's white or dead don't touch") can improve your general long term health by multitudes.

And so be it with Mr. Market…if you side step through all the rhetoric, props and deception, and focus on investments that have economic value at the heart of the them, not propped up by any whiz bang marketing campaigns or an overseeing federation, and clever use of the laws, then your chance of low volatility long term returns would be somewhat increased. Which is probably the way we all want to live.

Oct

30

Enter at Tuesday's close 5 days prior to the election (if midterm election's day was a holiday, as it was from 1950 to 1962, then the prior Monday close)

Exit: various exits after 1, 2, 3, 4, 5, 10, 20 days

Oct

30

One notes the consumer confidence was 94.5% with an October 15th cutoff date by Nielsen. Usually it's 100% correlated with the stock market. One would hypothesize that they use questionnaires and that the real date of response was October 8 when it was at a maximorum. For some reason the number was very bearish for bonds– for a second or two. Another example of an ephemeral number leading to non-skillful or noise traders contributing to the firmament.

Oct

30

 Since Rocky's unfortunate demise (though I still hold out hope he will yet be found alive), it seems like there hasn't been much talk of the muni market and the impact of various factors on rates. So when this piece on Chicago came out (albeit on Chicago as the new "Detroit"), I thought it might invigorate a discussion which seems to have disappeared from the list. At some point, there's going to be more than Chicago and Detroit in trouble, but I don't sense that anyone else shares that view.

Ed Stewart writes: 

I know the finances look dire but on the ground level much of the City (loop, west loop, near north) appear to be doing great. It is a "tale of two cities" - at least. Google just finished rebuilding an old meat freezer building into its new midwest headquarters about 4 blocks from my apt. New hotels, new restaurants everywhere, seem to be plenty of wealthy people with jobs or starting businesses. Plenty of street-level entrepreneurship. So far taxpayers don't seem to be fleeing the city. The banana republic element is mostly out of site to the extent that one can forget there is a serious problem. I think they realize they can't afford to trigger capital/talent flight.

My guess is that the Chicago bail-out will be the same one that saves all the other failed systems, if inflation does not pick up enough to get the job done. 

Oct

30

 "For others who did make it to the major leagues it took 5 and even 10 years longer to grow to the necessary maturity and capability. That was what the industrial and minor leagues were for; it is what college baseball now does."

George Brett, who is in the Baseball Hall of Fame and owns the highest season batting average in post WW-II baseball, has a career batting average of .305. He ranks 16th among baseball players of all time in career hits.

But, in his four years in the minor leagues, he never once hit above .300.

He needed the time to grow up to become great.

P.S. I still want the Giants to win (once a Giants fan, always) but I do love the Kansas City team; I hope it goes 7 and Tim Hudson gets his ring before he retires.

Victor Niederhoffer writes: 

Are there any companies like that which become good buys after 5 years of mediocrity? 

Gary Rogan writes: 

It's rare, but if it does happen it's only when there is a new CEO. Analogous change doesn't seem possible with individual human beings.
 

Oct

30

 The difficulty of describing the barks of trees with their fissures, geophysical orientation, (long versus lat), smoothness, spacing, strength, age, et al— experts agree that a new language to describe bark is in order.

Such a language should be used to describe market charts. The observation was inspired by a visit to the Bronx Botanical Gardens Friday with Dick Button, John Floyd, Ken Roman, and the collab. It was inspiring to see the fall plumage, and the naked parts of the trees, and the open and knowledgeable personas of the various experts that guided our tours. One always feels that a new look at one's mojo is appropriate after a walk in the woods, especially after a visit to the 125 year old native forest, now restored. Highly recommended.

Oct

30

 One notes that Lloyds bank is 25% owned by the English as is Royal Bank of Scotland. And one wonders if government owned companies in general including AIG and GM and so many of the US banks, perform better than counterparts considering they have unlimited funding, they have the government put not to go bankrupt, and presumably would be the source of flexionic emoluments. One believes its worth a study.

Mr. Isomorphisms writes:

It was seen in 2008 that banks need not be state-owned to benefit from the government put.

Victor Niederhoffer writes: 

It would be seen that whatever anti says would be very sententious as he manages 1.5 trillion or so in Norwegian. His book is a good compendium of research by others. We can't figure out here if he says that bond futures have a drift or not because of liquidity preference. But its impossible to dispute the Dimson stuff that stocks return about 6 percentage per year higher than bonds. That can add up over 100 years.

Richard Owen writes: 

Did someone at the Norges Bank fund publish a Dimson-type book (favouring bonds)? The Norweigian surplus seems to be invested in a fairly Dimsonian manner.

anonymous writes: 

While it may appear that they have an unfair advantage, one must consider that Government subsidy cannot outpace the real economy forever without a collapse of the Government or the subsidized. It does not matter if the subsidy is direct or indirect off the backs of profitable real producers by changing the channels of money flow from real producers to the TBTF banks. Otherwise government TBTF banks would own everything. As the flexions get this status by already being big enough to crush the economy by their collapse. One wonders how many years such unfair advantage can continue.

While I would agree a study on those with NEW quasi government guarantees are in order.

I would argue that in the Dimson long run one must consider the following end scenarios:

1. Banks become so regulated that they are like utilities. That is they cannot fail, but they are only allowed to grew based on the "demand" for money. like Utilities grow with the demand for them.

2. Banks truly do rule the government, and they growth continues unabated and out paces the economy until there is revolution.

3. The Government tires of extortion and decides to break them up or kicks in their going out of business plan by charging them with crimes the banks deserved or railroaded.

I would not bet on the bread and circus acts for the TBTF banks to continue forever, as this is a bet against the USA.

Oct

30

It's the optimism of the electorate that causes the rally right around election time, not the actual election.

Oct

30

 Is football manager the one job involving more schadenfreude, back seat driving, bad manners, 20/20 hindsightism and heckling than a market professional? Bill Gross just wanted a hug and some warm cocoa, that's all. Couldn't we give him that much at least? I would have done it gladly, and even whispered some affectionate and soothing aphorisms. The man's a legend, can't we love him so?

"Alan Pardew: Newcastle boss says: 'I know what I am doing'":

"Supporters have held 'Sackpardew.com' banners up at matches since early in the season."

Oct

30

My friend Laszlo Birinyi becomes a friend of The Upside Down Man by writing that "some people believe that stocks beat bonds. They don't" and that's not how he became the wall street wizard beating everyone else 5 to 1 by following money flows. Well, everyone has a chink in the armour and hopefully he will read The Triumph of the Optimists by Dimson, Marsh and Staunton, by far the best research on returns ever made.

Oct

24

 The wrongness of the sage's idea that you can just buy a company, a brand, and keep it forever is shown by these examples. A study in Soccernomics shows that of the 50 biggest companies in 1970 or some such, almost half of them were no longer in existence by 2010. Of course all these studies fail to consider being acquired. But the return of these 50 biggest companies have to be tremendously lower than the average. Mr. Jovanovich has the one major secret to the Sage's high returns, and it has to do with a service strategy that I don't understand. But next to the service strategy, and the affair with the owner of the paper, he is the consummate mooch always creating the public face of saying that everyone else should give more to the government, and service payments from everyone else should be higher, thereby defusing attention from all the handouts he gets from the government for being the public face of the idea that has the world in its grip, i.e. sacrifice is what we were all born for.

Ed Stewart writes: 

All of Buffetts's cash cows that have stumbled are big on buyback plans, particularly IBM. With interest rates so low the share buyback plans seems like a no-brainer. The problem is competition. A relatively free market does not want to allow competitors to have copious cash flow and return on investment. Right when these companies think it is time to "milk the cow" the reality is it might be time to reinvent the business model. I have read for example, that Kodak was very good with its alternative investments while its cash cow was killed by the market. The extreme buyback formula might work best in highly regulated industries where competition is restricted.

Rocky's Heir writes:

The title of Mr. Niederhoffer’s piece is “The Wrongness” but this noun could better be applied to Mr. Niederhoffer’s characterization that Mr. Buffett keeps his investments “forever.”

Admittedly, Mr. Buffett’s stated favorite holding period is “forever.” One can demonstrate that this is the analytically optimal strategy for both deferring capital gains taxes and harvesting the implicit call option in all companies that grow earnings at a faster rate than the index. However, there are numerous examples of Mr. Buffett and Berkshire Hathaway selling the stocks of companies whose characteristics, he believes have deteriorated. The current headline example is Tesco, which he acknowledges as a huge mistake http://www.cnbc.com/id/102092816 . Less recently, he substantially reduced his position in Moody’s (MCO) after the financial crisis, which in hindsight was a mistake, since Moody’s stock is now trading at an all-time high. Whether IBM joins the list of his winners or losers remains to be seen, but if it turns out to be the latter, then expect Mr. Buffett to eventually sell, harvest the capital loss, and not ride the stock to zero.

Notably also, during 2014, BRK sold holdings in NOV, PSX, DTV, LMCA, COP, GHC, STRZA — although these were comparatively small holdings.

If one finds the methodology of Soccernomics to be laudable, then the same analytical rigor should be used to examine the portfolio strategies of someone who will surely be remembered as among the greatest stock investors of the past 100 years. Confusing political biases with incorrect generalizations is just plain “wrong”.

Stefan Jovanovich adds: 

There are 3 events in American financial history that changed everything that went before them: (1) the Constitutional Amendment that enabled both Federal and State income taxes, (2) the rise of 50%+ estate taxation on great wealth, and (3) the abandonment of the gold standard. It is no coincidence that all 3 came in the same decade - the 1910s - that also brought government absolutism (of course, we can conscript you into the Army even though the Declaration of Independence promises "life" and "liberty"). The Oregano has been the master of working all 3 of the wrinkles and the government absolutism that came with them (of course ownership of liability insurance should be compulsory).

His avoidance of paying dividends is a direct lift from Henry Singleton. It is now obvious but in the 1950s it was not; if you pay out cash under (1), it gets taxed twice at the highest possible rates when the same flow could be taxed only once. The reason the Oregano's pilot fish (mixed vegetable/aquatic metaphor) is so consistently dismissive of HS is that it pains him that they had to copy the idea from someone.

His acquisitions of private companies - Marmon being the latest American example - are all enabled by (2). Since he works the tax system and knows it in a way that is absolutely foreign to CEOs, he is the acquirer of choice for any holders like the Pritzkers who are facing enormous potential tax bills if the sale is "normally" structured.

The "moat" around his successful companies - Coke, insurance - is the one built by (3); in an age of steady inflation unmoderated by any shortages of legal tender - prices can be ratcheted above costs for generations.

There is a fourth advantage that BH has for which I think the Oregano himself deserves the credit; he figured out how, as Ed Stewart and the paper he cited both note, insurance companies can provide an investment leverage that is "safe" from any call risk. In this area other people copied him - specifically, John Templeton and the Lazard folks with their bets on Japanese insurance companies in the late 50s, early 60

Oct

24

The Path of Least Resistance seems to be an oxymoronic idea if not an irresponsible usage of words. Any meme, theme, passion, fashion that has the least resistance has already come to the point of expiration on the philosophy of ever changing cycles.

An idea that has the least acceptance will be the one that will find the most universal supply favouring those who have accepted it. This excessive supply or liquidity from disbelievers is what compensates the minority or rare thinkers and doers. Any idea that has least resistance will suffer from universal demand. If say an ongoing meme is downwards movement (for whatsoever reasons) then there are more put buyers than writers, there is more size at the ask than at the bid etc. etc.

Similar holds true for other data that indicate mind of the market. For example a rising volume or a rising open interest is a reflection of rising struggle for the discovery of price and thus for the acceptance of the meme.

Again, I do run the risk of ending up construing meaning of words inappropriately in my mind. Rather than trying to rest the case on the table, I seek from the erudite why is the phrase "Path of Least Resistance" in such vogue? What does the Path of Least Resistance really mean?

Jeff Sasmor writes: 

Sushil was asking, what does the Path of Least Resistance really mean?

In electrical engineering terms, and when there are multiple paths with differing ohmic resistances, linearly proportionally more current will flow in paths with lower ohmic resistances. However, that's strictly true only for a DC circuit.

If you're talking about markets and money flows it might be more apropos to think about AC circuits with their complex impedances. In this sense, current flow is dependent on the *frequency* of *both* the voltage and the current. Further, the currents themselves create magnetic fields which have their own time-variant effects on the flows. Talk about flexionic!

Oct

23

 One might be pardoned for thinking that baseball has undergone some sort of recent metamorphosis judging by the recent chatter of how slow the game is. Between innings, one team takes the field and prepares for play, and the other gets set to take its at bats. But the determinant of how much time the changeover takes is television. That time period hasn't changed much, actually, for many decades. Indeed, given that commercials are now sold in shorter time increments than in the past, that television-determined time period could be shortened. No one, however, is talking about such.

One might try to limit each batter to one "groin-touch," but let's face it, there's no data to suggest that there's more of that going on now than, say, in the 1960s. Ditto for the batter tapping his cleats. Batters now step out of the box to reset their batting gloves, so I suppose one might have some effect by restricting the time taken in so doing. And then there's the time the pitchers spend prancing about the mound.

There's been some data suggesting that the latter may have increased a bit during the past couple of decades, so perhaps one might put in a "pitch clock," but I doubt that that will have a whole lot of impact. Let's see what might have increasing playing time during the past couple of decades: the designated hitter. Designed to spur offense (since that's what fans want to see), the DH has done exactly that. But offense means time. More offense = longer games. A 1-0 game generally takes less time to complete than a 5-4 one.

So I ask again: What changes have resulted in longer games, and specifically those long enough to raise concerns about the length of the game?

As for the comment about kids—the issue here isn't what's gone on with kids and baseball so much as baseball players and kids. I can recall when Brooks Robinson made a fueling stop at a gas station where I worked. Everyone took some paper out to him for a signature. He complied with each request, no money, no scowls, just a nice Oriole. I highly doubt that such would happen today. Does that have any impact on the young? Undoubtedly yes, and therein lay the problem for the MLB. I doubt that the loss of interest in baseball among kids has nearly as much to do with how long a given game might be as with the emotional attachment of those kids to ball players.

"One Of The Highest-Paid Players Of All Time Calls Baseball 'Slow,' Says Changes Are Coming"

Oct

23

 Mumford & Desolneux's book Pattern Theory: The Stochastic Analysis of Real-World Signals (Applying Mathematics) is the most promising work in foundations of statistical modelling I think I've ever read. The main idea is that whatever you're trying to model is some infinite-dimensional parameter space. The shape of the neighbourhoods and distances between them then gives structure to the randomness.

(My go-to example of infinite-dimensional space is handwriting: those who have tried to classify it, for example Douglas Hofstadter and Donald Knuth, have not been able to generate all possible ways to write eg "lowercase a" with any number of knobs. This is consistent with surfaces having a greater cardinality than reals. Demo of handwriting variation in a finite basis.

This is the rare book that doesn't get overwhelmed by the grandiosity of its own mathematical techniques. Lie theory and wavelets are just foundations, not the "Reverse Kolmogorov Smirnov Filter" of Nuclear Phynance.

P.S (Colour and music are also infinite-dimensional, in theory, as waveforms at least. Humans cannot resolve infinitesimal frequencies by eye or ear, of course. And ħ probably means that space can't resolve infinitesimal frequencies either. But theoretical waveforms are simpler; as long as a super high pitch was super soft, or conversely a very low pitch was very loud, the energy could be finite and constant.)

Here are some more great articles on loud low pitches:

"Strange but true: black holes sing"

"Have You Heard About B-Flat?"

"Big Long Cycle = Trend"

Oct

23

 If this is as good as he says the prediction that most jobs will be functionally obsolete is even closer than I realized: Tesla Unveils Dual Motor and Autopilot.

3.5 million truck drivers in the USA, for example, will be out of a job. I imagine that there will need to be an extended period where increasing numbers of people are doing mandated pretend work until the conception of what people should be doing with their time changes. When work was hard people wanted idle time, now that for many it is easy, people wonder what they would do with that idle time. They are afraid of it.

Pre-divison of labor economy if you had food and shelter and secured the ability to reproduce, your existence (I would think) was justified. You didn't need to rationalize anything or explain yourself. Today, people view their self-worth as part of a large, complex system– "how do I fit in, am I needed, how do I justify myself". Note: most people don't say, "We want high productivity and wealth" they say "we want a job".

I'm wondering how technological change will once again impact common value systems and ideals over, say, my son's lifetime. Many believe that work will be made that "filling the gap." I used to believe that, but don't anymore. Look around. Most organizations are already highly overstaffed to an efficiency-minded person, and that is just the private sector. In the public sector, at this point, the post office is a giant jobs program that also delivers mail. Same with public school systems. They are obsolete relics.

Oct

23

 Leo Robin wrote the lyrics to what will always be the best song about love and money– "Diamonds Are a Girl's Best Friend"– if only because the Monroe/Nixon rendition is near perfect.

Robin's usual collaborator was Ralph Rosenthal ne Rainger, who is still horribly under-appreciated as a composer. Rosenthal gave Schoenberg the money to leave Europe in 1933.

Schoenberg, who described himself in later life as "a "bourgeois" turned monarchist", has the best anecdote of military life I have ever read. When challenged by an officer as to whether or not he was the notorious composer Schoenberg, the composer replied: "Beg to report, sir, yes. Nobody wanted to be, someone had to be, so I let it be me."

Oct

22

 I was reading this article and started thinking about the ten scariest things in trading: The Top Ten Things That Make Horror Movies Scary

1. Fear of Death.  This is the ultimate fear, both existentially and psychologically. It isn't really a horror movie if people don't get killed.

In Trading: fear of depletion of assets.

2. The Dark. From our earliest childhood we are afraid of the dark – not the dark itself, but what it hides. It makes horror movies even scarier to watch them in a darkened theater, or a dark living room, right?

In Trading: not knowing enough news

3. Creepy, Crawly Things. Snakes, spiders, rats, and other crawling things are scary in and of themselves, but when they touch the skin, in the dark, it amplifies this common phobia.

In Trading: monthly expenses

4. Scary Places. Horror movies are full of scary places – graveyards, old houses, overgrown forests, dungeons, attics, basements. These are dark places, where evil things can hide.

In Trading: instruments or markets that one had very bad experiences with.


5. Disfigurement. Many horror movies feature grotesquely disfigured antagonists (think Frankenstein's monster, the Phantom of the Opera, zombies). Studies in early development have found that young infants will react with fear to asymmetrical or disordered faces.

In Trading: any instrument that had a devastating history.

6. Dismemberment. Fear of dismemberment involves loss of a part of the self. The popularity (and horror) of the Saw movies involves self-dismemberment as the only way to escape death.

In Trading: stop loss.

7. Suspense (Anticipation and Expectations). The best horror movies are full of suspense (think Alfred Hitchcock). Suspense involves creating anticipation that something bad will happen, but not knowing when it will occur. Some of the most shocking horror movie scenes, create anticipation, but then violate the audiences' expectations (e.g., the hero gets killed; the killer is the one the audience least expects, etc.).

In Trading: market keeps going up with some bears talking about a crash.

8. Spooky Music. Music can create moods and elicit emotions. The music used in horror movies can be creepy, and can be used to accentuate the actions seen on the screen. Music intensifies feelings of suspense and shock.

In Trading: unfortunate family events.

9. Lightning and Thunder. Many people are afraid of lightning and thunder – sudden flashes of light, that can kill, and a sudden and deafening sound that accompanies the lightening. Flashing lights and loud noises create a startle response and they are a mainstay of the horror film.

In Trading: trading alarm.

10. Fear of the Unusual. We know that young children are often afraid of things that are different or unusual (such as a disfigured face), and highly unusual-looking things are often sources of fear. But a common theme in horror movies is to take something that is normally not scary (e.g., a doll, a child, a clown) and make it into a feared object. In other words, making the usual, unusual. This may explain the growing number of people who confess to a fear of clowns and dolls.

In Trading: everything unusual in the market.

Oct

22

There are some very interesting points in this article about deception.

"Snake in the grass: Animals and viruses practise deception, fast and slow, in ways that help us understand human predators and scammers"

For example: "By constantly exposing individuals to harmless and weakened versions of deception, we might be able to build up the social antibodies necessary for individuals to recognise predatory deception when they encounter it."

Oct

21

Diwali also known as Deepavali and the "festival of lights" is an ancient Hindu festival celebrated in autumn every year. In spite of Diwali being a holiday, the Indian markets are opened for an hour, which is called Mahurat trading.

Barring the currency hedging issues and dividends and or fisher effect's on the actual futures…

Below are the returns of CNX Nifty Index, the day before Diwali's close (as Nifty has a tendency give additional 50 bps on that 1 hour trading day) and exit set to close the end of the year.

Oct

21

 I just read Alletzhauser's House of Nomura (1990, out of print) after an old Japan hand recommended it to me. Highly recommend for anyone who wants to understand the history of Japanese business/markets from the Meiji through Showa eras from the perspective of an outsider turned insider. My summary/review/editorializing of the pre-WW2 era (skip to Four Big Bets section for the more market relevant tidbits).

Since the book released in 1990, the author portrays Nomura as omnipotent and triumphant (it was Japan's most profitable corporation in 1987) in a reverential tone that would seem absurd today. Of course with the benefit of hindsight, we know that Nomura was both partly lucky and partly a beneficiary of circumstances not just in the 1980's bubble but also at its very founding.

Perhaps more interesting is the glimpse into the business world of Meiji, Taisho, and Showa before WWII. What's clear is that Japan had Prussian institutions but an Anglo approach to corporate governance. State capitalism produced large conglomerated oligarchies (zaibatsus) that were run for the interest of shareholders. Behavior typically thought of today as "Anglo-styled capitalism": hostile takeovers, confrontation, shareholder preeminence, creative destruction, cutthroat competition, mobility etc. was a feature of Japanese corporate life. A few elite families dominated pre-WW2 and financial disparities wholly reflected this reality.

After the War, this entirely shifted to an egalitarian culture with corporations operated for the benefit of managers and labor rather than shareholders. Nomura was slightly exceptional for its more entrepreneurial spirit and aggressive culture, but not to the extent most corporations were before the War. The mandarin class gained even more power in this new system so political connections mattered even more after the War.

Mercantile Osaka

In the late Tokugawa (1603 – 1868) and early Meiji (1868 – 1912) eras, Osaka was the center of commerce in Japan whereas Edo (Tokyo), the seat of political power, was the much resented "kanemushi" (money-eating bug). Osaka was host to the world's first futures exchange, Dojima, which traded rice. Money exchanging became the most important, far dwarfing the stock exchange, as Osaka ran on a silver standard and Tokyo on the gold standard. The author points out that Osakans still greet each other with the phrase mokari makka, which loosely translates to "how's business" (though my Osaka friends inform me that this phrase is quite antiquated and fallen into disuse).

Money Changers

In this environment Nomura Tokushichi I (1850 - ?), the illegitimate son of a samurai and a domestic worker, inherited a prosperous money changing shop from his adoptive father. The Japanese, then as even today, regarded money changing as an occupation with low social status , the lowest rung of a class one notch above the untouchables (hierarchy: nobles > samurai > farmers > artisans > merchants > outcasts). However, by the end of the Tokugawa Era, many impoverished noble families had resorted to mercantile activities while the wealthy merchant class exerted tremendous power over the indebted nobles. Tokushichi I became comfortably wealthy and played the part of J.S. Morgan (1813-1890) to his more adventurous son J.P. Morgan (1837-1913)…though with much lower social standing and dominance.

Meiji Restoration

With a new national bimetallic currency and the abolition of feudalism, the Meiji Restoration gradually made money changing obsolete. The Meiji government legalized individual private land ownership and privatized large state-owned businesses. Adopting the centralized Prussian economic model, Japan largely relied on direct finance via banks to allocate capital. However, the formation of companies still required equity issuance, which gave birth to a burgeoning but largely backwater equity market. In Osaka, the stock exchange in Kitahama (in close proximity to the Dojima rice exchange) was open for two short periods a month. The massive bull market of the Meiji era led to the formation of 155 stock exchanges by 1897 of which the Osaka Securities Exchange was one of the largest.

Tokushichi II

Tokushichi I bestowed to Tokushichi II (1878-1945) the benefit of a modest fortune and excellent timing. Like the so-called American robber barons (mostly born in the 1830s), Tokushichi's lifespan happened to align perfectly with crucial events of the Meiji and Taisho eras in relation to equity investing. Unlike his conservative father, the young Nomura Tokushichi II was an inveterate gambler and spendthrift. Tokushichi II's father had to bail him out twice: first when as an apprentice Tokushichi II stole from his employer to speculate in the stock market (and lost) and second when he had a social obligation to indemnify a client who had lost money on his recommendation.

Four Big Bets

Bet 1: Having witnessed the bullish effect of the First Sino-Japanese War (1894-1895) on the stock market, Tokushichi II convinced his father to let him plow half of the family's net worth into a massive expansion of the stock brokerage operation once the Russo-Japanese War broke in 1904. As the stock market rallied as predicted, the gamble paid off and Nomura fully transitioned from a money changer to a stock brokerage.

Bet 2: In 1905, Tokushichi II bet big again when negative rumors circled his brother-in-law's textile business. After investigating the business and finding that the order books were full with wartime orders for uniforms, Tokushichi II accumulated shares at ¥20. Tokushichi II cornered the market, forced a short squeeze, and sent the price to ¥100. The paper profit (¥20,000, then the wages in the lifetime of an average Osakan) equaled the entire original capital invested a year ago to expand the brokerage. After this coup, Tokushichi hired a journalist and moles in trading companies to gather order flow and shipping volume information.

Bet 3: Tokushichi II's bullish bets paid off massively in the 1906 bubble. Seeing a parallel between the Russo-Japanese War and the Sino-Japanese War (which preceded a large bear market), Tokushichi II waited for other major dealers to become net sellers before selling most of his stocks. The determined risk-taker, Tokushichi II went short, but the market kept rising. By January 1907, Tokushichi II, teetering on bankruptcy, sought and received an emergency loan to cover margin calls from a leading Osaka bank by bribing the local branch manager with a senior position at Nomura. The market turned in mid-January 1907 and lost 88% of its value by the end of the year (though the author doesn't make a clear connection to the Panic of 1907, which likely bailed out Tokushichi II). At 28, Nomura Tokushichi II was worth ¥5 million and became a celebrity in the financial community.

Bet 4: With the arrival of WWI, the Bank of England raised the discount rate from 3 to 10%, which precipitated a financial crisis in Japan. Japanese banks called in loans to speculators and brokerages, which in turn sent the equity market into a nosedive and bankrupted a large swath of the financial service sector. Nomura survived this episode in part because at that time it was mostly in the business of earning commissions rather than trading for the house. 

Though by now most Japanese speculators understood that war was profitable for the listed corporations, most didn't think that a European war would mean anything for Japan. Tokushichi II speculated that WWI would be bullish for Japanese exporters based on the reports of shortages in Europe. His younger brother, studying in England, sent wireless reports that beat the Japanese newspapers and contained far more objective and accurate information. He also had access to intelligence in the Mitsui House trading empire, which gave Tokushichi II an edge over other speculators. While local Japanese papers gave the impression that the War would end in the winter of 1916, better information directly from his brother in Britain persuaded Tokushichi II to buy the dip that accompanied expectations of peace. The bet paid off as the war dragged on, which augmented Nomura Tokushichi II's already considerable fortune and cemented Nomura's standing as the top/surviving broker in Osaka.

Jesse Livermore

Tokushichi II's story bears remarkable similarity to Jesse Livermore's (subject of Reminiscences of a Stock Operator, 1923). Tokushichi II (1878-1945) was born a year after Livermore and died naturally five years after the latter's suicide. Both had a natural attraction to bucket shops in their youth, possessed high tolerance for risk that resulted in multiple failures, learned early that the stock market was prone to manipulations, and profited from their understanding of war's influence on economic cycles. Both made and almost lost their early fortunes in the Panic of 1907 and made their second fortune during WWI.

Perhaps the key difference between the two men was that Tokushichi II became a big fish in a small pond as a first mover in a nascent market while Livermore was always a minnow relative to the whales who had created their fortunes decades earlier. Tokushichi II used his early winnings to buy social status (eventually elevated to House of Peers in 1928 and repeatedly asked to become Minister of Finance in the 1930's) and ingratiate himself with the business and political elites. He built a network that produced valuable inside and early information. Conversely, Livermore seemed to hurt himself when trading on his "inside information" since he was never truly a member of the business elite himself. While Nomura Tokushichi II earned his fortune from imputing information and later rent seeking, Livermore had to rely more on his technical trading skills. 

Nomura Zaibatsu

Once Nomura Tokushichi II exhausted the easy opportunities from stock speculation, he parlayed his fortune into the more stable business of brokering, which became the basis of a fledging pre-WWII zaibatsu with more socially respectable business interests: primarily a bank and a rubber plantation in Borneo. This required him to concentrate more on political protection and opportunism.

The Nomura group never truly achieved the same status accorded to the great zaibatsu merchant houses of Mitsui, Mitsubishi, Sumitomo, or Yasuda. Within Japan, Nomura never earned the same cache or respectability that leading investment houses enjoyed in the US. This may be in part because of its roots in the rough and tumble world of retail brokering (rather than genteel corporate brokering), the strong cultural distaste for seemingly parasitic businesses that deal with secondary markets, and the subordinated role of equities and bonds to bank lending.

anonymous writes: 

I have not read Alletzhauser's book so this comment is based solely on what I have learned in my investigations into the WW I gold standard in Japan. The company that made Nomura Tokushichi II's fortune was Koriyama Kenshi Boseki Co.,Ltd. which still exists in a different corporate incarnation.

NT II was a friend of the company's owner, Yutaro Yasuhiro, who showed him the actual books. The company had been rumored to be bankrupt; but, because of the effects of WW I in Europe, there was an effective embargo on textile exports to East Asia, and the company's order book was as full as it had ever been. NT II bought.
 

Oct

21

An Interview with Mark Andreesen

"I can tell you, at least from the last 20 years, if you bet on the side of the optimists, generally you're right."

He also does a nice job fancy-dancing around "world in it's grip" type of questions that have dangerously career ruining non-pc implications if answered incorrectly.

Oct

20

 It was only 17 months ago when Alan Abelson passed away on May 09 and moved to bear heaven after writing his "Heard on the Street" column for 53 years, during which after reading every one of his columns the collab and I concluded that he had not once been bullish. After the October 19th, 1987 crash, for example, he concluded that with the Dow at 2000 that the decline of 25% was just a (hopeful) start.

I stand by the comments made in Practical Speculation that he did more harm than anyone else in the history of markets by his consistently bearish views while the average stock rose some 15 fold. He was so persuasive and so many followed his bearish views and stayed out of stocks because of them. Thereby decimating the alternative path of their wealth. Furthermore, to add insult to injury he was much too gallant with the collab when she interviewed him in 1999, a predilection which one is told was not limited to attractive former Bloomberg stock market columnist heads.

Since he passed away, there has not been much that he would have enjoyed until this week. As the Dow has advanced fairly steadily from 15000 to 17200 in a typical 10% a year rise. However, almost a correct of 9.5% from high to low occurred this week, and if the Good One could arrange it, the wordful commentator would have been dancing on his grave.

However, I was pleased to see that his spirit lives on in Barrons with some very sonorous and seemingly sagacious commentary in the 10- 20-2014 issue of Barrons. Randall W. Forsyth refers to the Fed "running out of basis points". You see "so called quantitative easing seemed spent… Leveraged speculators, hedge funds as they are called in polite company were hemorrhaging losses on bad bets… that was the setup for nothing short of a paroxysms on Wed morning in the treasury market… in a manner reminiscent of the infamous flash crash of May, 2010… the collapse in bond yields far from being a rally had all the earmarks of a panic - in the opposite direction. Two presidents of Fed banks, from cities on opposite sides of baseball's national league championship series said the Fed might reduce the timing of tightening. A 'bullard bounce' ensued. The new media seems to have adopted the motto of never letting the facts getting in the way of a good story at least in the reporting of Ebola: 'the backdrop remains geopolitical and epidemiological' ".

In other columns Kim Forrest opines "the market is getting to be like a daily soap opera" as Vito Racanelli quotes in The Trader. "It was a low but I'm not sure that it was the low," Forrest says. Other articles pointed to $75 oil and in Market Watch, the lead advisory opinion noted the correctness of previous bearish forecasts and the similarity to the 1997 action. With a Dow 1738 low being a logical target.

There is much of interest in Barrons and they had many articles pointing to bargains galore among the hard hit stocks. However, whenever the market suffers a near Correction (down 9.5% from a high), we must remember the futile efforts of the former wordsmith Alan Abelson who never bought individual stocks, and think how happy he would be with the decline, and how he would remind readers of how happy he has been with his previous and undiminished bearishness.

Anatoly Veltman writes: 

Has a study ever been performed on the extent to which his multi-decade biz had proven profitable? If his biz results proved consistent (over a very lengthy period, spanning changing regimes no less), would that of itself be fruit for thought?

anonymous writes: 

Even though one hardly listens to brokers, mine predicted this move beautifully. The market will do what it takes to hurt most. It will get the weak hands to sell in panic and won't let those waiting on the sidelines participate in the bull market. How will the market achieve this? It will go down hard few days in a row, flushing the weak hands out. Those waiting on the sidelines have their bids at 10% off the highs. The market will go down just short of the 10% and will move right back up. The weak hands are out and the sideline wise asses won't get a chance to jump in. By the way, Mr. Saad, did you notice that the best performing account you have is the margin account you forgot all about over the last 6 years. Think about that for a second…

Steve Ellison writes: 

One suspects many permabears have successful advisory businesses because they satisfy some deeper longing in their clients than to invest profitably.
 

Oct

20

 I thought this article about "How Rebounds Work" was quite fascinating.

And here is an even better link on the same topic with some very interesting graphics: "Where do rebounds go?"

Pitt T. Maner III writes: 

Very nice graphics and analysis.

One of the fundamentals of rebounding used to be that you tried to track your opponent while the ball was in the air to see what direction he was going and then you tried to turn your body at the last possible second in order to "box" him out or put a body on him before he got into the rebounding zone. Wide bodies (Wes Unseld, Malone, Barkley-types, etc) were particularly effective in doing so. It took energy and work effort to do this.

The example with Noah shows him going through uncontested–the defensive players turned their backs too early and lost the opportunity to box him out–it looks rather lazy. To some degree it seems that modern pro basketball players have concentrated on areas of the game or specialized to such an extent that the fundamentals are not practiced and are often found lacking.

A fair number of rebounds are made below the rim so positioning by shorter players can make up for height differences (some of those Princeton-Georgetown matchups demonstrated that).

And the really aggressive guys like Rodman, if they managed their fouls well, and scraped and clawed were often rewarded. Rodman was a master at judging rebound distances and "worming" his way to a rebound through narrow spaces. How he ended up in North Korea I don't know…crazed.

Scott Brooks writes:

Rebounds pretty much go to the opposite side of the hoop from where they are shot. That is not a new discovery.

What a coach should pay attention to therefore is where do shots initiate from. That is the key.

Since most of the world is right handed and since most players move in the direction of their dominate hand (thus keeping their body between the defender and the ball), most shots are going to come from the right side (or the defenses left side).

This bit of knowledge is very important, especially at the high school level or lower (it is still important at the college or higher level as well)…….but how to apply that knowledge…..now there's the rub.

Rebounding is more than just boxing out (which is a lost art nowadays). Rebounding is a team effort. I like my guards and forwards that play the toughest defense to guard the opponents shooters if we're in a man to man defense or to play to the "strong side" if we're in a zone (strong side is the offenses right side/defenses left side). I want my defenders to play the shooters tight so that when they do shoot, they can get a hand up high (the closer you are to the shooter, the higher you hand is relative to the shot), and force the shooter to put a little more arc on the ball than they would have preferred.

A ball with a high arc, more often than not, comes off the rim "soft" i.e. it is rebounded close to the rim and is usually rebounded in the paint, whereas a hard bounce will goes outside the paint to be rebounded away from the rim. Soft bounces allow my center and weak side forward to control the rebound the vast majority of the time, assuming they've properly boxed out.

What about the other players, what are they doing?

My strong side guard and forward are the ones usually defending against the shot. If the shot is taken by the shooting guard (sometimes called the "2 guard"), then the strong side forward chip blocks his man (if he's close) and rushes to the hoop in a sideways motion with his back to the baseline keeping his eye on the man he's defending until he gets close to the rim, then he plants his right foot and pivots on it towards the basket with his left foot and body moving clockwise motion.

My strong side guard defending the opposing shooting guard (2 guard), boxes out the shooting guard at the point of the shot and, if done right, neutralizes him 99% of the time, i.e. he will not get his own rebound and is out of the play unless the his team gets the offensive rebound (which will cause me, as a coach to "verbalize instructions in a loud manner" to my team for allowing an offensive rebound).

So what I have is my center covering the middle of the of the paint, my strong side forward covering the left side of the paint (from the defenders perspective) and I've got my weak side forward (my best rebounder) covering the right side of the paint…..i.e. the spot where the ball is most likely to go……and all of them are violently boxing out the opponents.

That leaves only my weak side guard. What is his job.

He is tasked with covering/preventing quick passes across the top of the key from (the defenses perspective) left to right…..i.e. in this scenario, instead of shooting the ball, the"2 guard" does a quick pass the point guard ("1 Guard") who whips it over to the small forward ("3 forward") who then shots. So my weak side defender has to play with his back to the baseline (basically parallel to the baseline) while the keeping the opposing "3 forward" in front of him. (it's another story for another day of what to do if their "3 forward" moves down to low and has to be passed off to my weakside forward). My weakside guard is, therefore, tasked with keeping pressure on their "3 forward" to stop that quick shot if a the quick pass I just described happened. If he does his job right, the "3 forward" can't get off the quick shot and it allows my defense the 1/2 of a second it needs to switch from (their perspective) left side to right side defense.

Back to the original scenario (ball on left side of the defense in the hands of the "2 guard"…….When the shoot is taken (by the "2 guard") , my weak side guard has to chip block the "3 forward", then roll out for the outlet pass. If done correctly, when he gets the outlet pass he takes a few quick dribbles and looks for our strong side guard…..(remember him).

If my strong side guard has done his job right in boxing out the shooting guard (remember I said the "2 guard" has been neutralized from the play) he's got the inside position on the shooting guard. And if the oppossing point guard (1 guard) on the other team is forced to deal with my weakside guard (who now has the ball) we basically have 2 on 1 fast break occurring.

What does a 2 on 1 fast break have to do with rebounding you say? Well, if you do enough of them, then the opposing team has to assign a man to fall back near center court each time they shot to defend against the fast break which means that I have a 5 on 4 rebounding advantage.

The art of rebounding is a team endeavor. A great rebounder is one who is surrounded by a great supporting cast that simply do their jobs.

Yes, you want your best rebounder on the weakside (forward position). This guy may not be the tallest person out there, but he is the most vicious tenacious meanest SOB on the floor. He is quick and he is instictive and has the ability to multitask…..i.e. watching the opposing players and timing his "boxing out" (that's an entire art that we should discuss another day), while watching the trajectory and velocity and spin on the ball to determine where it is likely to come off the rim.

Heck, my weakside forward is usually the smartest player on the floor. I call him my "Floor General"…..but why I can him that and the job I assign to him is an entire discussion for another day.

I've written about this before, but there is a lot more to the strategy of rebounding than what I've just written here. Heck, I've only discussed the defensive side of the equation…..and I haven't even elaborate (although I have in the past) on the subtle violence and mind games that are associated with great rebounding and stifling defense or even discussed offensive rebounding……maybe I'll write about those another day.

Oct

20

It would be good to have the distribution of swings up and down after moves of x % from a "previous" low or high in markets the same way they now do in rebounds in basketball.

Ed Stewart writes: 

One thing I wonder about measuring swings is if static points in time (such as the close x days later) are best to measure swings. Measuring static points seem to miss allot of the intra-period variability that might be useful to know about and understand. I sometimes look at the expected value to a point and then the max and min excursion within the period. I'm wondering what better ways there might be to measure a swing that takes into account the variability within the measurement period.

Oct

20

 Here is an impressive animal fact:

A team of researchers working in Namibia has found that elephants are able to detect rain storms from distances as far away as 150 miles. In their paper published in the journal PLOS ONE, the researchers describe how they tracked both elephants and rain over the course of several years and found the elephants were clearly able to detect rain events from great distances and move towards them.

Oct

20

Up in the Pantheon of the top 10 pillars who have done the most harm to the wealth of the average person would be Shiller with his average of the p/e of the last 10 years as a predictor of excess. That would be bearish theoretically and empirically about 60% of the time, and would have led to being short during the 1960s and the 80s. Almost as bad is the Tobin q who should be perhaps number 3 in the Pantheon of evil influences on wealth.

Oct

20

 One read the biography Caesar by Christian Meir and finds many parallels between the breakdown of the social, political, and economic order in his time and the attempt of the great man to arrest it, which led to his assassination, and our current day break down.

One thing I had never seen before was the fact that "why is it always romance?". Brutus was the key link to the go ahead for the assassination plot. His mother was Caesar's favorite mistress. And it was said that Caesar was Brutus's uncle. She must have been very jealous of Caesar's plan to go to Egypt with Cleopatra et al.

One of my favorite analyses by Meir with relevance to markets is: "When Caesar declared the the republic was lost it was still in existence. When Augustus said it was restored it had come to an end. Yet it is typical of periods of decline that nothing is so predictable as the paradoxical: at such times one must expect the unexpected". 

Oct

20

I've got to give the Fed kudos (even though I'm not a fan of the tactics). But it should be said that the reasons for the panics were even more ephemeral and contrived.

A whole lot of panic cessation with a few choice words and that's all they were. Good weekend all.

Vince Fulco writes:

Very true, a nefarious thought popped in to my head mid-week that the street would enjoy an injection of supercharged vol just to shake up the players a bit before year's end. Supporting it was a friend at Merrill who indicated the firm widely disseminated a piece on global pandemics two weeks prior. Always plenty of conspiracies on the street of dreams.

Oct

20

 While walking around the rice paddies with my 3 year old daughter exploring, I came across a lean-to. The rice farmers used it to store things, to get themselves out of the sun, and run their ropes from it near harvest time to scare off the birds from eating their crop.

If you are interested in what products the locals use, the contents of the lean-to gave me some good insights. There was a Japanese made stone for sharpening their cutting knives, a particular brand of water additive for sweetening their drink, and a type of match for burning the end remains of the crop before the next harvest. Farmers here are not known to make a lot of money so to splurge on a imported product from Japan certainly was interesting.

Secondly, some time ago I spoke to a western European guy making great coffee and his own gelato, and asked him, "Why be buried in this area? You could be on the tour bus route and make a lot of money as your product is great." To which he replied, "I feel good just servicing the local community". I then felt slightly guilty by even having mentioned that to him. One year later, I noticed today while cruising on the bike, he has changed his location, and lo and behold, his parking lot in front of the shop was jam packed, and so was his car park opposite (shops don't generally have a secondary parking lot) with buses and tour guides everywhere. A faint grin ran over my lips, as I was obviously surprised. Cash is obviously king!

Oct

20

 My branch of the Davis clan began its American adventures through the German export trade. The Landgraviate of Hesse-Kassel was in the business of selling the luxury item of the 17th and 18th centuries - professionally trained soldiery. Current scholars calculate that during this period 7% of the entire population (perhaps as much as 1/4 of the males 16-45) were kept under arms and then rented out to whoever would pay for them. (For the United States today that would be slightly more than 22 million soldiers.) It was a steady trade: the British historian John Childs has done a tally that is quoted in the wikipedia article on the Hessians:

"Between 1706 and 1707, 10,000 Hessians served as a corps in Eugene of Savoy's army in Italy before moving to the Spanish Netherlands in 1708. In 1714, 6000 Hessians were rented to Sweden for its war with Russia whilst 12,000 Hessians were hired by George I of Great Britain in 1715 to combat the Jacobite Rebellion. … In the midst of the War of the Austrian Succession in 1744, 6,000 Hessians were fighting with the British army in Flanders whilst another 6,000 were in the Bavarian army. By 1762, 24,000 Hessians were serving with Ferdinand of Brunswick's army in Germany."

Roughly 30,000 Hessians were sent to North America to help King George put down the rebellion. The first group (16,000) arrived in 1776 to help Clinton and Howe capture New York. They had not, as they had been told in Germany, come to the colonies for fight Indians. Today is the anniversary of the Battle of Pell's Point (Pelham) in which Clinton and Howe tried to cut off Washington's Army as it retreated from the Bronx. It did not work, and the Hessians discovered that being under British command was not particularly good for their health since the tactics used at Breed's Hill remained unchanged.

Somewhere between Pell's Point and Trenton my ancestor deserted; by 1777 he acquired title to 50 acres of yet unsurveyed "Western" land. The amount is how I know that the person recorded as "Davies" was a German and most likely a private who had run away from the Landrave's army; under the first Bounty Act American privates were offered 100 acres to enlist and Hessians 50 acres to desert.

Oct

17

 There is kind of a nice but terrifying symmetry in the chart looking at the last two days, with a big red line in the middle.

In candlestick theory when the open and close are the same, it shows some sort of balance between buyers and sellers forming a doji pattern. These kind of things are testable. Also supposed to evidence change in direction when it occurs after a decline or rise.

I imagine in the old days in feudal Japan they would paint their charts for the rice warehouse receipts with a brush and ink while sitting in the tatami mat room in a kimono warmed by a charcoal brazier.

Jeff Watson writes: 

This is a good accompaniment to Sogi-San's mention of rice: Dojima Rice Exchange.

Jim Sogi replies: 

The Seventeenth Century Japanese rice traders relied on horse riders and runners to get the news of the crops and the buying and selling. To beat the time delay one enterprising trader rigged a series of flags on hilltops to relay the info to him in town so he would have the info he needed to place his orders ahead of the other traders. Definitely our kind of guy!

Jeff Watson writes: 

The Japanese taught old man Rothschild a thing or two 50 years before his coup in London. Hail to thee who can get and act on information quicker than the opposition.

Etali writes:

When living in Hong Kong, I learned of the story of an early British banker anxiously awaiting on Victoria Peak for signs of arriving ships from London. Apparently , the banker and shipping crews had worked out a flag signalling system. Certain flags signalled that the business news from Europe was good. Upon seeing the "good" flag, the banker rushed to the exchange to get his buy orders in before the ship from London docked. Other flags indicated the news was bad and of course, the baker dumped shares before anyone else had the news. This particular banker went on to found one of the beginnings of a highly successful British merchant bank.

Balzac: "Behind every great fortune, there is a crime!"

Oct

17

Bill McBride published this interesting piece on wage growth in the US.

On the one hand, one might argue that this is a surefire harbinger of inflation. On the other, some wage growth might carry with it some opportunity for increased spending (save? in this country??). Some top line growth would, I'm sure, be appreciated by one and all.

And that assumes that there really is wage growth going on. At best, the jury's still out on that one.

Bill Rafter writes: 

Wage growth has not been underestimated. Payroll tax receipts suggest otherwise. The latter do so some signs of coming back from the grave, but absolutely nothing to get excited about.

Regarding inflation, there are two forms of money growth that have to be monitored: that originated by the Fed known as the Monetary Aggregates, and that originated by the banking system known as fractional reserve lending. The aggregates are the Monetary Base, M2 and MZM. The lending data are commercial and industrial loans. The planned growth of the aggregates is designed to limit deflation. Inflation will not proceed apace until you get a growth in loans. So if you are worried about inflation, at this time all you have to watch is the loan data.

Aggregates and loan data are available on the FRED site. Payroll taxes are on the Treasury site.

Oct

17

During the 1946 election season the question was asked "What would Roosevelt do if he were alive?". There were a number of reasons for people to ask the question. The Marxists were attempting to bring true labor socialism to America by staging strikes against the auto makers just as they were converting back to their peacetime businesses, the coal mines (then the only fuel for power generation) and the railroads. Truman was doing his best to help by listening to the Harvard economists who warned against the catastrophe of abandoning the wartime wage and price controls.

After the election (in which the Republicans gained 55 seats and elected Joseph Martin as Speaker - the first one since Nicholas Longworth in 1928), the wags changed the question. It became "What would Truman do if he were alive?"

The answer, which came in 1948, was "buy the farm vote" with the system of subsidies, allotments and quotas that still rules American agriculture 2/3rds of a century later. I owe my career as a formerly licensed adviser to tax cheats to those farm bills and the compromise of 1954 that adopted its form of high nominal rates and massive and obvious loopholes. Rayburn could sell it to the Marxists (who never, ever know how to count), the real estate developers and oil producers while Martin thought the independent business people would be pleased and Eisenhower got his National Defense Highway system that he had wanted for a third of a century.

Oct

17

It's snowing in Hawaii!

Oct

17

 The Riddle of the Labyrinth by Margalit Fox is a great book describing the decipherment of Linear B, a Bronze Age pre-Homeric script found originally on tablets in the Palace of Minos on Crete. If that is of interest to you, this book will reward you. For me it was a quick and exciting read. If you are a Sherlock Holmes fan, chances are you will enjoy it.

The decipherment of Egyptian Hieroglyphics was solvable once the Rosetta Stone was found, which contained a translation into Greek. However Linear B looking like stick figures or the runic alphabet, had no comparable Cliff Notes.

But I also found the book an excellent guide for anyone interested in doing research on market behavior. The parallels between the two were uncanny. To decipher Linear B required pattern analysis, counting and frequency analysis before there were computers to make those tasks easier. We have computers to aid our decipherment of the markets, but the process of creating a framework to do the research is the same. A lot of setup and then lots and lots of actual work.

Oct

17

 One beauty of chess is that it crosses all barriers. Financier George Soros called me Hobo one sunny afternoon at his Southampton home where we split chess games, each winning with white. I discovered he had studied philosophy, and that philosophers quickly adjourn to hermetic strategies across the board.

Chess engraved on the brain doesn't seem to leave. This is especially true after one practices chess in sports during motion. The only flaw of the greatest board game in history is that the board doesn't have feet.
My jogging partner Bob Baldori and I invented aerobic chess on a Michigan track one day with a point man running a few steps ahead wearing a T-shirt magic-marked on the back with a chessboard and pieces in the starting position. This made it easier to visualize the moves as we ran four miles, and the FIDE should silkscreen these shirts for physical fitness.

However, the grandmasters might require silk screened tuxedos for befitting parties. The last one I played against in a speculator's Connecticut home was Arthur Bisguier who with white gave rook odds and gazed between speed moves out the window as if reading a comic book while telling me his life story.

He defeated a young Bobby Fischer and later served as second to Fischer at many international events. He won three US Open Chess Championships (1950, 1956, 1959), and played multiple-game blindfold exhibitions. He was taught chess at the age of four by his father, a mathematician, and kindly never practiced multiplication tables during our match. He thought it terrible, and was pleasantly merciless, that I had disgraced my father while reading funny books in beating him at chess.

After the match, Arthur dropped me off at an Appalachian trailhead near his home, and I took chess onto the trail in hiking the 500-mile Vermont trail, 500-mile Florida trail, 500-mile Colorado trail through the Rockies, the Pacific Crest trail for 1000 miles along the Sierras, the 1000-mile length of Baja, 1000 miles through the Amazon rainforest, and the length of Death Valley. I never would have survived without the lessons from chess.

Oct

17

 The international trade in steam (thermal) coal is a major source for electricity generation. It turns out that the new kid on the block is Indonesia. According to the World Coal Association, Indonesia overtook Australia in 2012 (the last year for which they offer data) as the largest coal exporter. In 2012 the total international shipments of steam coal were 1.142 Billion tons. This is 1/6th of the total world consumption.

According to the WCA, "transportation costs account for a large share of the total delivered price of coal". Here are the import figures, by country:

Top Coal Importers (2012e)

Total Steam Coking

PR China 289Mt 218Mt 71Mt
Japan 184Mt 132Mt 52Mt
India 160Mt 123Mt 37Mt
S. Korea 125Mt 94Mt 31Mt
C. Tapei 64Mt 56Mt 8Mt
Germany 45Mt 36Mt 9Mt
UK 45Mt 40Mt 5Mt

The figures for India are notable because the country has been importing more and more of all forms of energy. The U.S. Energy Information Agency had a report on the question in August. Here is the section on coal:

Coal is India's primary source of energy (equaling 44% of total energy consumption), and the country ranked as the third-largest global coal producer, consumer, and importer of coal in 2012. Despite its significant coal reserves, India has experienced increasing supply shortages as a result of a lack of competition among producers, insufficient investment, and systemic problems with its mining industry. Although production has increased by about 4% per year since 2007, producers have failed to reach the government's production targets. Meanwhile, demand grew more than 7% annually over the past five years with the rise of electricity demand and lower power generation from natural gas and hydroelectricity as a result of recent supply disruptions. Because power plants rely so heavily on coal, shortages are a major contributor to shortfalls in electricity generation and consequent blackouts throughout the country. Because coal production cannot keep pace with demand, India has met more of its coal needs with imports. Net coal import dependency has risen from practically nothing in 1990 to nearly 23% in 2012. India imports thermal coal for power generation from Indonesia and South Africa. The steel and cement industries are also significant coal consumers. India has limited reserves of coking coal, used for steel production, and imports large quantities of coking coal from Australia.

So, the rupee price on steam coal from Australia is not really very relevant to the question of power generation in India. Mea culpa.

Oct

16

Recalling fondly The Wiz's requirement that posts have numbers, a hand count reveals that the S&P crossed 1850 on 21 days this year since February.

Examining the standard deviation might suggest a trading system or indicator like Mr. Bollinger's to define a range where its not the average or median that is as important as the excursions.

Looks like a little more 1850 action.

Oct

16

After shooting up from below 60, went from 147 in 08 to 33 in 09. Quite a drop. Then back up to the 100 range area.

Oct

16

The hydraulic fracturing process which has lead to a big increases in recoverable fossil fuels is having an interest effect on other resources. Hydro is the Greek root for water and the process is extremely water intensive. In places where water is finite in supply like the western states, water rights are being sold by municipalities at prices 10x those just a few year ago. This is not a new story but an interesting twist. I'd rather own water rights than oil/mineral rights out west and I wonder how long before the h2o commodity becomes actively traded.

Oct

16

We entered a "correction" in Nasdaq: down 10.3 % from high at yesterday's low of 3691. What a great opportunity!

Oct

16

 Soccer is the biggest entertainment sector dwarfing US movies and football by 2 or 3 to 1 and is diffusing to all parts of the world. The average fan spend a few cents in China versus $30 bucks per capita in Singapore so there is much room for growth. While I loathe the game, because of its emphasis on heading as a key to victory, and its low scoring nature, I thought that as the world's most popular sport, I should learn something about it.

An ideal first introduction to it is the book Soccernomics by Simon Kuper and Stefan Szymansky. They apply regression analysis and game theory to analyzing all the nitty gritty of the game, its customers, its coaches, and its starts. It's a Freakonomics for soccer and has many valuable lessons for all market and sports people.

The authors are a soccer writer and an award winning soccer writer and economist. They cover such topics as the mistakes owners make in buying players, the irrational preference for Brazilians and blonds, why big city teams never win, why certain coaches are great, why England can never expect to win world championships. The book is suffused with the kind of thing we are used to from sabermetrics with every aspect of the game of soccer from the length of the pass, the amount of dribbling, to the proclivities on height and width of penalty kicks, the geometric formations that players gravitate to (the triangle is key), to the positions on defense and offense when ahead.

Central to their analysis is a theory of networks where they claim that Western Europe's emphasis on passing, originally developed in the Netherlands has diffused to all other countries . They apply a type of network analysis where they believe that the central nodes of knowledge, those with the most potential branches as arising from the trunk of a tree are most likely to spread and create benefits. Three coaches, John Cruijff, and Josep Guardiola and Arsene Wenger, have been key to the development of quantitative analysis of the right way to play winning soccer.

The book has many economic and sociological asides to explain things such as the rate of suicide, amount of soccer fans, the happiness of countries based on winning and the prevalence of teams, and the mobility of businesses. They claim that soccer is the worst business in the world, run by the worst businessmen. However, now that the revenues of 28 billion are 5 times what they were 7 or 10 years ago, the businessmen, who have a long term horizon, involving wealth as well as income may not be as foolish in their day to day decision making as the authors believe.

The book's major defect is that it assumes you know much more about soccer than the layman might know. Perhaps I am the only person that doesn't know the scoring and results and makeup of the leagues that they write about, but time and time again I found myself completely bewildered by the mechanics of the control of the game by the various associations, and who the players were that every soccer fan hailed as heroes or villains. Also marring the book is that it's written from the idea that has the world in its grip with numerous asides about the defective nature of capitalism and the Republicans. You would think that authors as dedicated and scholarly as these might try to be more objective and write for an audience that contains as much diversity as the billions of soccer fans that make up the game. 

There are numerous poignant and humorous asides in the book. One great player asks a reporter, "what team did you play for" and another poses the hypothetical, "What could an economist know about soccer?". And numerous pieces of analysis that give insights into sports such as baseball and basketball where the quantitative analysis of the moves and positions that make up the game (the Yankees just hired 22 statisticians to document each aspect of the game).

The authors believe that the interest in soccer and ultimately the ability of a country and team to win, is based on per capita income, GNP, and history of interest. Much of their analysis is based on a regression analysis that suffers much from the part whole fallacy and a likely inability to predict change with a reasonable degree of accuracy. Similar defects are apparent in their analysis of what they say is the key factor in wining, the payment of high players salaries. Their analysis of the importance of poverty as a factor in allowing kids with no prospects to achieve greatness because they have nothing to do but play soccer 24/7 from birth is much more illuminating and interesting. Of course, since they write from the idea that has the world in its grip they decry any possibility of genetic factors determining who's going to rise and fall in the player firmament.

My favorite chapter in the book is about the training schools that Barcelona has for its young players. It's a model for how to develop good teams. Key to the training are provision of good meals, the development of character in the players, the de-emphasis on winning at an early age, the emphasis on passing above all, the continued connection between their players before and after they leave the ranks of the juniors (Messi comes to eat with the kids frequently), the confident movement of kids from the junior teams to the top team, and the benevolent coaching "similar to a Catholic priest". Apparently this is why Barcelona tends to win the world championships as the games between their juniors and Madrid are quite equal at an early stage.

All in all, the book is an eye opener in the level of analysis that the average team uses these days, comparing very favorably to the type of analysis that we are accustomed to receive about markets. It's great reading for anyone interested in soccer. And it helps to give an uneducated sports person like me a much deeper appreciation for why this game has become the most popular sport in the world, and why it will continue to transcend all others.

Oct

16

A nice tour of the court. One wakes up after a 10 hour flight from Munich. Market at 1820. Goes up to 1835. Then down to 1816, then up to 1828, then down to 1818. Then up to 1828. Much volatility and opportunity to be shaken out of positions and opportunity for those with unlimited capital like the banks to profit from weak backhands.

Oct

16

Average Max DD : -13.79
Median Max DD : -10.59
Worst Max DD : -48.76
Best Max DD : -2.53

from 1950 to 2013:

Year    Start    EOY    MAX    MIN    MAX-DD    Year Returns%
2014    1848.36    ??    2011.36    1741.89    -7.40    ??
2013    1426.19    1848.36    1848.36    1426.19    -5.76    29.60
2012    1257.6    1426.19    1465.77    1257.6    -9.94    13.41
2011    1257.64    1257.6    1363.61    1099.23    -19.39    0.00
2010    1115.1    1257.64    1259.78    1022.58    -15.99    12.78
2009    903.25    1115.1    1127.78    676.53    -27.62    23.45
2008    1468.36    903.25    1468.36    752.44    -48.76    -38.49
2007    1418.3    1468.36    1565.15    1374.12    -10.09    3.53
2006    1248.29    1418.3    1427.09    1223.69    -7.70    13.62
2005    1211.92    1248.29    1272.74    1137.5    -7.17    3.00
2004    1111.92    1211.92    1213.55    1063.23    -8.16    8.99
2003    879.82    1111.92    1111.92    800.73    -14.05    26.38
2002    1148.08    879.82    1172.51    776.76    -33.75    -23.37
2001    1320.28    1148.08    1373.73    965.8    -29.70    -13.04
2000    1469.25    1320.28    1527.46    1264.74    -17.20    -10.14
1999    1229.23    1469.25    1469.25    1212.19    -12.08    19.53
1998    970.43    1229.23    1241.81    927.69    -19.34    26.67
1997    740.74    970.43    983.79    737.65    -10.80    31.01
1996    615.93    740.74    757.03    598.48    -7.64    20.26
1995    459.27    615.93    621.69    459.27    -2.53    34.11
1994    466.45    459.27    482    438.92    -8.94    -1.54
1993    435.71    466.45    470.94    429.05    -4.99    7.06
1992    417.09    435.71    441.28    394.5    -6.24    4.46
1991    330.22    417.09    417.09    311.49    -5.67    26.31
1990    353.4    330.22    368.95    295.46    -19.92    -6.56
1989    277.72    353.4    359.8    277.72    -7.56    27.25
1988    247.08    277.72    283.66    242.63    -7.64    12.40
1987    242.17    247.08    336.77    223.92    -33.51    2.03
1986    211.28    242.17    254    203.49    -9.42    14.62
1985    167.24    211.28    212.02    163.68    -7.66    26.33
1984    164.93    167.24    170.41    147.82    -12.68    1.40
1983    140.64    164.93    172.65    139.97    -6.91    17.27
1982    122.55    140.64    143.02    102.42    -16.43    14.76
1981    135.76    122.55    138.12    112.77    -18.35    -9.73
1980    107.94    135.76    140.52    98.22    -17.07    25.77
1979    96.11    107.94    111.27    96.11    -10.25    12.31
1978    95.1    96.11    106.99    86.9    -13.55    1.06
1977    107.46    95.1    107.46    90.71    -15.59    -11.50
1976    90.19    107.46    107.83    90.19    -8.37    19.15
1975    68.56    90.19    95.61    68.56    -14.14    31.55
1974    97.55    68.56    99.8    62.28    -37.60    -29.72
1973    118.05    97.55    120.24    92.16    -23.35    -17.37
1972    102.09    118.05    119.12    102.09    -5.14    15.63
1971    92.15    102.09    104.77    90.16    -13.94    10.79
1970    92.06    92.15    93.46    69.29    -25.86    0.10
1969    103.86    92.06    106.16    89.2    -15.98    -11.36
1968    96.47    103.86    108.37    87.72    -9.31    7.66
1967    80.33    96.47    97.59    80.33    -6.61    20.09
1966    92.43    80.33    94.06    73.2    -22.18    -13.09
1965    84.75    92.43    92.63    81.6    -9.60    9.06
1964    75.02    84.75    86.28    75.02    -3.55    12.97
1963    63.1    75.02    75.02    63.1    -6.54    18.89
1962    71.55    63.1    71.55    52.32    -26.88    -11.81
1961    58.11    71.55    72.64    58.11    -6.23    23.13
1960    59.89    58.11    60.39    52.2    -13.56    -2.97
1959    55.21    59.89    60.71    53.58    -9.17    8.48
1958    39.99    55.21    55.21    39.99    -4.36    38.06
1957    46.67    39.99    49.13    38.98    -20.66    -14.31
1956    45.48    46.67    49.64    43.11    -10.60    2.62
1955    35.98    45.48    46.41    34.58    -10.59    26.40
1954    24.81    35.98    35.98    24.8    -4.42    45.02
1953    26.57    24.81    26.66    22.71    -14.82    -6.62
1952    23.77    26.57    26.59    23.09    -6.85    11.78
1951    20.43    23.77    23.85    20.43    -8.11    16.35
1950    16.66    20.43    20.43    16.66    -14.02    22.63

Max DD is calculated not from max to min , but from equity peak calculated from the start of the year (set at 100). A good example would be to look at 2009 equity curve. 

Oct

16

Timed flexionic commentary can be shown in retrospect to be beneficial to the buyers of assets during price advances. This is arguably mostly evident in fixed income and currencies.

I wonder if such commentary is used during periods of declining prices to assist flexionic cultists to extricate from long positions or increase their shorts with preplanned orders.

www.nanex.com may have words to say in future days.

Oct

10

 I started paddleball at Michigan State University, switched to handball, and then when rumors of a professional tour and the first racquet arrived in 1970 at MSU, racquetball was the only game.

I had never hit a single anything before enrolling at Michigan State. The first time I walked into the Intramural Building a pivotal mentor swayed me. I heard the crack of ball on wood and looked down into those concrete pits and saw a purple ball– my specialty– any kind of ball, really. They had zoomed at me in the past in all sizes and shapes on house lawns, corner lots, the streets or parks.

The player down on the Challenge Court wore sunglasses under the bright ceiling lights. He carried a dozen purple balls around and around the court in a motorcycle helmet. Leaning in and watching, someone in the gallery complimented that he was Al Moradian, blinded by his own brilliance, the perennial campus champion. After watching him drop-and-hit, drop-and-hit for a few months, and with quite a bit of practice, one year later I stepped into his tennis shoes as the perennial paddleball champion.

The reason is I earned a backhand that Al didn't own. After watching him on the challenge court, I rented from the sports cage a flimsy plastic paddle that flexed like a flyswatter… and practiced. Paddleball suited me because one could sequester in a downstairs court for hours and hit balls, and the shots came back without chasing them off the four walls. Moreover, I discovered that the amount of initial practice directly related to improvement, and flattened out but was effectual. My theory of sports is to practice the weakness, not the strength, and to let the field try to secret their imperfections with various strategies.

Beside practice, the backhand arrived for two other reasons. I took class notes in longhand, as computers were nonexistent, and the flow of the pen across the page from left to right was cross-training. And, I became arm strong and ambidextrous from rectal palpations of hundreds of cows to determine their states of estrus.

I became the Intramural champion at paddleball, racquetball and handball, and in doubles in all three sports. They gave an official green MSU windbreaker for every championship, and in a couple of years I had a closetful. The year after racquetball arrived, the house I was living in burned down and the jackets melted. This was fortunate because studies in Veterinary school were getting tough, and because I never wore jackets even in winter, but bartered them for dates with the Michigan farm girls. Now with a backhand, books, and no girls, my grades and game improved.

After graduation, I took a west turn out of university for the west coast and became one of the first pro players, and the first with racquet and apparel contracts. I simultaneously entered and won satellite pro events right-handed and open division left-handed.

The primary reason was a backhand that became the Golden Era of Racquetball's best, according to the fans and magazines. It enabled me, whereas it was the flaw of nearly every player at universities and YMCA's across the country, and, because of racquetball, at private clubs in the court club boom.

Oct

10

 Good morning Mr. Niederhoffer,

In your bestseller, The Education of a Speculator, you wrote:

I need to know what is happening in the markets…I hooked up a music synthesizer to the computer, linked it to the interface between the computer and quote screen, and generated a program that would give a musical summary of the markets. I used piano tones for stocks, strings for interest rates, the cello for short-term rates, and the violin for the 30-year bond. The Japanese yen was registered with the high flute, corresponding to the favorite instrument in Japan, the shakuhachi. The English horn, the French horn, and the Alpenhorn stood in for the other currencies.

A lot has changed since then, particularly in terms of software tools becoming available to achieve this. In that spirit, the "music" in this video has been created by turning market data (prices, returns, volatility, and other time series) into MIDI-format (via our software tool) which subsequently was imported into what is called a Digitial Audio Workstation (DAW). The latter allows users to assign instruments (from a single guitar to a whole orchestra) to those data-sets and turn them into sound.

I created this video as part of my PhD research. The fact that it does, indeed, sound like music with a certain rhythm and timbre (rather than random audio-signals) is exactly what distinguishes my approach from earlier attempts at sonification of market data. In the final step, the resulting "composition" is linked to software which allows the creation of visuals that dynamically respond to the sounds (e.g. the small coloured spectra you see appearing against a backdrop of coloured fog).

The video captures a specific period in finance history. Usually I then ask watchers how they would allocate percentage wise a hypothetical portfolio across stocks, bonds, and cash based purely on this video (i.e. "Don't analyse the video but focus on how it makes you feel; what did it convey?").

What's the purpose of all this? Please allow me to share another quote, this time from Jack Schwager's The New Market Wizards:

"Every market has a rhythm, and our job . . . is to get in sync with that rhythm . . . There's no sense of self at all. There's just an awareness of what will happen. The trick is to differentiate between what you want to happen and what you know will happen. The intuition knows what will happen."

Although some investors/traders have a natural ability to intuitively get a sense for market rhythms, others may need a little help. The investment research method I'm developing is aimed at that: offering a structured, disciplined approach (including advanced software) to train investors' intuitive abilities to sense the market mood in general and its rhythms (i.e. swings) in particular. Massive amounts of data can be efficiently transformed this way to benefit from the whole spectrum of the human-computer bandwidth. Perhaps you're familiar with the behavioural finance concept of System 1 and System 2 of the human mind (e.g. Kahneman, 2011)? Audiovisuals are particularly suited to appeal to System 1 abilities.

Why is this important? Because I believe we have gone way too far in quantifying markets, inspired by the flawed premise of the "market as machine". As a result, what we casually refer to as "the market's mind" has become imbalanced (at multiple levels). Apart from the obvious suspects like HFT, VAR, and flash crashes, monetary policy is also misinformed by this bias. Moreover, we try to understand market sentiment and moods purely analytically (e.g. put/call ratio, bulls/bears spread, etc.) while increasingly repressing our emotions by outsourcing decision-making to algorithms. By distorting the delicate process of discovery it is no wonder we're facing secular stagnation, for example.

Admittedly, this is just my opinion, but should you be interested in the background to all of this I would be happy to send you a short introduction (derived from my thesis + draft paper).

Happy to discuss and clarify.

Warm wishes,

Patrick

Chris Cooper writes:

Here is some cool sonification of measurement data from the LHC in search of the Higgs boson.

And a good article about it: "Unlocking Big Data: Lessons Learned From the God Particle".

Jim Sogi writes:

I like the phrase in the article "ski the stock market" using virtual reality goggles. There are few good VR rigs coming out soon. One for the Samsung Note 4. In Dataclysm, Rudder plotted some big data on a scatter plot to get a handle, and in the case of language usage to determine ethnicity, focused on the rare outliers. It was the things people both said a lot and didn't say at all that allowed identification. Black people never say "my blue eyes" and asian women say "single parent family". Only white people say "my blue eyes" and "snowmobiling".

Oct

10

 "How our brains trick us into ignoring movie doubles but let us recognise people we love":

Our brains are constantly perceiving the world as more stable than it actually is. Consider this: Every time the light hits your face differently, you look a little different - but people don't perceive you as having suddenly changed into someone else. In fact, they probably don't see your face as having "changed" at all. Without this neurological trick, the world would be a decidedly more confusing place.

But according to a study published this week in /Current Biology/, that mechanism - which researchers have dubbed the "continuity field" - can also steer us wrong, and have us convinced that two totally different faces or forms are the same.

"The brain is creating stability out of what's actually a very unstable system," said David Whitney, the senior study author and a University of California at Berkeley professor of psychology. His lab coined the continuity field term in a previous experiment. In that study, they observed the mechanism by which people meld similar looking objects together.

"When you're watching /Harry Potter/, you don't notice that his plain T-shirt changes to a Henley, for example," first author and doctoral candidate Alina Liberman said. "Your visual system is primed to see things as remaining stable. You have a bias towards ignoring small changes in your environment."

Leo Jia writes: 

I wonder if this has to do with focusing of attention.

For instance, if you focus on the nose of a portrait on a computer screen and then the nose changes color or shape, you should be able to notice that. But if in the mean time, the ears changed, then it is hard for the person to detect that because his attention was on the nose only.

Perhaps this is the evolutionary way of using resources efficiently because the brain's processing resource is limited. This must have proved to work well during, say, hunting. Men wouldn't easily lose focus of the rapidly running rabbit because they see changes instantaneously. What men perhaps don't easily see is that a cheetah starts to chase the rabbit from another angle.

In terms of reading the market, the reason I believe we often miss things perhaps has more to do with the fact that there are so many things going on at the same time that our attention can't handle them all. 

Oct

9

 I know we've done a million studies showing the full moon doesn't predict squat about the market, but tonight's blood red moon full eclipse sure was accompanied by big moves in the market. Do you think a lot of people happened to be up watching the moon and figured, might as well do something crazy in the market? Hospitals and cops both say full moon is a busy time for them.

anonymous writes: 

But full/new moons do influence stock prices theres even a Fed Reserve paper on it.

Jordan Neuman writes: 

This full moon coincides with the Jewish harvest festival of Sukkot. I posted on the site two or three years ago that the period actually saw decent gains.  The saw about selling before Rosh Hashannah and buying before Yom Kippur had validity. It worked again this year.

Oct

9

 Something not well in Tokyo.

Pitt T. Maner III writes:

Super Typhoon Vongfong is about 4-5 days out. It's something to keep an eye on to see how it tracks and if the intensity changes downward.

The storm surge could be devastating and winds and rains in the 150 mph range are extremely destructive if they persist and typhoon stays organized near populated areas. 165 plus mph is unreal.

Satellite at present looks like Mitch 1998 in Atlantic.

Strangely it could have an effect in the US by shifting jet stream lower.

Oct

9

 Last week while in the DC area I took a visit to Mt. Vernon which I would highly recommend. It is an education into the life of GW the man, and not just the iconic figure that sits on the dollar bill. One interesting thing they have done is to construct images and statues of how he would have looked in his 20s and 30s since there are few portraits from this period. His early life was new to me and it is the story of a young ambitious man, whose father died early leaving most of the wealth to his old brother. GW, though guided by his older brother, was left to support himself and took up the trade of surveying. He learned the terrain of the expanding territories around Virginia and Maryland. He was an excellent horseman and outdoorsman. He began his land speculations at this time, eventually obtaining over 50,000 acres. He joined the British in fighting the French in disputed western and Ohio territories and was a colonel by the age of 23. He was involved with the first shots of that 7 Years War and showed many acts of leadership and bravery. After the war he married a widow of means to begin his life as a country planter in Virginia. This was cut short with the events of the Revolutionary War which occupied the next 8 years of his life, returning home just once.

What sets him apart from the other founding fathers is that he was first a military man, second a man of enterprise and afterward a man of government. He had immense power and was hugely popular, but he chose to leave government for his beloved Mt Vernon. He only had two years to do so before his death. This act of giving up power was his greatest achievement and is one of the cornerstones of our republic today. A visit to Mt. Vernon brings GW out of mythic stature to real life, where I learned about a very practical and able man, who had the courage to take big risks on his way to achieving greatness.

Oct

9

 Beauty  in the bellow of the blast

Beauty in the lashing of the tiger's tail                                                                                                            

Yes. The way the Fed orchestrates the announcements so that the flexions will not be discommoded, the market will not be weak before an opportunity for incrementing the idea that has the world in its grip, the kind of minutes that are needed when German is weak.

Oct

8

 Too many hands on one side of the ship?

Freeze, rain, snow, soil moisture, crops still in the field, next year's crop, silos, quality, hedging, foreign demand, sentiment…There are so many Ag variables to predict. It's complicated, but here is an interesting speculative comment for the Ag followers from Kevin Van Trump's "Current Marketing Thoughts":

There was ZERO "weather-risk" priced into the market, now there are some questions regarding quality and late damage to the crop here in the northern parts of the US, also a few fresh concerns about conditions in Brazil.

and


We have seen it time and time again the past few years, with the crazy speed of the market and the high frequency players in the game, whenever you get the trade overloaded to one-side or the other severe whiplash can occur in the blink of an eye. Speculators and hedgers alike can NOT rule out a $0.50 to $1.00 rally off the lows ($9.04) in the soybean market. Likewise you can't rule out a $0.25 to $0.50 cent rally off the recent lows in corn ($3.18) or wheat ($4.66).

Oct

7

If you're working a limit and miss the fill by 1//2 a point, and you then go to market when it's 5 away so to get the position on, the price will hit your original order limit. And of course if you don't go to market, you'll miss the trade of the year. You can put your lunch money on it.

Ralph Vince adds: 

This comports to one of a family of distributions named after Maurice Tweedie , who classified a group of distributions, incl. Pareto, as comporting to:

Variance(x) = a * ExpectedValue(x)^p, where the constants a>0 and p>=0

The various distributions that are classically known occur at certain values for p (e.g. p==2 for Pareto), which is of no consequence but what IS of consequence is that this basic form is where we see so much occur in so many events market-related, insurance-related, weather-related, etc.

Oct

7

 Perhaps one for the Department of Deception. Is the following not somewhat akin to moving the line in Las Vegas? Are there not examples of similar activities in other cases? A potential new crime at the millisecond level:

"'Spoofing,' a New Crime With a Catchy Name 'Spoofing,'":

A big hurdle in the "spoofing" case against a high-frequency trading firm is that a jury must decide whether one computer fooling another is a crime, Peter J. Henni…

"The indictment seeks to hold Mr. Coscia liable for trades executed in milliseconds by a computer, including one trade at 4:54 a.m. when he was probably asleep. The spoofing charges may send a chill through the high-frequency trading world because the evidence of fraudulent intent will come from a program that uses rapid-fire orders and does not depend on humans for its execution. So finding that Mr. Coscia engaged in spoofing may come down to a jury deciding whether one computer fooling another is a crime."

Ed Stewart writes: 

The indictment describes how Mr. Coscia's programs would enter small buy or sell orders for future contracts that he wanted to have filled. He then placed large orders on the other side of that trade at a higher or lower price to entice others to enter the market on the belief that the larger order would affect the price. Once the price moved so that his small order was filled, the program canceled the large orders. The program would then do the same transaction in reverse by entering another round of large orders that would move the price up or down to allow for Mr. Coscia to exit the position at a profit.

In other words he gamed other HFT traders who were using order book info to step in front of his large limit orders. As if jumping in front of a large limit order should be a protected activity? I would think non-HFT traders would applaud strategy, as it would increase the cost of stepping in front of orders, as the HFT would never know if it was a "spoof" or not. I see nothing inherently wrong with the strategy indeed it might be correcting a distortion itself.

The fact that this is a crime suggests to me that what is "level" to most is simply what tilts the odds in their favor.

Oct

7

 Finally Ag Commodities are getting a little break after months of straight down. Coffee up 7%. What was the explanation? Strong dollar dampens ags exports. Note that the yen and Euro are getting a little bounce today too after both being in downtrends for months. They are really driving the yen down.  

Jeff Watson writes:

But the question remains…Is Dec corn going to break 3 and are Nov beans going to break 9? Commercial hedging companies sell and deliver if necessary. The selling pressure from hedging companies is a real headwind in your face, even in a bull market. While one has enjoyed a respite from the continual decline in prices, one wonders….has the form changed, is this a bottom, or is this a selling opportunity? For the past year if you sold into strength in the grains and held for a couple of days, you made a very serious return. That's been the form and one wonders if it's changed. I recently got faked out in the grains around an important price point, and left 40% of the money on the table had I cashed in on Friday. Oh well, things could be worse…I'm a terrible poker player, and Ceres is very stingy. 

Oct

6

 The book Illumination in the Flatwoods by Joe Hutto, the best book on nature I have read, is a 1 1/2 year chronicle about the connection of a naturalist and artist who lived as a turkey, the most human of birds. It teaches you about the life of humans, the relation between romance and affection, the beauty and artistry of nature, the connections between all things including animals and humans, and how to be part of and leader of a group. One comes away from it with a reverence for the turkeys and Joe Hutto, and many ideas for how to trade the markets better, and live a better life.

Hutto imprinted himself on two dozen wild turkey eggs when they hatched, a thing he has done with foxes, deer, monkeys, waterfowls and many others. He lived and foraged, dreamed about, and protected the turkeys each day, until they grew into independent adults. There's mutual love between them memorialized in such passages as "I have never kept better company or known more fulfilling companionship. Our communications although somewhat abstract is completely satisfying and out interests are identical: plants, insects, reptiles, birds, mammals. We are driven by the same engine, and in spite of our divergent morphology, and intellectual approach, I find that our similarities are greater than our differences." Hutto mixes scientific knowledge and studies about animal behavior with the documentary so that one gets an education about ethology, ecology, psychology, and geology seamlessly and painlessly from a reading.

The Turkeys, spend most of their time on the ground walking on two feet, communicating and sensing like humans, and grow to be close in size to our size. They contain within them the instincts developed from 20 million years of evolution, and all it takes is a trigger from their daily life for them to know exactly the right thing to do. They are totally exuberant and enthusiastic and teach us to enjoy the present moments with gusto. As Hutto says: "They are more alert, sensitive and aware, they are vastly more conscious than I. In many ways, they are more intelligent… Every day I see that the most important activity of the turkey is the acquisition and assimilation of knowledge. They are curious to a fault, they want a working knowledge of every aspect of their surroundings, and their memory is impeccable."

 Hutto himself is an admirable person. He is a can do person who loves nothing more than building things, eating a grasshopper along with the turkeys, painting a scene about nature, and picking up a dozen rattle snakes with a garden hoe and transporting them to a new home. I particularly admire his ability to withstand the thousands of insect bites from gnats and Florida black bugs, the constant wetness from perspiration that cause him all sorts of pain and soreness that arise in the day and fray with the turkeys. Yes, this life was difficult, but he notes it was easy compared to his previous imprinting study of water fowl where he lived with them for 6 months, submerged half way in tide pools, with alligators stalking him and his charges 8 hours a day. Without further ado, but recommending the book and accompanying PBS documentary wholeheartedly, I turn to the 15 or 20 things I took away from it that should help us with our trading.

1. Seriousness

The turkeys are the favorite prey of many animals, and parasites, and have to be very careful from birth that they don't die. As a consequence, they are very serious about learning at all times, and never allow anything out of the ordinary to escape them. While they are exuberant and enthusiastic, they don't have time for frivolity. Like the turkeys, the market person is always prey to disaster, and must not be distracted during the fray.

 2. Sense of Place

The turkeys like certain places and will speed up to get to them, and once they get there just relax and admire the beauty and majesty of it. They especially enjoy ponds and edges. The market person has certain landscapes that they should look forward to, and should expedite their passage to them, and take full advantage of their beauty and profits potential.

3. Interconnections

The turkeys often join flocks of other species, including jays, chickadees, woodpeckers, cardinals, wrens, gnat-catchers. The birds are attracted to the movements of other birds. On occasion, the market person must know that all markets move together. The normal negative correlations don't work. The bid moves in one market carry over to the others. Try to find the mechanism that creates this, but also be alert that one big move can presage another.

4. Curiosity

Nothing escapes the turkey's attention. Nothing new can happen without them investigating it and assimilating it into their daily life. They won't move on until they understand it. They never forget once they have uncovered it. The market person must be alert to all new things, all unusual moves, all crazy events that cause big moves. For example, on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was a preamble to one of the biggest drops the next day in market history.

 5. Edge areas

The turkeys loves to forage in areas that are between forests and farmlands, wetlands and drylands, pastures and creeks, pines and oaks. The edge lands are more interesting, provide a better variety of food, and provide more areas of escape. The edge of markets are great opportunities for us. The time between one market open and another open, the moves that occur during and after the fixings, and reopenings, the times that pit markets close and electronic markets open, the times between work and lunch, are all grist for an opportune study and alacritous attempt to profit.

6. Acquisition of Knowledge

The turkey's main business during the day is gaining knowledge. Any object that they haven't met must be assimilated. All new things must be examined by each turkey. The market person should have a wide canvass. He should study science, economic, psychology, politics, and turkeys. Whenever a new relation occurs, whenever a new crazy reason for a market move is on the cusp, the market person must pause to understand it.

7. Fossil Ancestry

The turkeys have 20 million years of evolution to teach them about all things that have ever been life threatening to them. They instinctively know which reptiles are dangerous, which insects are edible, which places they are safe. They rely on instincts leavened by knowledge of the current environment. The humans have fossil ancestries and instincts also. When you feel your color changing, your hair raising, your sense of fear arising, know that your tens of thousands of ancestors are sending you a warning, and pay attention to your instincts.

 8. Color

The turkeys will try to remove any clothing on Hutto that they don't like. Blues are their favorite color, and reds their most hated. Market persons should wear colors that are not distracting to their colleagues, and don't interfere with their quiet contemplation.

9. Skirmish Lines

The turkeys move in a line so that when one turkey harasses an insect but doesn't catch it, and the insect flies away, the turkeys behind it are able to catch it. They maintain that order all the time so that they are optimally formed for the flock to capture the maximum of prey. The humans who trade markets maintain a line of trades so that if the first one doesn't lead to the desired move, the trades right behind it perhaps on a scale down or scale up will do the trick. Similarly, the big market operators can't move the markets by themselves. They form a skirmish line with their colleagues by having meetings where they agree that the market should be down or up, and then go to the old stream media now the new social media to broadcast their views, and make sure that the personages in the line next to them can move the food in the desired direction.

 10. Sensory abilities. The birds can detect movement and smells and color to a discrimination level that is almost supernatural. They can spot a hawk at 2,000 feet above. They are always alert and never rest without the protection of cover and their leader. They can smell all their predators and prey and investigate all new things with their beaks. The market person must always keep his eyes and ears open and should never wear headphones or any other distraction.

11. Herding versus Following

The turkeys like to be together at all times. They have numerous calls to assemble. And when they can't see their brothers and sisters they are unhappy and nervous. They never wish to be alone. And yet, they know that Hutto is their mother and leader. They wish and know they should follow him, but he must never do anything that disperses or confuses them. Hutto's relation with the turkeys is similar to many trading mangers, and leaders on a trading floor that I have seen. He stands at the front and reports various ideas and opportunities, and trades that he is doing, and the herd of traders and salesmen follow him in a flock of related activity. Never forget that humans have the herd like tendency of birds in a flock, and as Galton points out the mentality of oxen who will never lead but follow a leader with blind ambition. Okay, that's a start.

Steve Ellison comments: 

In point 4 you write: "For example on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was preamble to one of the biggest drops the next day in market history."

This is a very interesting example. I suspect the 10-point decline in the S&P 500 after the unemployment report on July 8, 2011 was in the same category. The S&P 500 fell another 130 points in the next month and did not regain its pre-July 8 level until late October. I generally think most news is discounted before it happens, so any market reaction to news is likely to be reversed. However, there may also be cases in which a reaction to news exposes an underlying supply/demand imbalance. Finnegan moves, such as the 2010 "flash crash" and quick recovery (only to have the S&P 500 drop back to the flash crash low 3 weeks later and continue down), may be in the same category.

Jim Sogi writes: 

Viciousness. I've heard turkeys can be vicious. I believe trading takes a bit of viciousness. The reality is you are taking money from someone. You may be ruining someone. It takes a certain attitude to do this. It's abstract as you are screened from the other side in anonymity behind the screen. But I've seen the reality of it. A trader needn't have a vicious or a terrifying mien. Take the Chair, for example: he seems mild mannered in person, but underneath there is a drive that makes him a good trader. Please don't take this wrong, I don't mean he's vicious. He's the most magnanimous man I've ever met.

Andrew Moe writes: 

I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff

The only reason they are able to do this is that they provide a necessary function for the market at the lowest possible cost. Perhaps one should take heed of the original brilliant post in this thread and examine the why and the where of how HFT fits into the market ecology. What do they eat? How do they hunt? What do their tracks look like (nanex will show you some pretty pictures)? Do they herd? What are their defenses? When are they weak? The turkeys undoubtedly know all this and more about anything that might be stalking them. Once you understand the predator, it is much easier to avoid being the prey.

Anatoly Veltman writes: 

"You are taking money from someone" And do you say the same about someone who is perpetually long stocks?

It's interesting to hear your opinions on the subject. I'll tell you one thing for sure: I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff.

anonymous writes: 

My 2 cents

The investor's wealth ultimately comes from flows that derive from the real economy such as eventual dividends, buybacks, etc. I would include the return of leveraging equity which is financed by "real" economic activity. This is particularly true when the finance rate is in some way subsidized by state intervention, which is frequently the case.

Trading and speculating -if successful- takes advantage of the money flows of other traders and market participants. Many of these strategies (at least what I am familiar with) are based on the concept of "urgency." My finding is that ideas with persistence are in effect "giving the market what it wants" even if what it wants is mistaken if viewed from an X period(s) of time later perspective, which is where the profit is made.

In the real world there is much overlap, however I see these as two distinct sources of potential return.

If one believes (as I do) that the primary purpose of financial markets to price things (equity, debt, commodities, currencies), it makes sense that there is a competition to set prices and achieve equilibrium (which is never reached). If one does not want to participate in this contest they can hold for very long periods and seek to get the investor's return that derives from the "real" economy and leveraging equity.

My way of seeing HFT is that it occupies the space the floor used to have. They are consistent (the good ones) because they get massive scale and turnover beyond what an individual could achieve trading manually. This is why (once again, the good ones) are so consistent, it is a law of large numbers type effect.

I had the opportunity to invest in such a firm when it was just getting started and the principles were looking for backing. Upon reviewing their business model I felt I could not get a handle on the extreme blow-up risk do to potential operational error. It was outside of my competence level to assess accurately or prudently. I passed and still feel I made a good decision, even though with hindsight the guys were very successful and I would have made a large return. My point in mentioning it is that the great HFT return stream can hide things that are not obvious - particularly operational risk that often appears to be huge (…or at least I tell myself that rather than kick myself for passing). 

Andrew Moe writes: 

I'm glad the thread lives, and it will hopefully develop in a few directions. But one point I raised was very pointed: I was not implying HFT as a sector. I was questioning the moral aspect of a handful, who managed to place themselves into a no-risk pocket within the ecology. Their only risk is CAPEX committed and personal freedom, should lawmaker flip on them one day. But their conscious choice is to operate daily as nothing more than a tax on all participants.

When Mr. Sogi said "taking money from other human", he merely implied competing (and prevailing) within the risk-taking endeavor–not within 1:1000 day risk of loss.

Oct

6

 I used to find when turning off surfing video music and just watching the surfing video, and then playing some other music, it used to sync on the big bottom hand turns or re-entries. It would also close at the same time as some major tube section–I would swear by it–but it was some time ago, and Kelly always drove off the lip harder than anyone… Hard for an Ozzie to say that. It reminds me of how Vic wrote in his first book that "music is designed to end at the hour and that's when the prices get market and the margins and settlements are settled."

Oct

6

 "Bitcoin went down."

One efficient markets cliché is making fun of the people who hop around trying to explain and anthropomorphize whenever the stock market goes up or down. You know, Stocks Mixed On Strong But Conflicting Emotions or whatever.

Another cliché is that bitcoin is reinventing modern finance as we watch. So bitcoin prices dropped below $300 yesterday and look at this: "Bitcoin tumbles: are investor's losing faith?".

Analysts are citing a number of factors for the decline: bearish chart signals; ongoing regulatory concerns; large sell orders by some early adopters; and a shift in the supply/demand balance.

There's a sense in which you always want to be the analyst who cites "a shift in the supply/demand balance," though in a larger sense you never do. (Also never be the "bearish chart signals" guy, come on.)

"Some contend that Bitcoin's price is irrelevant and that it does not reflect the virtual currency's true value." Of course, and while the second half of that sentence is true in any financial market, the first half is weird. But that's not a surprise, right? Obviously bitcoin didn't go down yesterday "priced in bitcoin".

Oct

6

 The KC Royals were a powerhouse in the late 70s early 80s when I was in High School in Kansas City, Missouri (KCMO), Interest rates were at their peaks also. 30 years ago was the last playoffs the KC Royals played until this year. 30 years ago at the start of October was the time the 10 year CMT was at 12.54%. The 10 year has fallen ever since.

Royals are a low budget team, KCMO with teamsters/union mixed with and political corruption history. The town and the team seems to signal the fall of the unions, interest rates, local political cronyism collapse in on itself. Was 30 years ago also signal the end of the narrowing of the wealth gap? Could the rise of the Royals, signal the inverse, the end of big business and banks cronyism, the rise of interest rates, small businesses, wealth gap narrowing again? Or is this a 1 or 2 year fluke? Hopefully I will be around in 30 more years to have an answer. But I will leave a testable question for the reader, "do years where low budget teams winning the playoffs have any predictability for the small caps or markets in general?"

Oct

6

 From a lifetime in various sports, there have always been four stages to test any new act for the proven repertoire.

1. Does the new thing work in solo drill?

2. Does it weather practice games?

3. Does it withstand great fatigue?

4. Does it carry through tournament stress?

Thus, any new thing to be added to your sports show is not proven until it wins a tournament. At that point, you may relax and continue to use it to success.

Only about 1 in 10 of my early new tricks withstood the rigors to become a sweet spot of my game. Sweet, because any simple new thing added to a standard act usually makes a dramatic change in performance.

Oct

6

 So much–once again–for moneyball.

Kansas City-9

Oakland-8

Ralph Vince writes:

Baseball is certainly a game where you truly need at least a 7 game series to determine who is the better team. Unlike, say, football, where in most games, the better team wins, that margin is much, much smaller in baseball, given the nature of the game (truly, a game of inches…and bounces…and breezes, and tiny margins that decide the day).

Don't take my word for it, however. We can compare major league baseball, to say, basketball, where the percentage of time the better team wins, given the nature of basketball vs baseball, is higher than baseball. Here is the data for all 7-game playoff series from 1905-2013:

1905 - 2013

Series Baseball Basketball

1-0        62.7     77.3

2-0        82.7     93.7

3-0         97       100

2-1        71.1      82

3-1        84.6     96.3

3-2        69.8     85.9

So, series 3-2 we see that in baseball, the team that is up 3 games to 2 games has taken the 7-game series 69.8% of the time vs basketball's 85.9% of the time. Clearly, basketball dominates baseball in this metric, and further evidence that the outcome of any single baseball game reflects who the better team is less frequently than most other sports.

Stefan Jovanovich comments: 

In baseball the "best" team is the one that actually wins in the post season, not the one that has the "better" stats during the regular season; that is, as the coach said, "why they play the game" and why the game, which can be counted so easily, still eludes the precision that sabermetricians have promised.

What makes baseball relentlessly unfair is that the advantage that "better" teams usually enjoy - home field - counts for the least. Of all the major sports, baseball is the one has the lowest "home field" advantage - 52-48. What makes the game doubly unfair is that the "inches" even out, just as they do in the racquet sports; and the referees cannot easily, as they often do in football and basketball, decide the game.

For those of you who have not read Moneyball, the reason for my snarky reminder of the final score (Kansas City-9, Oakland-8) was that the Royals won the game by doing precisely what Master Beane has argued against - they stole bases and sacrificed - and the A's got their 8th run by doing exactly the same thing.

Oct

6

 Google has always given me the creeps. They have an awful amount of information and power and its growing. They are not the only ones.

In the Dataclysm, by Christian Rudder, who owns Okcupid an electronic dating service, he discusses the issues involved in big data. We all give up information in every transaction, when we go on Facebook, do a Google search, buy with a credit card, redeem a coupon. We get value in return, but the big data can be mined in creative ways to find out some very personal information. Facebook data can be used to determine if one is homosexual with an 80% accuracy. Target can determine if a customer is pregnant. Target doesn't want the customer to know that they know she is pregnant, so they put in lawnmower coupons together with the cribs and diapers so the customer will think she is getting the same booklet as the neighbor. Not. Big brother is watching.

In Okcupid data, they can tell a persons race by the language they use. Curiously men view women as being half above average in looks, and half below average, a bell curve. However, when women view men, they only think one in six men is above average in looks! My wife says, well that's obvious…women look at other things in men, not just looks. I guess that's how the ugly old guy gets the megababe.

On the dating site, people filter all the women or men by multiple criteria, however in experiments, they found that people were more satisfied by the experience in a blind date, (without pictures) even when one party was below average and the other above average in looks. Take away: people do not want really what they say and think they want.

Funny factoids aside, there are some big issues in privacy, use of the data. NSA has access to even more data, and recruits top math students to decipher it. What do they do with this info? They are not under the motto, "Do good".

We are basically at the beginning of history. Data is just starting to be collected. Kids now have their whole lives frozen and preserved forever in digital form. That drunken polaroid does not disappear when cleaning out the attic.

The book is annotated with explanations. I'd be interested to hear from the statisticians how this big data is mined. The word counts and graphs a la Tufte (who Rudder mentions) helps to tease out info.

Oct

6

 Thailand has been volatile in recent months, the army having been active in the political sphere. The President has been appearing on state broadcasts, offering a carefully worded assessment and hoping to deliver 'smiles over frowns'. A visit to the south west of the country sees the end of rainy season. Here, tourists and visitors are sacrosanct and there is limited risk. Nonetheless, two British tourists were murdered in recent weeks. In past days, two Burmese labourers volunteered guilt, taking the police for a guided tour of their beach-side activities.

The Burmese are gang labourers in Thailand, constructing much of the real estate. They all work in bright pink or blue T-shirts, although I don't know if this is a cultural phenomenon or a way for their gangmaster to keep track. The truck we are using has an engine double the normal power rating: it will grip the road perfectly with ten Burmese labourers weighting the axle, but, empty, comes close to stalling out in second on hills.

It is a Toyota Hi-Lux, the most popular vehicle on the roads, combining utility and capacity with cool: we could almost be preppy Houstoners, crowded at the traffic lights, save for the peppering of scooters around us mounted by three or four family members. You can get the Hi-Lux on the road for BHT40,000 ($1,250) cash. The Thais are a peaceful and friendly people, but seem to change character behind the wheel. We keep to the speed limit over the hills at night, causing locals to attempt two car overtakes from behind us into blind bends. The road death rate is 4x a typical western country and the injury rate an even higher multiple. That you can get a Hi-Lux on finance is probably key to their prevalence. People live in tin-roof shacks but have a brand new truck parked outside. In dress, transport, and smartphone usage, there is little to split locals from westerners.

Our truck's starter motor is flaky and we had to get a push start in the Big C supermarket car park. Locals hear our failed ignition and magically appear to help. The old guy chastises my timing on the ignition, and pulls me out of the cabin. I unthinkingly comply, despite the fact he is in prime position to drive off with the truck.

Supermarkets are still high margin affairs in Thailand: they merchandise in a way that would make Sam Walton proud. In the UK, you have Aldi eating out Tesco's heart, check-out girls have been exchanged for robot tills, and accounting fraud is the only way to turn a decent profit. Here, supermarkets look like they did twenty-five years ago in the the west: fully serviced and doing Univever and P&G's bidding. Taking back margin into your pocket with own-brand products might seem a financially bright idea, but only if it doesn't reconfigure the chessboard to a losing endgame in the process.

The tourist areas attempt, somewhat successfully, to simultaneously cater to the Magaluf and Marbella crowds. One can exit a 'Dusit' or 'Banyan Tree' five-star oasis onto a club-lined street full of drunks and bar-girls. Many ex-pats come here to find love and the exchange rate seems to be roughly one male, ageing, obese, clapped out westerner to one female nubile with single-digit body fat, naivete, and a desire to transcend circumstances. Or at least enjoy some fake Gucci bags and free drinks in the interim. Westerners can fund their girlfriend's real estate activities, which yield 7% net on construction costs. A full-service maid costs BHT10,000/mo ($325/mo). Non-residents can live on an endless cycle of sixty-day visas as long as they exit for a day at the end of each rotation, but only two hundred permanent residencies are granted per year and have very strict requirements, such as fully fluency in Thai. It is perfect for business people with offshore affairs.

It is interesting to ponder how multi-national franchise applications are controlled and reviewed. Putting a Starbucks and McDonalds next door to each other on the town centre 'walking street' probably seems like a good idea on paper, until you visit and realise it is the nexus of the red-light district and that the neighbours are massage shops and ping-pong shows. Perhaps footfall is the only key criteria.

The mafia is involved in much of business. The recent clearances by the army have tried to stymie corruption and the local mayor has been arrested for activity through his family holding company. It's not clear if violence features, more death by a thousand cuts. To get anything done in the precinct you need wheels greased, otherwise your project or business will stall out waiting for correct permissions. Tax-assessments are entirely subjective and can hit arbitrarily. On the other hand, if you have the right backing, you can build a ten story block right up against your neighbours windows and any complaints will be futile.

Everything has a cash clearing price. Bribes are never requested but can be offered unsolicited. The problem being, therefore, that you need to be a local in order to know the going rate. For example, allegedly BHT10,000 ($325) covers a police shakedown, BHT30,000 ($1,000) will get a passport and visa fixed, and BHT100,000 ($3,250) covers one month's protection money for a concrete truck. Recent anti-corruption activities have tried to curtail such methods. Previously, everyone took and everyone paid, and all was in equilibrium. Now, the police, for example, need to make up income and have taken to breathalysing car passengers and fining them for being drunk. A squeeze in the money supply.

Oct

6

 So it's Friday afternoon about 3:30 and I'm wrapping up the day when I get a call from my stepmom Patti.

Apparently, my cousin Veleda who lives in KC has a friend that was coming to St. Louis to see Pearl Jam in concert that evening, but his fiancee' had injured her back and was unable to make the journey.

So he had a couple of tickets that he didn't want to see go to waste.

So I called Veleda and she gave me her friend Justin's phone number and 10 minutes later the tickets had been changed into my name for pick up at the "will-call" window at Scottrade Center in downtown St. Louis.

So, now thanks to the courtesy of Justin (Thank you, Justin), I am in possession of two tickets to Pearl Jam. So now I have to decide who to take.

My wife was sitting with me when all this happened, so the first offer has to go to her. Gwen declined……she is not a real fan of heavier rock….but she did suggest that I take my son, Hunter who is fan of classic rock. Hunter (aka "Boosh") had already seen the Def Leppard/KISS concert earlier that summer and loved it. So Gwen thought he should go.

I called Boosh who was out for a walk in our neighborhood and he was in!

Unfortunately, Boosh really didn't know very many Pearl Jam songs, and there really wasn't time to get him up to speed, so I had him YouTube a couple of songs……..Jeremy, Even Flow, Yellow Ledbetter (incidentally, YL is my favorite PJ song)…….which got him pretty psyched.

We left early since I wasn't sure where the will-call window was. Since we got there early, we found a good parking space just across the street from the Scottrade Center and walked right in. We found the will-call window and got our tickets.

So now, we had to wait to even get into the venue. We waited almost an hour before the gates even opened. But it was an interesting hour.

We people watched.

We saw an odd array of people ranging from middle aged professionals like myself down teenage burnouts dressed in goth gear to emo's, to families with their children.

I was able to sneak a few pictures of the some of the more "interesting" people/groups in attendance.

There was the obese women in a wheel chair sporting a mullet.

There was a guy dressed in green military gear that looked just like Fidel Castro including the beard.

There was the professional guy who looked like he came right from work wearing coat and tie.

There was the mother and son with each with multiple piercings (ears, mouth, tongue, nose, cheeks, eye brows) and their bodies were adorned with tattoos.

However, everyone was very respectful and courteous.

It was not at all like it was in the old days. No one was looking for a fight, no one was yelling or getting obnoxious or getting upset when someone jostled them.

A VERY large heavily tattooed man accidentally elbowed me pretty hard when the line started moving. When he turned to see who had he had bumped, he had a look of concern on his face and words of apology and kindness flowed forth. When I smiled at him and said, "Meh, accidents happen", he smiled back and patted me on the shoulder.

When we finally got to our seats, the Scotttrade Center was largely empty. Far more empty seats than full ones. It was now ~ 6:30 and the concert was scheduled to start at 7:30.

So Boosh and I waited patiently. As people started filling in the seats, we made conversation with the people the around us. Of course, most of the conversation revolved around music and concerts.

Although most of the people around us were in the 30's and 40's (a few in their 20's and a few kids), I was probably the oldest in our immediate area (although there were people nearby that were clearly older than I…..I think I even saw some people that may have been in their 70's). I was asked a lot of questions and told stories of concerts "back in the day".

I told the story about how I had 3rd row center seats for Led Zeppelin back in the 70's and how on the day of the concert my report card came and my parents saw that I got an "F" in math (my one and only F of my entire school career) and grounded me from the concert.

People around us were partying and having a good time.

But there were things that were conspicuously absent.

For one, there were no beach balls bouncing around the concert hall.

Secondly, the room was not filled with the "haze of sweet smelling smoke" that I remember from the old days.

Also absent was the guy next to me saying " 'ere" (I spelled that phoenetically……some of you will clearly understand what that means) as he passed something to me.

We did catch the occasional whiff of marijuana, but only a little bit.

Also, the biggest difference was the Jumbotrons. They were showing the Cardinals first playoff game on the big screens.

Of course, between 7:30 and 8 pm, the Cardinals were not doing to well as the Dodgers dominated them.

Then, at about 8 pm, the concert hall was full and (as we were told by the band), the band was ready to come out and start playing…….but there was a problem…….

At about 8 pm, the Cardinals started a rally. They were down 6 -2 when the 7th inning started…….and were up to 10 - 6 after the inning was over.

The crowd was going crazy watching the Cardinals on the Jumbotron…..and Pearl Jam was just standing by waiting for the inning to end, knowing that they couldn't go out on stage while the Cardinals were staging this major comeback. So they waited and waited and waited. The inning lasted almost 1/2 hour.

When the inning was over ~ 8:25 Pearl Jam came out and started the show.

The first thing I'd like to point out is that, although I am a PJ fan, I did not know as much about their music as the people sitting around me did.

They played 3 songs before I even heard one that I knew. Now, don't get me wrong, the songs I didn't know were still fantastic and I enjoyed them very much.

They hit on almost all of their standby classics. Even Flow, Daughter, Better Man, etc.

The band absolutely rocked the house for 90 minutes and then left the stage. I figured the concert was over except for the encores. I was wrong. They were just taking a short bathroom break (as guess even famous musicians are subjects to the foibles of age and need more bathroom breaks than they did when they were younger).

When the band came back out, it was just the lead singer Eddie Vedder (one heck of showman, BTW) who came out with his acoustic guitar and began the second half of the show.

He played a few songs, including the old John Lennon song, "Imagine". It was very very good!

When the band joined him, they played a few acoustic numbers and then got back to the business of damaging my already diminished hearing capacity with more their hard rock numbers.

They played for another hour and ended the show with a bang.

Then came the encores…….a full 30 minutes of encores.

Of course, they saved a few of their classics for encores. The best song of the night was "Alive". They rocked the house with that one.

And then finally, for the last encore, with the house lights fully up and the entire concert hall fully lighted, they played "Teenage Wasteland" by the Who. Here is my iPhone recording of the final song.

A few other notes about the concert:

The band was incredibly gracious. They took time to read off emails and stories of fans that were going through hard times and dedicated songs to them.

The read off a list of birthdays being celebrated and even pointed out a few people in the audience who were either celebrating something or had just gotten out of the hospital to be at the concert.

One lady held up a sign that said "My 100th Pearl Jam Concert" that made it on the Jumbotron. A few songs later, the Vedder said that he was told that someone in the audience was seeing their 100th PJ concert and wanted to know where she was.

Once she was located, he took about 60 seconds and personally thanked her for her support of the band. Vedder had a bottle of something that he was drinking on stage (wine maybe) and said that he wanted to give this her as a personal gift from him and the band for her support of them……but the women was really far away from the stage.

So Vedder asked the audience to pass the bottle to her. He handed it someone and later we got to see that bottle had made it's way to her.

The band made a point at several times during the show to express thanks to their fans for their loyal support.

And they demonstrated their gratitude by putting on one heck of a show. I can't imagine how redundant it gets playing the same songs over and over again each night. But the band clearly took a lot of pride in their show and overall performance.

At no time did I feel like they were just going thru the motions. Vedder did the job you would expect from a lead singer and showman. Mike McCready did everything and more that you would expect from a talented lead guitarist and the rhythm section didn't miss a beat.

There were only two negatives that I could see. One was expected, and the other was a bit of a surprise.

First, the expected: When a band has a playlist as long as Pearl Jam has, there are going to be a few popular songs omitted.

They didn't play "Black" which really surprised me as that is one of their most popular songs  and they didn't play Yellow Ledbetter.

As we were leaving the Scottrade Center the one recurring theme I heard from concert goers was the absence of the song Yellow Ledbetter. Apparently, I'm not the only one that loves that song.

The unexpected negative was the lighting. I've been a bunch of concerts in my life, but this one had a twist to it.

I recall that the lighting used to be "on the performers", but at the concert last night lighting was "behind the performers".

What this resulted in was the audience being blinded for much of the show. I would say for about 50% - 75% of the show I couldn't really see the stage or the performers. All I could see was blinding lights in my eyes. It was like driving down the highway with all oncoming traffic having their high beams on.

I spent most of the night watching one of the two jumbotrons off the side of the stage just to see what was happening.

Although I'm not sure why they did it that way, I have a feeling it was to discourage people from taking pictures and videos of the show…..but I could be wrong about that.

Regardless, it was a great concert from great showmen. I highly recommend to everyone that if you have a chance to see Pearl Jam in concert you should take it!

Boosh and I had a great time!

And thanks again to Justin Trent for gift of the tickets!

Oct

1

One lesson I am taking from the following article is that randomness is the safest and least damaging method after a series of losses. Of course it is better to have a strategy with an edge. But when you feel threatened or defeated any known strategies could take on a negative edge, so it is better to go random, which always has a zero edge that is better than a negative one. Species seem to have learned this through evolutions.

One other lesson perhaps is that randomness is a great mind opener if one is mindful enough. It is said that failure is an opportunity to learn, so maybe this lesson teaches us that randomness is the door to success.

"Strategic or Random? How the Brain Chooses":

Many of the choices we make are informed by experiences we've had in the past. But occasionally we're better off abandoning those lessons and exploring a new situation unfettered by past experiences. Scientists have shown that the brain can temporarily disconnect information about past experience from decision-making circuits, thereby triggering random behavior.

In the study, rats playing a game for a food reward usually acted strategically, but switched to random behavior when they confronted a particularly unpredictable and hard-to-beat competitor."

anonymous writes: 

An interesting thought that reminds me of modeling the Genetic Algorythm process. Throw in a random factor that ends up improving the search results.
 

Sep

30

A study by Kora Reddy showed that for a sample of SPY days:

"4th trading day from the last trading day of the month (i.e 25th September 2014 in this month's case) is down and it is quarter ending (in the months of Mar, Jun, Sep, Dec)"

There were 45 instances, and all 45 had a higher close during the following 5 trading days.

For analysis, starting with all SPY days since 1993, we want to avoid overlap, so we pick every 6th SPY close and determine whether or not it had a higher close over the next 5 days.

Original study:

count: 45
with higher close next 5 tdays: 45
success rate: 100%

Non-overlapping SPY closes (every 6th):
count: 908
with higher close next 5 tdays: 863
success rate: 95%

To get a measure of the significance of the original results, we take our "every 6th SPY close" data set and assign a value of "1" for instances that have a higher high over the next 5 trading days, and "0" for instances that don't. Then we take that series of 1's and 0's and randomly pull 45 observations at a time (with replacement) for 1000 iterations.

Random runs: 1000
Mean sum (of the 45 values pulled): 42.77
SD: 1.437
z of original results (45): +1.55

So if we randomly pull sets of 45 non-overlapping SPY days, we would expect about 43 of them to be successes, i.e., have a higher high over the next 5 trading days. The original results have a z of +1.55 against our randomized runs, so they fall under the common +2 level of significance but are still positive.

To take the analysis one step further, we look at the size of the move from each SPY close:

Original study:
count: 45
mean move to 5-day High: 1.83%
SD: 1.15%

Non-overlapping SPY closes (every 6th):
count: 908
mean move to 5-day High: 1.65%
SD: 1.52%

z of original results (45): +0.81

So, analyzing the size of the Close-High moves shows that, while still positive, the z of the original results is much lower than that obtained by looking at the results as binary, hit/miss observations.

Sep

30

"Nearly a third of ASX-listed companies are fragile, at risk of financial catastrophe, report says":

A report out today on the health of Australia's listed companies says nearly a third are confronting the risk of a financial catastrophe.

Analysis of almost 16,000 annual reports by professional accounting body CPA Australia showed more alarm bells were ringing now than during the depths of the global financial crisis in early 2009.

The research, conducted between 2005 and 2013, said the red-flagged companies were exposed to the dual risks of the end of the mining investment boom and an unexpected slowdown in China.

Sep

29

 Most of my survival techniques are self-taught on the spot. Once while hiking at 12k' in the Sierra Nevadas with winter coming on, I had to find a way to sleep at night without a sleeping pad. The frozen ground conducted my body heat into the earth and I couldn't fall asleep. After a few hours of trying various positions, I fell into a sleeping tripod in which the knees and right elbow were the only contact points, and of course the toes. Nearly all of the body weight was on the former three, and since the knees and elbow are calloused, little heat was lost and I slept comfortably for many nights before coming out to civilization. I later learned that tripod sleeping is standard among nomad Tibetans who also use the right elbow as one may turn the head away from the heart.

I remembered that today in the hot Amazon on a vast crisp-dried floodplain carpeted with one species of dark green leafed one foot plants that absorbs heat. I was sleepy from earlier drinking river water, and there was no shade. The ground was so hot it burnt my skin through the clothes. The solution was the tripod sleeping and I awoke an hour later able to continue to shade and the river.


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