February - 2010
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
1
 S&P +15.90
 USB -0.21
2
 S&P +10.90
 USB +0.08
3
 S&P -0.80
 USB -1.01
4
 S&P -34.70
 USB +1.13
5
 S&P -1.90
 USB +0.23
6
7
8
 S&P -3.90
 USB -0.18
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Copyright Dailyspeculations.com

Feb

8

I have updated my market standings at 5:30 pm Eastern Time.

Feb

8

My locally owned lumber yard is feeling the recession. Normally they are open Saturday 8-12 and workers usually work 49.5 hours per week and some of that is overtime pay. Effective today they will close on Saturdays and workers are on a strict 40 hour work week. I heard some grumbling this morning from workers there. I told them to live with it and be glad they have a job.The 'stimulus' will never reach the little guys where it could really be used to stimulate and help small businesses grow and hire more workers.

James Lackey comments:

So let me get this straight. After the worst downturn since the great one.. Now they are doing layoffs? Now, when lumber prices are on the rise enough for a Home Depot upgrade today? Or did they just realize with unemployment very high there is no need to pay overtime? Or is the get the joke a bad hedge?

An example is a LETTER from a SELF MADE MERCHANT TO his SON, LORIMAR "you been in the packing business long enough to know it only takes 30 seconds for a bull to lose his hide; if you believe me when i tell you they can skin a bear just as quick on 'Change you wont have a Board of Trade Indian using your pelt for a rug during the long winter months."

"Because you are the son of a pork packer you might think you know a little more than the next fellow about paper pork. There is nothing in it. The poorest men on earth are the relations of millionaires. When I sell futures on 'Change there on hogs traveling to dry salt at the rate of one a second and if the market goes up on me I've got solid meat to deliver, but if you lose the only part of the hog you can deliver is the squeal" pp 193-94.

Feb

8

There is an upcoming article in TAS&C (April 2010) by David G. Hawkins that deals with modifying Price Volume Trend Indicator, a 1980 variation of Granville's OBV indicator. The article is chart-based rather than statistics-based, but there are a number of talented readers who could correct that, should they wish. The article references two contributions to TAS&C by Larry Williams (2000 and 2004). What is interesting to us is that he overlays a linear-scaled indicator onto a log-scaled price, recognizing that most indicators behave linearly while equity prices do not. We had long noted that, but never thought of superimposing the one chart onto the other.

Feb

8

Sometimes my whole quote board is red. Every single market is down, sometime big like last week. It's not always a good idea to go against it. Sometimes everything is green. It must mean something when everything correlates.

Feb

7

Many markets have declined about 10% from their January peak three weeks ago, including almost all the Europeans, and Asians and the US. One wonders whether the concept of reluctance in magnetism is relevant with the reluctance depending on permeability, cross-section, force, and length. What would a good way to quantify this be? One hypothesizes that the reluctance is inversely related to the speed of the descent and directly related to the number of times it crossed back and forth.

William Weaver Jr. writes:

Crossed prior data, or consolidation post descent?

Four or five years ago I tried defining consolidation as pressure where P=force/area, so that strength of the consolidation was equal to the number of times price crossed the range divided by the length of the range. There were many inherent problems with this such as what constitutes crossing of range, or how do you determine the boundaries of the range if there are outliers. I solved both by trimming n% of the data off both sides, but I'm not a fan of fixed parameter solutions so I dropped the research.

Add volume:

I am a fan of buying stocks that dropped on large relative volume and have since consolidated on low relative volume. I was writing that paper last year about prospect theory and asset prices (that I never submitted anywhere) and found that the most profitable stocks to buy (using the metrics discussed) are those that are down on high volume (clarification: ranking based on change in volume divided by change in price so that one buys stocks where the change in volume is much greater than the change in price; this could be a stock that has jumped higher; volume is almost always more volatile than price, so the ratio IS dominated by volume, but produces better results than using just price or volume independently or standardizing the numerator and denominator before deriving the ratio).

I think the solution should be based on three things: time based (assets mean revert; decreasing force over time - rate of change; consolidation can only occur for so long; does it matter? one can use breakouts from ranges); consolidation based - pressure? and volume based. I'm imagining substituting volume for heat and picturing any consolidation as a tin can filled with water. However, falling volume with consolidation would then be the equivalent of depressurizing, so the can should not explode, unlike many mean reversions that we have all witnessed where price violently moves back to prior areas of trading.

Pitt Maner III says:

[Reluctance is] slightly analogous to certain aspects of aquifer performance testing (i.e. recovery phase in ground water levels inside a well when the pump is turned off and water levels return to static level).

Typical type of software used for data analysis:  Acquifer Test Analysis Software .

Very important for water supply studies and determining impacts of production wells.

The Biscayne Aquifer by the way is considered one of the most prolific aquifers in the world and it is why South Florida has the water supply to support a large population.  After pumping down or slug testing a well in the Biscayne aquifer the water level will often rebound so quickly that it exceeds the static water level recorded before pumping began.

Alan Millhone comments :

Bad weather has a lot to do with people's attitudes on investing.It was nice the other day and I met two customers and sold one a new roof and the other a house of windows. Weather's bad here in Belpre, OH now and another snow coming Tuesday and my phone is silent. Also, before the last snow I rented an apartment. No one will move now with bad weather in my area. Weather has to influence many things from stocks to home improvement. This affects Lowes and Home Depot.

 

Feb

7

Wind Direction (WDIR): WNW ( 290 deg true )
Wind Speed (WSPD): 27.2 kts
Wind Gust (GST): 33.0 kts
Wave Height (WVHT): 9.8 ft
Dominant Wave Period (DPD): 8 sec
Average Period (APD): 6.1 sec
Mean Wave Direction (MWD): W ( 271 deg true )
Atmospheric Pressure (PRES): 29.79 in
Pressure Tendency (PTDY): +0.04 in ( Rising )
Air Temperature (ATMP): 61.2 °F
Water Temperature (WTMP): 65.8 °F

The NOAA has a series of buoys off the coasts that measures the aforementioned parameters. The data is updated every three hours on the web, and gives the amateur surf forecaster another arrow in his quiver. With experience and observation, one can look at the measurements and other data and have an accurate idea of current surf conditions at the local surf spot. The most important measures from the table are wave height, wave period, and wave direction. The measurements on the buoy indicates, for my location, a short period wind swell, and the direction indicates that the south side of jetties and piers will give the cleanest surf, although the north side will produce bigger surf. Due to the short period, the waves won't be as powerful as a longer period swell. The chart shows the pressure to be rising, so one can expect a day that won't be marred by rains, but the wind at the buoy suggests that conditions might be windy at the surf spot. The data from one buoy is a great tool, allowing for one to make decent guesses, but the predictability is just a ball park estimate. There are several buoys in my area of interest, and the study of the data from each allows for an extrapolation that will offer a decent forecast, good for the next 24-48 hours. With the swell direction and period, it is possible to construct vector models, mine is proprietary. If one has a good weather model with a wind rose (Accuweather and NWS is the best), and the ability to measure the length of the fetch, the forecasts can be accurate for a longer period of time. It is very important to know the effects of the local bathymetry, and how it will affect the swell. Every surf spot is different, and every spot reacts differently to the input (swell size, direction, and period).

Since waves are caused by wind blowing over water, the longer distance a steady wind blows over water, the better for waves. In practicality, better waves will be formed with a 15 MPH wind speed over 1000 miles that 45 MPH winds over a 20 mile length. Weather conditions are important, as they offer a level of prediction, eg: whenever cold fronts come through, we will get waves (Axiom#1 for Florida surfers). Knowing and studying the tide charts will allow you to pinpoint the time of the day the surf will be better. The surf is always better at low tide in Florida (Axiom#2). Winter waves are bigger than summer waves with the exception of hurricane waves (Axiom#3).

There are a few professional forecasters that do a good job on a world wide basis. Sean Collins over at Surfline.com has the best forecasting tool, the LOLA. LOLA is a proprietary tool that Mr. Collins uses to generate a swell rose prediction that has uncanny accuracy on a world wide basis. He gets rough estimates at first, and I assume that he compares the forecast results with the real results to tweak the system with a fudge factor for local conditions.

Many other people use different indicators to predict surf. I know a few inlanders that use a giant American flag as their indicator. If the flag is flapping in a certain direction and how it flies gives them personal, accurate indicators of wave height. Others use clouds as their indicators, and can get uncanny results. The flag and cloud indicators tend to miss a lot of swells, many which can only be predicted and discovered by the buoys.

There are many similarities with surf forecasting and market forecasting. Different market participants use different indicators, just like the surf forecasters. Grain traders use seasonal effects in their study of the grain markets, and surf forecasters have many seasonal effects to help or hinder their efforts. There are less inputs for surf forecasting than the markets, with the market inputs changing all the time. While market forecasters have to deal with the law of ever changing cycles, that's not much of a worry to surf forecasters, as our cycles are very seasonal and predictable.

With all of the technology, communications, surf cams, etc., surfers are able to get a five day forecast for swell in Hawaii(or anywhere on the globe for that matter), and plan a trip from the East Coast without much fear of getting skunked. Whether this is good or bad is up to the individual. I remember when I was in college, driving 20 hours to the coast, only to find the waves flat, no surf at all.

Jim Sogi adds:

Let me add some factors. Local wind is a big factor. Chop on a 20 foot wave cant be fatal on dropping in. It has to be glassy. In Hawaii the tide is very important, as it is in Bali and G-Land as well as the reef sticks out. The quality of the swell is harder to define, but swells of higher period from further away tend to be cleaner, and have more power. Another odd factor is the crowd factor. Perfect waves with too many guys out are not as fun as not perfect waves with few guys out. Recently there have been so many absolutely perfect swells, clean, big, no wind, perfect conditions and 4 guys in the water, clear air, mountains in view, blue sky. Just perfect. Its been the best year in the last 15 years because of El Nino . El Nino has big market impacts on weather, on economies, and psyche's. How is another question.

In markets the crowd factor is important. I note that at panic bottoms, or during big big moves like recently, the crowd really thins out. It's good to watch crowd action and reaction in waves and in markets. I notice this in the waves as well. In 20 foot surf, only a handful of guys are out with the equipment, knowledge. It's a good time to be there.
 

Feb

7

Here is an attempt at sports-style standings for markets, as suggested by the Chair.

The 10-year US Treasury bond moved into first place on Friday as Sugar suffered a huge defeat and fell all the way from first to fourth place.

I may have overcomplicated things by adjusting for currency, but I often felt in recent months that the S&P 500 was going up largely because of dollar devaluation.

Feb

6

Now that the first week of February has elapsed, we will tear off the January page from the calendar and show only February.  We have saved a copy of January for future reference.

Feb

6

The Hotel CaliforniaThe Greece and Portugal saga reminds one of the lyrics in the song, Hotel California:

"You can checkout any time you like, But you can never leave…"

For time immortal, countries in Greece's condition fight the inevitable outcome for some months. They defend their currencies. Their domestic interest rates skyrocket. And then they cry "Uncle!" They devalue their currency and restructure their external debt. (And of course, the IMF shows up with an "austerity plan" too.)

The question is can Greece go down the well-worn path of devaluation and exit from the EMU?

There's a new legal analysis from the European Central Bank which says, in the well-turned phrase of international legal scholars: "Umm. We didn't put it in writing." The document clearly states the mechanism for expulsion. But it also says that they intentionally didn't establish a mechanism for voluntary withdrawl… but is it possible over the weekend?

For anyone short Euros based on this situation, the analysis in the ECB legal working paper of Dec. 2009, "Withdrawal and Expulsion from the EU and EMU: Some Reflections", is worth a read.

Ken Drees writes:

The PIGS could be put in a pen — two-tiered Euro currency — till they all get better and rejoin. Salute!

Feb

6

soybeansCommercials are at an 18 month net-long extreme in soybeans. Interestingly however, large specs are also net-long. Small traders are heavily net-short against both. Who's going to win that one?

COMMERCIALS +24,820

LARGE SPECS +29,270

SMALL SPECS -54,090

Feb

6

Ronald FisherSo… I have studied the foundations of Statistics. Gone back to first principles. I am now convinced that the Bayesian approach is the way to go. It makes much more (common) sense than the rest.

The only reason Statistics today is not 100% Bayesian, is that the Reverend's paradigm has been made practical only recently, with the growth of computer power and the discovery of some really clever algorithms (Gibbs sampling etc…).

My idol, role-model, who I hold totally admire and who keeps me in a state of awe, Ronald Fisher, was a Bayesian. It is not obvious until you read his original articles, but he was. He was also a nice person in a time before computers, so he developed some simple not-entirely-Bayesian solutions to help mankind.

Bayesian statistics is the way to go… Only problem is that I have come to realize I know very little about them beyond basics.

My program for 2010 is to master Bayesian statistics. By "mastering" I mean being able to read a PhD thesis, but not necessarily to write one (I have a life).

There are many great statisticians on this list that could advise me on some books. I think Vic is a great Statistician, and Fisherian/Bayesian even if he doesn't realize it.

So far I have read:

Bayesian Computation with R Albert
Bayesian Data Analysis Gelman & Carlin & Stern & Rubin
Bayesian Forecasting and Dynamic Models West & Harrison
Introduction to Bayesian Statistics Bolstad
Introduction to Modern Bayesian Econometrics Lancaster

What I need now is to know what are the best books in the field, and some form of advice on progression, the above books being a bit of a strange mix between obvious and difficult.

If you were a university teacher, what books would you require your students to read and in what order?

And should I read the original articles from the 1950s advocates, eg Savage, De Finetti or Jeffreys?

Feb

6

Speaking of ratios and round numbers and other perceptual voodoo, it is oddly mesmerizing to see:

1 Dow ˜ 10 S&P ˜ 10 gold ˜ 20 NASDAQ ˜ 1 Nikkei ˜ 10,000 USD

Feb

6

Toyota is sure it's a pedal problem and not drive by wire. This reminds me of my dad's not liking the feel of two springs on the throttle stop the NHRA mandated. I said "Um, dad, if the throttle sticks on this 1,000 horsepower bad boy…" "I'll shut it down, son." "Not if you're sliding sideways, pop – leave the heavy duty springs on the carb…"

Anyway, drive by wire must be 100,000,000 times safer than an old throttle linkage when a motor mount breaks. Everyone who ever owned a Lincoln Town Car knows what I mean. That was the clunking sound you heard when you stepped on the gas. The engine falling back down into place. You shouldn't have let your grandson drive the car on spring break. Push hard enough the engine rises up and the linkage goes to WOT and won't shut down.

I forgot all about Ford's cruise control WOT wide open throttle problems they had for a decade. Moisture would get into the cruise control box, short it out and any random time the car would go to full throttle. They had to admit the problem was real after a few Secret Service agents ran their cars into trees at the White House. So now I am cracking up that Toyota's problems are now good for Ford.

Yet I am not laughing about the Lexus floor mat deal. Even if it's just the mats. (Lexus hasn't had a pedal recall) What you're saying is if you drop a newspaper, your new iPad, or a bottle of Coke while driving, the rebound on the pedal is so weak (no two springs. or very strong rebound mechanism that NHRA mandates, that my dad and everyone must hate the feel) you're at full throttle trying to slap it into neutral and holding an ignition switch/button for three seconds to kill the engine.

So now I am like the old curmudgeon who says all new tech is bad because kids can't write an essay, just a paragraph. The oral tradition was lost to the Gutenberg press. All hope for a strong memory is lost with Google search. No one will know how to parallel park once drive by wire is in all new cars. I can hear my dad now… "First they made it so you couldn't work on a car without computers, now you can't drive with out one." ha ha.

Ford blamed the floor mats for years.

Feb

6

utah backcountryThis weekend we're going to try Alpine touring in the backcountry far away from the resorts and helicopters. Avalanche danger is considerable. The guides dig a pit in the snow and look at the consistency of the various layers to get an idea of its structural soundness and whether there are ice layers, or loose layers or slabs that might break loose and cause an avalanche. The take notes on the aspect, temperature, depth.

I noticed Vic doing something similar with data. Rather than just look at charts, he makes tables and looks at the layers, the structures and consistency of the data elements and relationships. Though looking forward, it is important to understand the structure of the current and prior market, just as the backcountry skier needs to understand the structure of the snowpack. The theory is that the structure will affect the performance of the snow and the market.

It is also important to look up and see the sky, the weather, the wind and measure the steepness of the slope. These type of things add up to markets like today's, approaching a 3% drop.

For markets, the weather might be the economic climate and news. The slope steepness might be analogous to the interest rates, yield curve or ROC of the market. I do not believe they are built into the data.

Feb

4

The Junto will meet at the Mechanics Institute 7:00 PM Thursday, Febuary 4, the first Thursday of the month as always. Ann Heller and Duncan Scott will be talking about their recent reviews and honors of their heroine. All are invited.

Feb

4

Under the Buttonwood Tree[More excerpts from this hard to find history of the NYSE]. Heavy speculation in stocks and bonds, in merchandise and real estate were entered into on the floor of the old [i.e. pre-December 16, 1835] Mercantile Exchange, and between the hours of half past one and half past two o clock in the afternoon, when the merchants congregated in the rotunda, it presented a scene of the liveliest interest. On every face was depicted the excitement that reigned within, and as the busy groups, closely crowding each other in this early temple of commerce exchanged their views, and effected transactions, the magnificent vault above them reverberated to the hum of the voices of a by gone generation of New York business men.

Though the NYSE had proved the centre for the vast speculations of the two good years of 1835 and 1836 yet it had so little connection with the panic of 1837 that the members suffered but slightly. It was a commercial panic pure and simple, and by far the most disastrous that ever visited America. It sucked down into its dread vortex of ruin upward of sixty banks, with liabilities of 500 milion. Almost every merchant and trader failed, and it was the standing but grim joke of after days that the average basis of settlement for the grand total of 440 million of indebteness was one cent on the dollar. Everbody was alike. Debtor and creditor were suing and being sued and collectors fees, assignees shares, and costs of courts, lawyers, and sheriffs swallowed up almost the entire fabulous sum.

The return of confidence and of business was only slowly brought about and with the assistance of millions of dollars worth of state bonds, which could only be emitted at heavy rates of discount. As a sequel, Pennsylvania, Maryland, Florida, Louisiana, Mississippi, Illinois, Indiana, Michigan and Arkansas either openly repudiated or were delinquent in meeting a large portion of their indebtedness, and the securities had fallen so low on change that even reckless speculators hesitated to touch them and Wall Street operators preferred the poorest of railroad stocks to the state "fancies".

The first serious flurry in the market occurred in the years 1853-1854. The year 1852 was one of the most remarkable. Prosperity and confidence was inspired on every hand, call loans increased greatly in amount, and at one time the weekly average of loans ranged from 95 to 100 hundred miilons. The year in fact had never been equalled in wide spread prosperity since the formation of the Federal Union. Investments were made in all descriptions of bonds and stocks, and the banks accumulated correspondingly excessive amounts of deposits.

This state of things reached a crisis in September, 1853 and stocks fell rapidly. Panama Railway fell from 140 to 96. Harlem from 65 to 53 and the bubble of Parker Wein Coal from 65 to 7 1/2. Governments alone holding their own. The market however recovered rapidly and speculations began afresh in 1855. Daniel Drew and Vanderbilt with George Law, Ben Richmond, J. Little, Nelson Robinson and a host of lesser lights were active and up went the railway stocks and bonds again. All the trunk roads were paying good dividends, and by August 1857, the banks daily credits amount to 120 million. On August 24th, the great Ohio Life Insurance and Trust company suspended owing three milions and the results were disastrous.

The greatest excitement prevailed upon the board as the prices of the securities and stocks fell lower and lower. Erie declined 20% and The New York Central 25%. The Bank of Pennsylvania and other prominent financial institutions failed, and by the middle of October the New York banks suspended specie payments. The trouble was all occasioned by the banks suddenly contracting their loans, precipitating the very results they sought to avoid. At this time the Chicago St. Paul and Fond Du Lac railroad company became bankrupt, and in 1859 the famous Chicago and Northwestern Railroad Company was formed to take its place. Business picked up during 1859, the only serious setback being the first placing of Erie in the hands of a receiver. But in 1860 and prior to the war a general rise was observable, and those who bought to hold at this time made fortunes. And from this time up to Black Friday the stock market continued on the most active and prosperous conditions.

The extraordinary range of prices during this period enabled the conservative capitalist to make money with greater rapidity and certainty than by any of the ordinary forms of investment, and many large fortunes were made by investors at this time. The war boomed every species of stock, and on the floor of the exchange intensely exciting scenes were witnessed as unexpected news of victory or defeat would raise or depress the values of securities several points in a few minutes. Bold operators made or lost money, and when the Gold Board was established, the two kindred exchanges did enormous and continously prosperous business in unison with the inordinate activity of all branches of trade and commerce.

Feb

4

Steve Mcqueen in BullittMy dad made me practice a few times turning the ignition off while driving the car at age 13 or so. It was at the race track parking lot. It never happened in the race cars as we had toe clips, but in the past decade some genius decided to get the kill switch close enough to 5 point harness, neck restraints and all the extra roll bars and padding they have today.

Only time I screamed "turn the key off" was when we worked on the 500 CID crate motor street car, a '67 corvette with a tri power (3 deuces). My buddy had the old tri power carb book and went to task rebuilding them for me. I let him drive the car. In a freaking neighborhood he shifted into 2nd and stood wide open throttle and when it pegged the rev limiter I knew the throttle linkage was stuck. I was reaching over to turn off the key as we were balls out ready to run off the end of the road into a freaking house. He turned off the key pushed in the clutch and we coasted to a ez stop. He said "sorry about that/" I said "hey jerk off, let's not test things in the neighborhood," my goodness.

What freaked me out was the 911 call where the cop and his family were blazing down the HWY @ WOT and his brakes were on fire. He was on 911 in a panic. How in the world didn't anyone say to shut off the damn engine.

I did see on the internet a motor trend guy say kick it into neutral or push in the clutch then get over and shut engine down. Yeah, so you can still use power steering and power brakes, but man, it's stressfull to hear an engine pegged against the rev limiter as you do it. And what if a kid threw it into reverse on an auto trans (race cars have reverse lockouts)? My goodness, just shut er down.

So this weekend we had 5" of snow. I taught the teenager not to panic while engine is pegged against rev limiter while in park. Taught him how to power slide, do doughnuts with real wheel or front wheel drive cars. Taught him anti lock brakes and with out. It's fun locking up brakes in snow turning wheel then let off the brakes and the car will turn, spin– what ever you need.

We ran out of time, but the best to learn is parking a car like the blues brothers. Do a 180 from 30 mph and land perfect into a curb parking spot. The other is the James Bond: as fast as it will go in reverse, spin the wheel to spin car in forward position, let off brakes and shift into proper gear and end up going perfectly strait under acceleration. That, my friends, took us 15-20 hours of practice as 16 year old kids, first in the snow them on pavement to perfect.

Only thing I haven't done is drive a car on 2 side wheels for a bit. Never really wanted to till now. I saw the X motocross racer jump the rally car on New year's. That's rough on the back.

Anyways flats, blow outs, catching the edge of the road at 70mph in the rain…stuck throttle. Don't panic and do not ever stand hard on the brakes. Look where you want to go and you will auto steer the correct way. Relax, kill the engine and coast to a stop. When you kick a car into neutral on auto trans as long as you dont depress the button on the shifter it will never go into reverse. So practice. Idle down the street, turn off the key and slap, yes slap, the shifter into N. Turn hard, no power steering, you can do it. You get 2-3 brake assists with the vacuum reservoir. Relax. You can steer and stop with out the power on…muscle it.

Feb

3

Wall Street in 1867[Anonymous: Souvenir of the New York Stock Exchange, New York: J.B. Gibson Company, 1893. Published to commemorate the first 100 years of the NYSE].

This noble institution is reared upon an imperishable basis of unswerving honor, sterling integrity, and unflagging enterprise. The collossal achievements of our capitalists in the field of railroad development would not have been possible without the unerring guide (the NYSE) provided the public of the values thereof.

Very different from ours was the Stock Exchange under the Buttonwood tree of Wall Street where old time brokers sat and smoked their huge mearschtrams [Ed: meerschaums ?], nodding their indescribable hats, with the utmost gravity in transacting business. Long and cordially was each bargain dwelt on before it was closed. Men such as Nat. Prime and John Ward who dealt largely in US Bank stock and the shares of the newly incorporated banks which had taken the place of the old concern that went down in the panic of 1814.

One of the first important spec movements of magnitude at these early dates occured in 1822 when an extensive bear presence in Wall Street forced the holders of hypothecated bank stocks to throw them on the market, causing a rapid decline resulting in the stoppage of discounts in New York, Philadelphia, and Baltimore. Memberships at that time could be had for 100 dollars.

As the country emerged from the great depression of 1814, speculative and large joint stock enterprises met with a very favorable reception. In 1825 the Croton Water Works asked subscriptions for two million dolars of capital and ten million was subscribed. The famous and long to be remembered Morris Canal and Banking Company had a capital of 1 million dollars and was oversubscribed. The subscriptions were so successful that they were speedily able to sell out all they desired and in fact all the leading stocks found the times favorable for several years and paid enormous dividends. From five to 10% semi-annually dividends [Ed.: as a percentage of par value] were repeatedly declared by insurance companies: The Ocean Company in 1828 paying 20% semi annually, the american insurance company paid 12% each half year, and in 1829 declared a semi annual dividend of 15%. Such investments were as a matter of course eagerly sought, and when the formation of railroad companies began, their stock found a ready market. State legislatures eager to avoid taxation and to aid internal improvements also availed themselves of the opening and issued bonds by the millions. By 1837 there were at least one hundred and seventy five millions of dollars worth of these securities in existence, 60 million of bank shares, 40 of railroads, fifty for canals and the rest miscellaneous.

During 1833 the market became very much depressed, several failures occurred and one house went under. Among the active stocks of those good old days were those of the Life and Trust company, Mohawk and Hudson Railroad, Delaware and Hudson Canal, Boston and Providence Railroad, Saratoga Railroad, Morris Canal and Banking Company and Harlem Railroad. In the year 1835, the brokers boomed many of the leading stocks so much that within five months, Morris Railroad had gone up from 70 to 207, Harlem from 63 to 100, and Delaware and Hudson Canal from 72 to 115.

Feb

3

Percival and the Holy GrailTo know whether the market is currently trending, you have to accumulate a database of intraday progression over at least 30 trading days; then continue to add to your database and trade concurrently. Let's first discuss "intraday progression".

For each stock, currency or futures contract, you need to define the day's "opening range". For a typical stock or commodity: it may be daytime opening 15min "hi/lo box". For internationally-flavored futures contract, the day may well be starting overnight. For FX currency-pairs: I recommend first 30-60min range of domestic time-zone (e.g. Far East open for AUD and JPY crosses, but N. Am. open for $/CAD). Exercise discretion and make provisions for markets that would commonly tread water in advance of crucial regularly-scheduled news releases, and then significantly gap. Award a score to each day, ranging between -4 and +4, grading intraday price progression out of optimized (consistent) "opening box". A day (will occur less than once a week) that never significantly traded out of the opening-range all the way through the close will get zero. -4, -3, -2 and -1 are bearish mirror progressions of intraday events described below as bullish +1, +2, +3, +4.

The most typical day (about twice a week) will be a 2-pointer, where market will break its opening box to the upside and end anywhere up there. +1 is awarded to a day (about once a week) that didn't close that high; but it did manage to overcome an earlier short-lived break-down and ended back within the box. +3 is given following same weak start but stronger close well above the box (about once a week). +4 is the case of prolonged trading well below the box, surprisingly reversed by a blistering second-half rally ending well above the box (less than once a week). An extremely rare (once-twice monthly) case would be very late failure of +4 attempt rolling-back into the box and thus getting a zero. You must be very cognizant of the fact that automatic grading of each instrument under the sun, each day, has shown to be somewhat deficient (understandably, those funds who have succeeded and coded at that level of proficiency will never disclose their secrets). Thus, it remains partly discretionary domain (albeit using consistent set of rules and optimized boxes) to assign those -4 through +4 daily grades to each instrument on the trading board of hundreds! Yes, it requires a lot of market-savvy manual labor.

For each instrument, a black box then accumulates running totals as summation of the latest 30 trading days. Although theoretical maximum reading would be 120 either way, we hardly ever see liquid widely-traded markets conquer the seemingly magic 30 level. The key discovery is that a market that just advanced from lower-sum area to over 10 area (positive or negative) is a market beginning to reliably trend! Once beyond 23, such a run will be getting frothy, and we would commence faze out of profitable position. Having rolled back 10 points off the high (say back to 17 from 27) would cause us to abandon trend bias altogether. It should be understood, however, that a new, down-trending bias would only be assumed way later, once the 30-day summation crosses below -10! So it is obvious, that our summation trend-indicator is a laggard. Well, trend-following is a lagging trading concept!

In my over 20 year real-time market experience, I've observed traders disciplined enough to put on biggest exposure exclusively at points of acceleration from 11 to 23 end up as undisputed winners! With decades of steady gains, they would handily outperform a value-investor or a contrarian. These trading programs were hugely favored by macro hedge fund managers and their clients, as lowest drawdown systems and quarterly results that maximized popular yardstick ratios. I will note that large futures positions taken promptly in accordance with above-described signals were roughly corresponding to riding the right side of wave three of three in a typical Elliott Wave impulse, and thus were yielding upwards to 100% return on margin deposit in just one day of trading! That was because commodity exchange margin requirements under SPAN would still be relatively low at that point, as a newly-recognized gapping trend would suddenly begin accelerating.

A necessary postscript is that only a part of the total program was described above, and quite briefly at that. At its best implementation, the program is multi-dimensional and will not (and arguably should not) be fully described in open forum.

Misan Thrope objects:

Holy Grails are mythical. It is philosophically impossible to determine whether tomorrow you will be trending or range-bound.

Rocky Humbert replies:

On your first sentence, arguing that The Holy Grail is mythical is a religious argument – I'll leave it to greater minds.

On your second sentence, if one uses certain physical and/or information models as a guide to financial market behavior, one can reach different conclusions. I respect many people who both agree and disagree with this view. For some, this is a religious debate too!

Lastly, while the Holy Grail may be a myth, the Hole-ly Grail is not. I keep one on my desk. My secretary filled it with coffee once and it made a terrible mess.

Rocky Humbert, quantitative analyst, speculator and master chef, blogs as OneHonestMan.

Don Chu writes:

A very sensible 'hand-count'. Very much like Mark Fisher's work — his opening range AC/BD classifications and rolling multiple day pivot count, a la his The Logical Trader.

Anatoly Veltman replies:

Correct, Don! Mark practiced (and taught) this methodology for decades. I was at first a sceptical participant in his late 80s after-hour weekly group; but listening to the finer points over the next few years (and markets were always discussed in real-time), I ended up incorporating dozens of his ideas into an overall approach. He deserves tremendous credit!

Feb

3

Teddy RooseveltIf you review the legislative history of the "trust-busting" railroad legislation of the late 19th century, you find the representatives of the railroads appearing as the principal advocates of "sensible" regulation. Why? Because they were being beaten up by their large customers (Standard Oil being the most important) and their unregulated competitors. We are seeing much the same thing now with General Electric and others actively supporting "green" regulation.

As for the virtues of Trust busting, what appalled people who thought the United States was governed by its Constitution and not by the "moral compass" of its betters was Teddy Roosevelt's unequal application of the Sherman Act. He wanted labor unions to be exempt from its provisions — as they now are — but he wanted the Act to be applied to all business combinations, even those where the parties themselves raised no objection. The Sherman Act's original intent was clear: to prevent the judiciary from enforcing commercial racketeering, from allowing a revival of the guild system of restrictions to entry into an area of commerce that 19th century Americans found so obnoxious.

As he did with so many laws, Roosevelt ignored the plain language of the Anti-Trust statute in favor of his own "living, breathing" interpretation. I think he did it for the best of reasons; he truly loved America and he wanted all Americans, even the ones he considered second-class, to love the country as much as he did. But, his good intentions were led astray — as so many of ours are — by his refusal to ask what the consequences of his reforms would be for individual liberty.

Feb

2

Volume, from Jim Sogi

February 2, 2010 | 2 Comments

Interesting drop in volume on today's up move in ES:

2010-02-01, 1896011
2010-01-29, 3068079
2010-01-28, 3052088
2010-01-27, 2634603
2010-01-26, 2449263
2010-01-25, 2080292

The old TA theory is that an up move on low volume is weak, and a down move on increasing volume is strong, but it doesn't prove out scientifically.

Sushil Kedia comments:

A homegrown theory I developed borrowing on the Chair's applications of the concept of struggle to markets interprets volume as a struggle for price discovery. Extending this with memetics, a higher volume indicating a higher struggle for price discovery meme implies an ongoing persistence of the meme. So, within any time frames or patterns or noise, if you perceive a meme then interpreting lower volume as lesser struggle tilting towards consonance and thus implying a fading meme comes by. This way of looking at price and volume relationships does lead to several testable ideas getting the gut feel closer to science.

Bill Rafter writes:

The only use we have found for volume is as a surrogate metric for volatility. Indeed S&P volume and VIX have very interesting relationships. However the standard TA mantras that  (a) volume “confirms” price and (b) volume-weighting indicators makes them better, have not been confirmable.

Here is an excellent graphic I prepared relevant to volume.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Kim Zussman writes:

Here's another check. SPY daily returns (c-c), with volume traded, 1993-present, were used to check for big up days = >+1% (0.01). Then calculated relative volume (RV) as:

(today's volume) / (average volume prior 5 days)

Then compared next day's return for two cases; if it followed a big up day which had low RV (RV<0.8) or a big up with high RV (RV>1.3):

t-Test: Two-Sample Assuming Equal Variances

                       low RV      hi RV
Mean               0.0010    -0.0015
Variance          0.0002    0.0002
Observations        151    146

Pooled Variance    0.0002
Hypothesized Mean Difference    0.0000
df    295
t Stat    1.5263
P(T<=t) one-tail    0.0640
t Critical one-tail    1.6500
P(T<=t) two-tail    0.1280
t Critical two-tail    1.9680

Feb

2

Whale corpseSurely there must be some good market analogies here in this wonderful, brief video narrated by David Attenborough showing the feeding strategies of Bottlenose Dolphins.

Pitt Maner III comments:

Amazing video. Dolphins also can echo locate a pin on the bottom of a pool from large distances.

While we are on the topic — sessile, bottom feeders appear to make out fairly well in the long run also! Talk about a meal for a lifetime…

Dead whales constitute an unpredictable food source, as it's impossible to figure when and where one will die. And it's a one-shot deal. But nevertheless, when the hefty animals die, they sink to the seafloor and the payoff is big for marine species able to cash in. Scientists estimate one whale corpse provides the nutritional equivalent of 2,000-years worth of normal biological detritus sinking to the seafloor.

Nick Higgs is on a research cruise off Japan to find out more about the amazing ecosystems that form around dead whales on the seabed.

Feb

2

FDRThe pension problem in this country is a time bomb that is set to go and will likely either cripple the nation or be one of the final straws that breaks our back. Remember, pensions are backed up by the PBGC..

James Lackey writes:

I fear to quote history as a non-expert here and never ever want to imply predictions… the devalue-ists vs. the deflationists battles have always been apart of post crash, post war debate. Here we have choice of soup–the depression expert vs. the non computer using inflation expert with an American idol caught in an argument on how to restore past glory. With the people caught in the panic and demanding answers.

After Baldwin talked Churchill back to the Gold Standard they all realized prices were too high, so they had to subsidize (bail out).

Before FDR devalued, he cut govie pay and military pensions.

Pick your author on how good bad either path is/was…

Not sure if tea party baggers know how volatile these adjustments can be when the markets solve problems. Hey, wait, yeah they do. It's the NASDAQ.

Stefan Jovanovich writes:

I don't think American history offers many clues to what will happen next for jobs and incomes because there are no precedents for a country where half of the income went to teachers, government employees and people whose private sector jobs exist only because of regulations (lawyers, accountants). I don't offer that as a political statement, only an observation that we no longer have a situation where Keynesian deficits can produce more demand by creating government jobs whose workers buy things with their paychecks. We already have that economy now, and the multipliers from government borrowing and spending are now 0 or less than 0, not positive.

In terms of the dollar and its future value measured against other national currencies, I think you are right to draw lessons from the 1920s and 1930s; because that was the last time that ALL the world's trading nations devalued their currencies against gold and against each other. But that offers no clue as to how far the United States and others will go in taxing and restricting investment capital flows. The Great Depression became great because all the countries shifted to mercantilist currency and trade policies at the same time. As much as trade flows have fallen because of the GFC, the decline is nothing compared to the death spiral that occurred between 1930 to 1933.

Vincent Andres comments:

(Unfortunately) I completely share Scott's opinion.

Our states (we) have generously accorded overvalued pensions based on optimistic/erroneous previsions, (and this resembles _very closely_ to the subprime problem, where today's distribution of houses was based on tomorrow's expectations about their prices.) We thought we were able to build our present houses and our pensions by picking in the future, in the future of our kids, because as everyboby knew, trees were able to grow up to the sky.

The recurrence (in the mathematical sense) was build on the recurrence, but now we see the recurrence changing direction, trees are not growing up indefinitely; what will we do with our promised houses, promised health, promised pensions ? all those things paid by picking money in a infinitely rich future.

There are many excuses for those miscalculations (and not having know a war is probably the biggest excuse) which really made those systems function exactly as a Ponzi scheme. Today's worry is that we are unfortunately at the point where the Ponzi scheme explodes.

We live in interesting times–I also completely agree, on the other hand, looking a bit on the history side, this is not as dramatic as a WWIII.

In France (at least) WWI has seen its young generation slaughtered, while the elder were far less concerned (at least they were not slaughtered).

I wonder if our young generation would accept such a sacrifice? Such endebment for our houses, our healths and our pensions. (Maybe the massive mind-destroying we applied on our children will help them to not understand what we have done? Those days, our French government, like every 2 or 3 years is picking from Pierre's pensions to reverse to Paul's pensions (Pierre is in the private sector and Paul is in the public sector as for each reversal)  just around 5/6 billions, nothing to become nervous, and, in fact, nobody seems annoyed, so, as far as today, it seems to work fine). But even those reversal, really –theft–, will not indefinitely be enough. One can only be amazed when one sees that, on one hand, farmers are committing suicide, silently, without revolt, while in the same country, state employees are retiring at 50, having spend 20% of their life striking and with such miserable results. How is such a thing possible? What mental ascendancy is at work to obtain such passivity/resignation, unconsciousness of the horrible injustice of the situation?

… Yes, the coming period will probably be interesting. My hope is also that things will happen with a minimum of violence, but, in a form or another, I doubt our irresponsible generation will escape the hour of truth.

Feb

1

Carroll Quigley (Bill Clinton's mentor) has a theory published in Tragedy and Hope that all civilizations tend to go through four stages: a start (in conquest), rapid expansion, crisis, hegenomic rule, and then contraction and decline. The contraction comes from the weakness of will that emerges from the solution to the crisis. Does this have market applications? Can it predict anything about our own stage?

Does the Federer win, as in the past, augur bullishness for stocks? As long as The Knicks have Robinson playing, they are bound to lose. He's what Bill James would call a player whose stats are a lot better than his game. Who would win the OJ Simpson award that Bill James gives out among CEOs and operatives from the Beltway? What are the reasons for the market's very special actions around the end of months when the bears have previously been in control? What is the equivalent of Bill James's marginal analysis of winning shares that enables him to predict the exact teams' records with variables such as hits, walks, runs, and total at bats? Also, what is the analog of his point that the only pitchers that last and are good buys on a team are power pitchers that have good stikeouts?

My friend Irving Redel believes gold will be a good buy slightly above 1000 as investors will buy it as the return from fixed income is too low, and they are frightened of stocks.

Thomas Miller writes:

I wonder why more investors wouldn't be looking at high dividend paying stocks during these times. Even if one is fearful of stocks, a diversified etf or fund with high paying dividend stocks, even US and foreign, would seem to warrant investigation for at least part of an investment strategy. Buying after market "corrections" of some fixed percentage number would seem to make this less risky. I believe a portfolio of high dividend stocks has shown to outperform SP 500 over time. The tax on dividends is lower. I wonder if investors would really pile into gold as an alternative to stocks, bonds, or cash, absent some international tensions rising or rampant inflation on the horizon.

Pitt Maner III comments:

Pre-announcement perhaps of interest to gold followers. Mideast tensions.

Meanwhile, state-run Press TV quoted Iranian President Mahmoud Ahmadinejad on Sunday as saying that the nation will deliver a harsh blow to "global arrogance" on February 11.

the counter:

The deployments include expanded land-based Patriot defensive missile installations in Kuwait, Qatar, UAE and Bahrain, as well as Navy ships with missile defense systems within striking distance in and around the Mediterranean, officials said.

And here is an article about Iran as as explanation for rise in price of oil from July 2008.

Feb

1

Just as Daily Spec is starting to present financial data in sports-statistic-like terms, Bloomberg has announced that it will use its analysis tools on sports.

Robert Smythe asks:

Can someone explain briefly the chart at the top of the page? What do these numbers mean? USB?

Alex Castaldo says:

These are the price moves in S&P futures and in Bond futures on the given day. (Sorry about the ugly abbreviation USB, the full word US Bonds did not quite fit the allotted space). In each case the nearby futures contract (currently March) is the one we use.

The price change for bonds is quoted in points and thirty-seconds of a point, as is traditional in Bonds. So for example on January 12 bonds rose by 1 point and 20/32, and this is shown as +1.20.

As Paul Marino notes, the whole thing is inspired by sport scorecards that show the recent wins/losses for a team.

The four colors are based on who wins and loses on any given day. A Red ink day is when both Equity and Bond investors lose, while Green is when bond and equity prices both go up. The mixed cases are: a warm orange color when the environment was favorable to those who take equity risk but unfavorable to those who avoid equity risk (i.e. bond investors), a cool blue when stock prices went down and bond prices went up (sometimes called a flight to safety or flight from risk day).

We hope you find our calendar interesting.

Feb

1

The understoryThe Bronx Botanical Gardens has a nice exhibit of the four layers of life in a tropical rain forest: the emergent at the top that get most of the sun, the canopy, where most of the trees reach and where insects and birds are mainly active, the understory, clouded in shade, and the floor, where the debris falls and provides minerals for the roots of trees and food for large animals and insects. One wonders if the ensemble of stocks is divided into similar layers, and whether there is anything predictive about those that reach a certain height. Let's start with the S&P 500 and look at the emergent layer, stocks above 100. There are 12 of them:

Name    Price  Market value m   Perf in 2009                                 

AAPL    192         174161                  90                                 

AZO      155         7673                     59                                     

CME      286         19079                   65                                       

FSLR     113          9462                   -20             First Solar                

GS       148         78572                     81                                        

GOOG     529     168135                    56                                          

IBM      122        160771                    33                                       

ISRG     328        12631                   218             Intuitive Surg               

MA       250         32425                     84             Mastercard             

PCP      105         14811                    62              Precision cast parts       

PCLN     195          8585                    191             Priceline                   

WPO      434         4085                    11               Washington Post   

What can be said about these companies that differentiates them? Five of them are Internet based. All of them are undoubtedly led by CEOs who embody the idea that has the world in its grip. What else?

A comparison with the understory below 10 is appropriate. AMD, BSX, CPWR, ETFC, EK, FTR, HBAN, IPG, JDS, KEY, LSI, MI, PCS, MU, MOT, NOVL, ODP, RF, S, TLAB, THC, TER, XRX — twice as many companies in the understory. Many were once in the canopy. How would this best be analyzed and something useful come out of it?

Feb

1

Andy MurrayIt's frustrating that Andy Murray is one of the top few tennis players in the world right now. There is not much about his strokes or his strategy that's distinctive or interesting. His only distinction is his on-court personality — he scowls and sometimes swears after every error that he makes, as though his expectation is not to make any errors throughout the match. Federer, by contrast, treats his errors as an expected part of the game. His face shows no negative emotions; it looks like granite.

Everybody who gets to number one in tennis has some kind of distinctive flair. They never get there by doing everything like everybody else, just a little better. I hope Federer gets a more interesting opponent in the next three majors.

Feb

1

SPY's Friday close was the second consecutive below the simple 100DMA, after a long period above the moving average.

Going back to 1993, checked for instances when SPY closed < 100DMA two consecutive days, following at least 20 consecutive closes > 100DMA. Here are the mean returns for the next 5d, 10d, and 20d:

One-Sample T: 5d, 10d, 20d

Test of mu = 0 vs not = 0

Variable N  Mean   StDev   SE Mean     95% CI            T      P
5d        18  0.010  0.021  0.005  (-0.00057, 0.02114)  2.00  0.062
10d      18  0.007  0.023  0.005  (-0.00447, 0.01933)  1.32  0.205
20d      18  0.004  0.040  0.009  (-0.01570, 0.02430)  0.45  0.656

All up, if not significantly. If only it were that easy…

Jan

31

Jungle Ball Python[Ed.'s note: this post contains some vivid descriptions of snakes that may disturb some readers]. My son, John has a pet python. He's a jungle ball python, about 4' long. The python does not do very much, except to wait on his log, in his tank, for a meal. His moves are infrequent and very deliberate. He does not waste a single joule of energy, and just waits patiently for food day and night, week after week, month after month.. Snakes and alligators don't require a lot of food, and can wait for 5 months or more for a meal. They don't exercise, play, show personality, get crazy, or cause any trouble. They just wait for their next meal, single minded, hard wired in their next task..

The snake exhibits several signals when he is hungry, and can be seen after he sheds or evacuates, for example. When he is hungry, I feed him live rats. Although the snake is a master at camouflage and deception, he knows when a rat is being introduced to his tank. Snakes generally have poor eyesight, but can detect the presence of a rat through smell and vibrations. The rat goes into the tank, and the snake sits there sizing up his prey. It can go for 30 minutes to an hour and a half, while the snake watches the rat, waiting. He slowly puts his body in position, moving and flexing his coils quietly, maybe taking 30 minutes for a set up. He will sit perfectly still, while the unaware rat walks all over the tank, sometimes over the rat and,….the rat doesn't have a clue of the dangers. The snake finally senses his best opportunity, strikes at the rat, bites him on the back of the neck, and wraps his body around the rat suffocating him quickly. The rat squirms and quivers while the snake constricts a little more on each exhale of the rat. The snake is so quick, you can hear a swoosh when he attacks, much like the swoosh you'd hear in old Bruce Lee films when they were fighting.

The python, having dispatched his prey, lets him go and positions him for the swallow. When he's ready, he disjoints his jaw and puts it over the rat's nose, and uses his body to push the rat into his mouth, wiggling his neck to allow the rat to be swallowed. It takes about 15 minutes, but that big rat, 40 times the size of the python's head, is swallowed and the snake goes to the corner to hide and slowly digest his meal. I like the way the snake always strikes the rat in the same exact place, with quick dispatch. He makes a split second decision with his pea sized brain and wins. Trading can be like that, requiring split second decisions, and hard lethal strikes.

 The snake has a ritual for eating his prey, and manages to eat without wasting energy, getting hurt, or alerting his prey. Many trades require you to sit patiently for weeks or months for the proper set up, positioning yourself then swooping down on the prey just like the snake does. Snakes have many admirable qualities that traders should study and emulate. These traits include patience, economy of motion, concentration, surprise, and a quick but lethal offensive. No matter that the rat has a brain that is the same size as the snakes's, and is probably much more intelligent, he always loses to the python, every time. The snake is hard wired for the attack, has infinite patience, and will dispatch his prey quickly……all qualities successful traders should strive to practice and learn.

Pitt T. Maner III responds:

These guys are in the news down here in South Florida. Too bad there have been some irresponsible owners.

"Reptile retailers, brace yourselves: the federal government wants to ban the import of some large and seemingly popular snakes. Responding to growing concern over the spread of Burmese pythons in the Everglades, the federal Fish and Wildlife Service proposed Wednesday to ban both the import and interstate transport of the python and eight other snake species, all large constrictors."

A possible 10 to 100 thousand burmese pythons in the Everglades is amazing — they are bit too good at what they do.

My cousin is a big time, amateur "herper" and I remember going with him up to Orlando about 15 years ago to a national convention held there and it was quite impressive to see the reptiles on display and the captive breed ones for sale — water dragons, White's tree frogs, skinks, all sorts of snakes, etc. Very educational. One of the things I remember was a lecture about trying to catch a very large snake that escaped in a multi-room facility — the idea was to set the trap along a wall as the snake would tend to cling to walls as it moved from place to place. Big, non-venomous snakes though can still give some nasty bites.

Here is a summary of South Florida's non-indegenous species, the local vets get a lot of dogs who have tried to lick the Bufo toads.

Marion Dreyfus reminisces:

I remember living among unexpected boas and two-step and three-step crates in Thailand. I came home one night to find a 6-footer in my living room, as we lived near a thriving klong. The maid Sumpohn slew it with a shovel before it bit me. We called her Richard [the Lion-hearted] for a while. Up-country, I stepped gingerly on the roads near fields of produce, as much longer than 6-footers would slink out and slither on the hot bake of the dusty roads. And in Cambodia, I was foolish enough to wear a snakeskin dress in Ankhor Wat, and was actually chased by some outraged untethered serpents not happy with my attire. I changed my dress subsequently, and rode elephants, tall off the ground rather than encounter the ground-bound cold-blooded fauna.

Once, though, I overnighted at a friend's farm in Connecticut, and woke with a serpent cosied up next to my prone body. His pet had eluded the glass cage, somehow, and sought random visiting warmth. It was not the best wake-up notice I have ever experienced.

Jan

31

The partnership between Ostrich and ZebraThe reaction to recent events where something devoutly to be wished actually happened and sadness and disappointment and revulsion occurs is part of a general syndrome related to the dissipation of the sex cells. Time and time again, a company reports good earnings above expectations and a terrible decline ensues. Time and time, an important link in the totality is confirmed a la Bernanke today, and the market drops an immediate 1%. Time and time, a bill that everbody wants, like the stimulus bill, or the Massachusetts election results, occurs, and the market drops an immediate 1% the way it did last Tuesday. What is the reason for this? Is it a variant of 'buy the rumor, sell the news', or is it insiders selling on the news? Or is it related to the general apathy that results when the discharge has occurred? Can it be predicted, and acted upon?

A friend writes in that the ensenble of comovements between bonds and stocks posted on our web site always reminds him of Leo Goodman's classic article "Movements and Comovements between M Dependent Time Series" that Doc Castaldo has kindly sent hundreds of copies out to far sighted researchers in previous glory days. It is good to honor and create a visual model and real life exampe of such important dependcies. And perhaps this will be a prelude to providing statistics on this site that will be at least as informative by half as the average sports statistics contained in such fine publications as The Post or Sporting News under "Stat City". The desire to provide a league standings tabulation is keen.

I am reading several books on animal partnerships and the partnership between the ostrich, which has good eyes, and the zebra, which has good hearing, reminds me of the partnership between many markets. One or the other, whether it's silver or the omniscient one, are there to alert to possible danger. One feels the pain of the CEOs who were at a dinner at the Oval last Wednesday, and learned about the Volcker plan only at 9 pm that night an hour after the dinner and just 12 hours before the 6% decline started. "That's not squash," as my friend from New Zealand used to say when I mixed in a volley or two. Heard at the Olympic Club at 10 pm: "You might want to play an all court game tomorrow, mate."

Of course there is a higher purpose to the recent decline of 6%. First the move must shake out all the weak longs who were buying it based on their hopes for the January baromoter. Next, it has to set all the public behind the form so that they will sell out in disgust at the three-month lows. Finally, it must engender a Dow below 10000 to create the kind of newspaper headlines and fear that will shake out the remaining weak longs before a rally occurs.

Paolo Pezzutti comments:

After you have finished your succulent second plate of spaghetti "all'amatriciana" and you are offered one more, can you eat it? After a long uptrend when earnings have beaten repeatedly expectations for a year, can you really expect more surprises? Some take profits, others go short. It seems that the news release is the trigger to execute actions that were long planned.

I found on CXOAG this post that addresses the issues raised: Earnings Surprises and Future Stock Market Returns. The post reports about the study Aggregate Market Reaction to Earnings Announcements.

The authors investigate the relationship between earnings announcement surprises and market returns on the days surrounding earnings news. The analysis identifies a negative relation between earnings news and market return that persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news. There may be a considerable degree of inefficiency in the market’s processing of aggregate earnings information. Consistent with this interpretation they find that Treasury bond rates and implied future inflation expectations respond directly to earnings news.

George Parkanyi writes:

Definitely, the same type of news after a few months loses its power to move the market (true for both the down side and the up). At a certain point you stop listening, you’re on auto-pilot. Markets respond to surprises –- the something new, the something different, or the something possible. This is very much a human characteristic.

A related example was the Internet bubble. Everyone was buying the companies that had no earnings – because while they had no earnings the potential for earnings was unlimited. As soon as companies started to report any kind of a profit, they were crushed. For now someone had put a limitation on all that “potential”. I was highly amused at the time how earnings for an Internet company was the kiss of death.

Kim Zussman writes:

If it were as simple as "up on good news", Galleon and others trading on inside information would immediately overtake the solar system –like a hadron-collider black hole. This evidences supernatural laws which prevent even cheating determinists from commandeering supreme mating rights.

Years ago at a Stephen Hawking lecture on time travel, he "discussed" (the lecture spun from his laptop) various paradoxes produced if one could go back in time. For example, if you killed your parents in the past how could you have been born in the future to go back to kill them? One theory was that when you pulled the trigger, the bullet would "diffract"; somehow splitting before hitting it's target — in compliance with rules keeping the universe in logical order. (whose logic?)

Another theory was parallel universes — one in which your parents died, another they lived and you were allowed to develop.

The questioners were kind to Stephen, because of his illness, but after the show he sat helpless in his wheel-chair in a van outside with the dome light shining on his contorted face like an involuntary spot light. A crowd hovered outside to see the great man, like at the zoo.

On a different note, Pfizer's run-up to the Massachusetts Miracle is typical. Removal of near-certain health care reform and promised payoff by pharma met with big decline. Would you have sold knowing the election results before hand? The upside is that if you can be at peace with the way market treats your logic, you will understand how to be a ladies man.

Duncan Coker writes:

I would like to pick up on Messr Parkanyi's comment regarding "the markets respond to surprises, something new, somthing different or the something possible…this is a human characteristic." I agree. Related to this, I attended a showing of the film Poliwood last night where the director Barry Levinson was there for a Q and A session. It is a documentary about the triangle of media, celebrity and politics and how the lines between reality and theater, entertainment and substance, are becoming more and more blurred. Politicians become celebrities and celebrities become politicians. Media fosters celebrity and celebrity feeds the media. Politicians need the media for promotion and the media needs them for content. One of the ways to get high ratings in news television is to present conflict in a dialogue. That is why guests are always at the extremes of a position. It allows for more yelling, arguing and better entertainment for the viewers. Polarization is more interesting television. Informed and moderate discussions is just boring to watch.

I wonder if this carries over into the market. Stagnant markets are boring, wild swings make for better entertainment. Also, who benefits from wilder markets, financial media has something to write about, brokers and exchanges have more commissions and fees, money managers can justify their services. It allows politicians something to regulate, gives floor trades movement to scalp, hedge funds can fire up the algorithms. The causality works in both directions as well. Last week the politicians spiced up the boring upward move of the past 2 weeks. When a fund is rumored to be weak or going under another spike. The media does all it can to create excitement and volatility around the market. When traders over-trade and the line between entertainment and substance can get blurred. Also, like the television example, conflict is more interesting. In the case of the bulls and bears it is most interesting at the extremes, so the market follow this type of cycle.

Ken Drees adds:

This fits here with financial television as of late. The big question or overall theme being is this just another dip for the market or something more? Hopefully capturing viewers by keeping this nail biting question front and center–having two view points and the ensuing debates roll on out.

Off the bottom it was "is this a sucker's rally or a setup for another drop?"; now its "is this just a little dip and the start of a sideways consolidation, or the start of a substantial 5 -10 % correction?"

It seems like these times of opposing question of market direction after extreme linear moves should be watched closely for reversal. I find it interesting that the choice not talked about much off the march low was this: Or is this the start of a nice 50% multi month rally from oversold conditions not witnessed since 2001?

Today the choice missing would be this: Or is this the start of a 50 to 70% drop, retracing most of the gains of 2009?

TV — usually it's what they don't say or its the opposite of what they scream into your face — making great TV but bad advice.

Jan

31

drought in hawaiiEl Nino has brought drought to Hawaii. It rained once in four months. The last few days have brought a welcome rain. Many of the plants are already brown, and the rain is not enough to revive the shriveled branches and leaves. It will take new shoots of growth to replace the vegetation. I see this as an analogy to our economy. Some irrigation is not enough to revive dead industries and businesses. One rain is not enough to support the new shoots, especially where the new shoots sprouted with the one rain, or irrigation, and then it stops. The shoots wither. Further next year's drop is diminished as there is no rain to set the coffee flowers for the next crop.

The drought has caused fire. We've studied fires here before, and concluded they can be healthy in nature. However, managed fire prevention, while stopping the natural breakouts of small fire allows lots of weeds to grow, so when the fire does go out of control, it becomes much larger, much worse and threatens the entire forest and human areas. Again good analogies for the economy. When the week businesses are not allowed to fail naturally and get propped up, when economic difficulty does strike, it threatens the entire economy as chains of businesses go up in flames.

Jan

31

Shane DorianShane Dorian held a surf contest for the local kids as a public service. His friends are world famous surfers 8 time world champion Kelly Slater, Rob Machado, Fred Pattacia and come to sign autographs and pose with the kids. They put on a surfing demonstration. Kelly and Rob were using really really short 5' boards. This is something new. Kelly is always thinking of new things to do surfing, new moves. It's why he's 8 time world champion.

It's similar to music. Mile Davis always was on the cutting bleeding edge of jazz. He was the only one from the 50's bebop scene to survive and thrive in the new age. He always was playing something new. He didn't rehearse. He told his players, don't play what you played in practice. Here's the riff. He said music was in the moment. You had to improvise, and make the moment happen. Most people use what worked before because its comfortable, because they got approval, because they made money with it. But it all died away… all of it.

It's the same with the market. The market is always throwing something new at us every single day. It's always changing. There is no rehearsal for the market. It's in the moment. Trying to reuse the same hackneyed trades that world a decade ago won't cut it. Sure they may be statistically significant, but the world, systems, change. Got to live in the moment. Otherwise you're going to fall the way the old jazz of the old jazz musicians. It's not going to thrive. You have to have new stuff all the time. Sure it's scary.

Jan

31

Mel Gibson in the Edge of DarknessThomas Craven’s story–chasing down his daughter, Emma Craven’s (played by newcomer Bojana Novacovic), killers–was a highly popular 6-part series in the UK in 1985: It’s 15th on the British Film institute’s Top 100 TV list. It has been updated a lot to take note of domestic and international tensions, the aura of secrecy over weapons manufacture and control, terrorism, secret government installations, nefarious black ops, and Gibson as angry avenger on the learning curve of a daughter he evidently hardly knew. It is a thriller set at the intersection of big business and oceanic politicking.

Mel Gibson is no longer the beautiful, mentally slow lad of TIM (Australia, 1979): He’s been away from the silver screen for seven lean years, getting arrested on DWIs and directing some mean-spirited agit-prop religious indictments and the like. As a colleague remarked, He hasn’t aged all that well. We no longer swoon at his visage, and maybe that means we concentrate more on the scripts. His return consists of a dollop of the gripping Liam Neeson thriller, TAKEN (2008) aka a vigilante-pursuing the murderers of his daughter under the misapprehension that her bullet was meant for him, cynical corporate skullduggery a la Russell Crowe in THE INSIDER (1999), plus a rad or two of Merrill Streep and Cher in SILKWOOD (1983). And a dash of the LETHAL WEAPON franchise (1987-1098) whacko residuum.

The four don’t quite intersect. Widowed Boston homicide vet Craven (Gibson) finds the bloody trail of his daughter's murderers leads to a hush-hush defense-industry combine, Northmoor, where she was an intern, supposedly. During the brief few minutes where she is still talking, she neither convinces that she’s an MITnuclear physicist, nor the firebrand integrity-beseiged fighter we are led to see as the plot unspools. We fix on the truly scary, unexplained character of Ray Winstone (who appears in the 44-INCH CHEST ughie indie) playing a mercenary (or magic messenger) we don’t know how to classify, Jedburgh. We see Danny Huston’s Bennett, head of Northmoor, and something immediately snaps into place if you are at all movie-sophisticated: Baddie alert! While a solid character actor, oleaginous Huston never appears as the good guy, so casting him is a menu-card for predictable later evil…. And sure enough.

In Martin Campbell's reworking of the hot British miniseries, Craven’s take-no-prisoners flinty, blind-siding sock ‘em-ups and Danny Huston's serpentine mystery sandwich don’t particularly marry well, some of the unstitched elements being Winstone's pop-up messianic Judgment man. Also not jibing is Emma’s oddly vicious boyfriend and his nasty proclivity to attack visitors related to his now-dead gal-pal. Why would a gorgeous, talented, PhD physicist go for such a creepy unhinged nutjob? How can every meeting Craven has with every friend of his daughter be surveilled, no matter how far out in nowhereland? We never actually see or hear why the film is titled EDGE OF DARKNESS—guess it was somewhere in the TV series, but they forgot to put it back into the update.

And why would a character as insanely intrepid as Gibson’s (and his daughter) be named “craven,” anyway? A jejune linguistic joke?

The infra-dig sarcasm between Huston and Denis O'Hare (as a gummint co-conspirator) is pleasantly arch, and the cast enjoys their twirling-mustaches oily bought men, whether Boston Brahmin statesman or guilty-from-the-gut killer.

Though derivative, it does offer more meat for the lions than many a studio flick, with the lined, gravelly steeliness of its careworn star not ineffective, and not unmatched to a chronicle of a policeman parent with nothing to lose, who apparently cathects for his anxious, angry, sleepless, spoiling-for-a-broiling audience.

Jan

30

Greek Temple at AgrigentoGreek and Portuguese bonds are in a nasty spiral. Very little seems to be working in terms of convincing the markets to mop up some paper. Greece 3.7 2015 is now trading 86-86.5, yielding approx 6.6 pct and some long term Portugal bonds are down a point or so since yesterday. I don't think Europe is in any way capable of rescuing Greece, or anybody else for the matter; the virus will soon spread to Italy, as it suffers from the samle chronic high debt to gdp ratios as the afore mentioned countries. Thus the trade of the day could be long Bunds short Btps.

Jeff Rollert writes:

Would it be unreasonable to compare the inability of any country to act as the world's military police, and in a similar sense, one country being the worlds bank?

Seems like the ECB built a wing on their house with wood full of termites.

I've always enjoyed the science fiction writers observation that the world will never unite until there is a non-Earth threat. Perhaps that includes monetary unions.

Alston Mabry writes:

It used to be so simple: The Greeks would have a crisis, the drachma would fall, and the Neuro's would swarm down for sun and fun and economic stimulation. The Greeks then took the extra money and started another story on the house because they knew that keeping the cash was not a good long-term investment. You'd see half-finished buildings everywhere, bristling with rebar — just the local version of a savings account with a currency hedge.

Bruno Ombreux adds:

Have you been to Athens recently? That's exactly what they have. Half-finished houses. They don't even bother covering the concrete. I was told that it was for tax reasons. As long as the house is unfinished, there are no real-estate taxes. So they don't finish their houses. This is very creative.

Jim Sogi replies:

Same thing in Peru.

William Weaver comments:

I didn't attend either event, but I remember in 2003 when Athens hosted the FISA Junior World Rowing Championships and then in 2004 Olympic Games someone made a comment about how clean everything was. It wasn't until about a week into Jr Worlds that someone finally noticed the grass on the sides of the highway between the athlete village and the rowing venue wasn't grass, but a green tarp covering heaps of trash.

The state of the art rowing venue is to my knowledge abandoned today. It was also only finished one week prior to Jr Worlds, and no one thought to anticipate the mid-August winds that sweep the city. The winds created such waves that the Men's eights heats had to jump ship and swim their boats between 500m and 1000m to cross the finish. Finals were reduced from 2000m to 1000m. The Games were lucky and didn't have this problem.

But what about selecting cities in order to build athletic facilities that will help the community in years to come? I wonder if there is been any research regarding future price performance of munis issued to build venues for Olympic Games. Most venues go unused after the event.

Henry Gifford adds:

Another reason for the rebar sticking out the tops of buildings in some places is that they expect to build the building taller later, when money is available, but without a mechanism for collecting on debts there is little money available for lending, thus things tend to be paid for in cash, and built gradually. Here, with loans available, that strategy doesn't pay as well as borrowing the money to build a property to it's "best" economic use, as the cash flow is much worse on a partially built-on property - same land taxes, same land cost, lower return, higher hassle/permit costs for repeated small construction jobs.

Jan

29

the banker from monopoly[Editor's Note: TBTF = Too Big To Fail]. My friend Rocky Humbert posed the question: ‘If 1000 mini-AIG's and mini-Fannies are all imploding, why is that less of a catastrophic event than a single mega-AIG? Arguably, it's a more serious systemic risk…as the possible chain-reaction will be like the whack-a-mole game at the video arcade.’

His statement presupposes that 1000 separate actuarial teams would ignore or miscalculate risks inherent to derivatives. The assortment of risk management methods and individual company’s investigations initiated because of pricing disparities among competitors will illuminate many risk pricing issues that went unnoticed in the past. Notwithstanding past widespread risk pricing blunders, it is likely that risk management performed by 1000 separate competitive entities will lower overall systemic risk.

Rocky Humbert begs to differ:

I respectfully disagree with your premise for these reasons:

Thousands of supposedly independent and uncorrelated investors BOUGHT the housing related derivatives over the past several years; and all their models presupposed the same generalized assumption - that housing prices wouldn't decline nationally. This demonstrates beyond any doubt that a systemic event is systemic exactly because of a widely held belief. Any time large groups of people share the same belief, it becomes a systemic risk. How can you ignore the exception that proves the rule?

The wave of bank failures in the early 1930's was spread across the country in small and medium sized banks too. Similarly, the RTC which spent billions cleaning up the S&L failures of the late 1980's. Who was the TBTF institution in the 1930's ?

The equity quant debacle in the summer of 2007 demonstrated that most of these independent minds were using similar models. This was not a systemic risk event — but it demonstrates the illusion of independence among participants…both hedge funds and broker-dealers.

There are many many illustrations of similar phenomenon in the natural world — feedback loops, harmonic amplifiers, etc etc.

George Parkanyi adds:

Banks should be allowed to grow as big as they want, but not allowed to be counter-parties to each other where their own capital is involved. And certainly no borrowing from each other or insuring each other. (They are supposed to be competitors after all). That way, they would be transacting with each other only on clients` behalf (e.g. letters of credit, wire transfers, cheque clearing etc.). They should be able to take deposits, borrow from the Treasury with the transparency associated with that, and they should be allowed to trade their own capital on 3rd-party exchanges (again, not directly with each other). And of course they could form syndicates to spread risk when financing 3rd parties. This way their business, and sphere of exposure would be limited to the business they do with their clients and their proprietary trading through exchanges that have well-established margin rules and centralized, neutral clearing mechanisms. There would be relatively little linkage to allow a chain reaction to occur. (There would be some through lending to the same clients. One guy calling in a loan at a bad time could cause problems for the others. But this would just have to be risk-managed - you can`t take the risk out of everything).

Something like this would compartmentalize risk without having to treat institutions differently simply because of their size. Thoughts?

Jan

29

Because the market sells down on a positive result in my mind doesn't equate to frustration or a negative emotion. I feel that it's only direction — emotionless. With that said, we watch fin tv, talk to people, read whatever and there is a mood to the market inwhich we are connected to. So the GNP number tomorrow is going to be good and above expectations. So the market should go up feeling that the worst is over for the recession, but wait — that means rates may go up now, or that O needs to quit the jobs bill now or that this is the news so it gets sold and thats what everyone is doing so its time to buy — an insanity of circular knots — like marveling at how big the creature's teeth are as he bites you across the torso.

Justin Mamis said it was called the "price news drug effect" where everyone fits the market into the news and news into the market — and if it didn't fit to a logic then your mind worried and got stuck in some dumbstruck sidecar being pulled along. His point was get off the need to equate the market with news.

What I think is interesting is who does (a collective group) the initial buying or selling? Is it some squad of dark minds, or is it a flock of birds moving as a single unit, or a school of fish turning at once under the connected forces of group travel — direction? I think more the latter.

Victor Niederhoffer adds:

Perhaps this musical will give insight into the relief of frustration hypothesis.

Jan

29

Dubai towersNovember 27, 2009, the Dubai crisis hit dropping markets from a high of 1111.25 to 1067, and as I recall a bit lower that night. Greece debt crisis going on and market approaches the 1067 level again tonight.

It's my theory that context is important. A ball has different statistical importance with a 3-2 count than at 1-1. The bottom tick means something different than the top tick. While it sounds trivial in this example, qualitative analysis should be combined with quantitative analysis. Running or swimming x in x at 25 is different than at 55. Time, season, context is important.

.

Jan

29

otzi the icemanOtzi has no heirs [see Surprising Results Of Complete Mitochondrial Genome Of 5,000-Year-Old Mummy ] is not strictly proven, although they are right in a statistical sense. They can't say anything about Otzi, but they are right about the population he is issued from.

This combination of genetics and statistics gives me the opportunity to express my most complete admiration for R. A. Fisher.

Now that I dug a bit into the foundations of Statistics, I have come to realize that Fisher is one of the great geniuses of the 20th Century. Greater than Einstein in my opinion.

I don't understand why he is not more famous. Take for example, The Conditionality Principle. Fisher had the intuition and Birnbaum formalized it.

This thing is a moment of pure concentrated genius and joy.

I don't know anything else like that in science. In the sense that it is incredibly practical and down-to-earth while being at the same time very foundational and philosophical.

Jan

29

Gold S&P consilience. 1140 to 1080.

Jan

28

Algorithmic trading developed impressively during the past years. Up to 60% of trading in equity markets is computer-driven. Some say that the increasing dominance of algorithmic trading could cause "tiny price changes to snowball, rolling down the hill at exponentially increasing speed". There is the possibility for a crash to happen also because too many funds are trading in the same style. What is the human control on these machines? How long will it take before a mistake is recognized as such? Is there a way to prevent "algos gone wild"? Can regulation help or would it make it worse? In practice, there is a risk of systemic imbalance. On the other side there are those who believe that high frequency traders deliver a service: liquidity and their systems are the most efficient way to match buyers and sellers.

In the paper "Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market", Alain Chaboud Benjamin Chiquoine Erik Hjalmarsson Clara Vega find that:

- algorithmic trades tend to be correlated, suggesting that the algorithmic strategies used in the market are not as diverse as those used by non-algorithmic traders

- there is no evident causal relationship between algorithmic trading and increased exchange rate volatility

- even though some algorithmic traders appear to restrict their activity in the minute following macroeconomic data releases, algorithmic traders increase their provision of liquidity over the hour following each release

- non-algorithmic order flow accounts for a larger share of the variance in exchange rate returns than does
algorithmic order flow

- there is evidence that supports the recent literature that proposes to depart from the prevalent assumption that liquidity providers in limit order books are passive.

Among the most recent developments in algorithmic trading, some algorithms now automatically read and interpret economic data releases, generating trading orders before economists have begun to read the first line. They allow trading to take place automatically in response to market data and news, deciding when and how much to trade. There are services that allow to react more quickly to breaking news events, providing a quantifiable measure of qualitative information present in news articles. The result is that computers can place orders more strategically than humans.

In the paper, it emerges that there is no positive correlation between algorithmic trading and the level of volatility. The evidence points towards a negative relationship, suggesting that the presence of algorithmic trading reduces volatility. Computer trading provides liquidity in period of stress (after the release of news). From the data analysed, the growth of algorithmic trading has not caused lower market quality.

George Parkanyi writes:

I don't see them being a problem unless everyone is automatically increasing trade size and leverage with the trend. The associated risk-management is fairly sophisticated. That they would do this in a highly-correlated, invisible way is highly unlikely. And high-frequency trading is by definition short-term, so there is constant buying and selling in the market. A lot of these strategies may not hold a position overnight. Markets that are up a lot or down a lot as one-way sure-bet trades are pretty highly publicized. You'll eventually get a sudden reversal, and a lot of haircuts, but these overextensions most savvy players can see coming (though you don't know where or when the turn is going to happen). Wouldn't worry about it - enjoy the liquidity.

Jan

28

SurpriseOne rule I picked up early on from Tudor Jones's philosophy: in trending market, surprise (defined as “big one-day change in price”) follows trend! Based partly on this rule, within an hour of the record-size gap-down in SP futures on Oct. 19 of 1987, Tudor doubled-up on its Short position! (My understanding of the day’s progression: S*r*s interests, in contrast, were Long coming in; and then were on offer, as the day wore on). S&P futures broke below 300.00 in the preceding week and plunged in the course of that Black Monday as low as 190.00!

Black Monday’s open was an example of open game, where futures have never before been known to drop almost 20% straight-line in two weeks, and then be offered limit-down at Chicago’s open. I, for one, never bid that day: who had an answer if any of totally unbelievable bargains changing hands on record volume were worth bidding?! That’s open game – when all valuation tools are locked out, and only support of consequence is the bell. But next day, bouncing of off 181.00 low print on almost non-existent volume, and spreads widening to the point that no transactions were taking place at all — that was an entirely different story…

Same again played out 10 years later, on October 27 of 1997. Gap-down open again (luckily, I came in 100% short), followed by a faint rally attempt, where I doubled-up with my broker’s permission for “intraday play”. Futures proceeded to plunge on heavy volume, triggering momentary circuit-breakers. Eventually, my floor broker said: “Listen, you picked the high so why don’t you just figure out the low and leave me your order, I just can’t hang any more.” I muttered “There will not be a low today”, and I hung up… He calls what seemed to be an hour later: “You were right: they’re shutting us down for the day; we’re not re-opening from this limit-down…” That’s when a closed market was an example of open game, where no support could again be calculated. And again on the contrary, a limit-offered level of next day’s futures open proved to be a brand new game — where many (including me) covered and then feverishly chased offers in attempt to reverse — to no avail, the game already closed…

Jan

28

Edward LorenzDimensionality of Market Trading: Open (State-Input-Output)/Closed (State-Input-State)

Query, Comments, and the Issue

What is the equivalent of an open versus a closed game in market trading, and under what conditions is each better or worse?

Upon reading the comments, one may conclude that there is significant variation in the interpretation of the meanings of open and closed relative game theory applications to market trading. Ball and bat indicates baseball or cricket. The Black Monday events related to futures distinguishes valuation tools and calculation of market support. A two-dimensional answer also may encompass both (option spreads and directional futures) issuances and (high/low volatility) market conditions. Fees then VIX, cash balance, and price-volume-spread applications may be linear processes.

My presupposition here is that Victor’s query originates from his recent recommendation of Nigel Davies' book on chess. As the ecology of chess may function as a multi-dimensional system (e.g., 3d chess), and as open (1 e4 e5) and closed (1 d4 d5) moves operate as tactical or game strategies, we may address the query by researching the issue:

If market trading functions as a multi-dimensional system, how may open and closed strategies operate for optimal performance?

Excerpts — A Survey of Research on Open/Closed Concepts

Consider the following excerpts from research on open and closed concepts. Note that the direction of this research leads to theory of chaos and logistic mapping.

Ecology (definition): The branch of sociology that is concerned with studying the relationships between human groups and their physical and social environments: also called human ecology.

Note that both games and markets are human constructs constituting physical/social environments that function as rules-based systems.

Systems and states (terms): A system is a combination of interacting elements that performs a function not possible with any of the individual elements. In a dynamic system, outputs depend on present and past values of inputs and must define the concept of a state.

The state of a system makes the system’s history irrelevant. The state of the system contains all of the information needed to calculate responses to present and future inputs without reference to the past history of inputs and outputs; present inputs and the sequence of future inputs allow computation of all future states (and outputs). Some dynamic systems are modeled best with state equations while others are modeled best with state machines.

Dimensionality of dynamical systems: Discrete chaotic systems, such as the logistic map, can exhibit strange attractors whatever their dimensionality. However, the Poincaré-Bendixson theorem shows that a strange attractor can only arise in a continuous dynamical system (specified by differential equations) if it has three or more dimensions. Linear systems are never chaotic; for a dynamical system to display chaotic behavior it has to be nonlinear.

Open/Closed Principle: The term Open/Closed Principle is that once completed, the implementation of a class could only be modified to correct errors. New or changed features would require that a different class be created; that class could reuse coding from the original class through inheritance. The derived subclass might or might not have the same interface as the original class.

Implementation can be reused through inheritance but interface specifications need not be. The existing implementation is closed to modifications, and new implementations need not implement the existing interface.

Polymorphic Open/Closed Principle advocates inheritance from abstract base classes. Interface specifications can be reused through inheritance but not implementation.

The existing interface is closed to modifications and new implementations must, at a minimum, implement that interface. Thus, the Principle became popularly redefined to refer to the use of abstracted interfaces, where the implementations can be changed and multiple implementations could be created and polymorphically substituted for each other.

The concept of an “open system” was formalized within the framework of thermodynamics. This concept was expanded upon with the advent of information theory and subsequently systems theory.

In the social sciences, an open system process exchanges material, energy, people, capital and information with its environment. In the natural sciences, an open system is one whose border is permeable to both energy and mass. By contrast in physics, a closed system is permeable to energy but not to matter.

Open systems have a number of consequences. A closed system contains limited energies. Open system assumes that supplies of energy cannot be depleted from a surrounding environment, being infinite for the purposes of study. For instance, the radiant energy system receives its energy from solar radiation, which may be considered inexhaustible.

A closed system is a system in a state isolated from its surrounding environment. An idealized system is where closure is perfect, yet no system can be completely closed (only varying degrees of closure).

In thermodynamics, a closed system can exchange heat and work (aka energy) but not matter with its surroundings. In contrast, an open system can exchange all of heat, work and matter.

Note that Victor and Laurel analogize market exchanges with energy related to thermodynamics (see Chapter 13 in Practical Speculation and Page 32 of my current book project, Theory of Quantitative Relativity for Program Trading and Portfolio Management Systems Architecture).

Syllable: A syllable is a unit of organization for a sequence of speech sounds and is typically made up of a syllable nucleus (most often a vowel) with optional initial and final margins (typically, consonants). Syllables are often considered the phonological “building blocks” of words. The general structure of a syllable consists of the following segments:

Onset (obligatory in some languages, optional or even restricted in others) Rime Nucleus (obligatory in all languages) Coda (optional in some languages, highly restricted or prohibited in others)

In some theories of phonology, these syllable structures are displayed as tree diagrams (similar to the trees found in some types of syntax). The syllable nucleus is typically a sonorant, usually making a vowel sound, in the form of a monophthong, diphthong, or triphthong, but sometimes sonorant consonants like [l] or [r].

The syllable onset is the sound or sounds occurring before the nucleus, and the syllable coda (literally ‘tail’) is the sound or sounds that follow the nucleus. The term rime covers the nucleus plus coda.

Generally, every syllable requires a nucleus. Onsets are extremely common, and some languages require all syllables to have an onset. (That is, a CVC syllable like cat is possible, but a VC syllable such as at is not.) A coda-less syllable of the form V, CV, CCV, etc. is called an open syllable (or free syllable), while a syllable that has a coda (VC, CVC, CVCC, etc.) is called a closed syllable (or checked syllable). Note that they have nothing to do with open and close vowels.

Dynamical system (concept): The dynamical system concept is a mathematical formalization for any fixed “rule” that describes the time dependence of a point’s position in its ambient space. Examples include the mathematical models that describe the swinging of a clock pendulum, the flow of water in a pipe, and the number of fish each spring in a lake.

At any given time a dynamical system has a state given by a set of real numbers (a vector) which can be represented by a point in an appropriate state space (a geometrical manifold). Small changes in the state of the system correspond to small changes in the numbers.

The evolution rule of the dynamical system is a fixed rule that describes what future states follow from the current state. The rule is deterministic: for a given time interval only one future state follows from the current state.

The concept of a dynamical system has its origins in Newtonian mechanics. The evolution rule gives the state of the system only a short time into the future based on a relation that is either a differential equation, difference equation, or other time scale.

To determine the state for all future times requires iterating the relation many times – each advancing time a small step. The iteration procedure is referred to as solving the system or integrating the system. Once the system can be solved, given an initial point it is possible to determine all its future points, a collection known as a trajectory or orbit.

Numerical methods implemented on electronic computing machines have simplified the task of determining the orbits of a dynamical system. For simple dynamical systems, knowing the trajectory is often sufficient, but most dynamical systems are too complicated to be understood in terms of individual trajectories. The difficulties arise because:

Trajectories may be periodic and wander through different states of a system, so applications often require enumerating these classes or maintaining the system within one class. Classifying all possible trajectories has led to the qualitative study of dynamical systems, that is, properties that do not change under coordinate changes. Linear dynamical systems and systems that have two numbers describing a state are examples of dynamical systems where the possible classes of orbits are understood.

The behavior of trajectories as a function of a parameter may be what is needed for an application. As a parameter is varied, the dynamical systems may have bifurcation points where the qualitative behavior of the dynamical system changes. For example, it may go from having only periodic motions to apparently erratic behavior, as in the transition to turbulence of a fluid.

The trajectories of the system may appear erratic, as if random. In these cases it may be necessary to compute averages using one very long trajectory or many different trajectories. The averages are well defined for ergodic systems and a more detailed understanding has been worked out for hyperbolic systems. Understanding the probabilistic aspects of dynamical systems has helped establish the foundations of statistical mechanics and of chaos.

Dynamical system (definition): A dynamical system is a manifold M called the phase (or state) space endowed with a family of smooth evolution functions that for any element of the time, map a point of the phase space back into the phase space. The notion of smoothness changes with applications and the type of manifold.

Differential equations can be used to define the evolution rule: an equation that arises from the modeling of mechanical systems with complicated constraints. Many of the concepts in dynamical systems can be extended to infinite-dimensional manifolds—those that are locally Banach spaces—in which case the differential equations are partial differential equations.

Linear dynamical systems: Linear dynamical systems can be solved in terms of simple functions and the behavior of all orbits classified. In a linear system the phase space is the N-dimensional Euclidean space, so any point in phase space can be represented by a vector with N numbers.

Flows: For a flow, the vector field is a linear function of the position in the phase space with A a matrix, b a vector of numbers and x the position vector. The solution to this system can be found by using the superposition principle (linearity).

The distance between two different initial conditions in the case A ? 0 will change exponentially in most cases by either converging exponentially fast towards a point or diverging exponentially fast. Linear systems display sensitive dependence on initial conditions in the case of divergence.

Maps: A discrete-time, affine dynamical system has the form with A a matrix and b a vector. In the new coordinate system, the origin is a fixed point of the map and the solutions are of the linear system. The solutions for the map are no longer curves, but points that hop in the phase space. The orbits are organized in curves, or fibers, which are collections of points that map into themselves under the action of the map. There are also many other discrete dynamical systems.

Local dynamics: The qualitative properties of dynamical systems do not change under a smooth change of coordinates (this is sometimes taken as a definition of qualitative). A singular point of the vector field (a point where v(x) = 0) will remain a singular point under smooth transformations; a periodic orbit is a loop in phase space and smooth deformations of the phase space cannot alter it being a loop.

It is in the neighborhood of singular points and periodic orbits that the structure of a phase space of a dynamical system can be well understood. In the qualitative study of dynamical systems, the approach is to show that there is a change of coordinates (usually unspecified, but computable) that makes the dynamical system as simple as possible.

Rectification: A flow in most small patches of the phase space can be made very simple. If y is a point where the vector field v(y) ? 0, then there is a change of coordinates for a region around y where the vector field becomes a series of parallel vectors of the same magnitude. This is known as the rectification theorem.

The rectification theorem says that away from singular points the dynamics of a point in a small patch is a straight line. The patch can sometimes be enlarged by stitching several patches together, and when this works out in the whole phase space M the dynamical system is integrable. In most cases the patch cannot be extended to the entire phase space.

Bifurcation theory: When the evolution map (or the vector field it is derived from) depends on a parameter, the structure of the phase space will also depend on this parameter. Small changes may produce no qualitative changes in the phase space until a special value is reached. At this point the phase space changes qualitatively and the dynamical system is said to have gone through a bifurcation.

Bifurcation theory considers a structure in phase space (typically a fixed point, a periodic orbit, or an invariant torus) and studies its behavior as a function of the parameter. At the bifurcation point the structure may change its stability, split into new structures, or merge with other structures. By using Taylor series approximations of the maps and an understanding of the differences that may be eliminated by a change of coordinates, it is possible to catalog the bifurcations of dynamical systems.

Ergodic systems: In many dynamical systems it is possible to choose the coordinates of the system so that the volume (really a ?-dimensional volume) in phase space is invariant. This happens for mechanical systems derived from Newton’s laws as long as the coordinates are the position and the momentum and the volume is measured in units of (position) × (momentum).

The ergodic hypothesis turned out not to be the essential property needed for the development of statistical mechanics and a series of other ergodic-like properties were introduced to capture the relevant aspects of physical systems. Koopman approached the study of ergodic systems by the use of functional analysis.

Nonlinear dynamical systems and chaos: Simple nonlinear dynamical systems and even piecewise linear systems can exhibit a completely unpredictable behavior, which might seem to be random – within completely deterministic systems. This seemingly unpredictable behavior has been called chaos.

Hyperbolic systems are precisely defined dynamical systems that exhibit the properties ascribed to chaotic systems. In hyperbolic systems the tangent space perpendicular to a trajectory can be well separated into two parts: one with the points that converge towards the orbit (the stable manifold) and another of the points that diverge from the orbit (the unstable manifold).

This branch of mathematics deals with the long-term qualitative behavior of dynamical systems. Here, the focus is not on finding precise solutions to the equations defining the dynamical system (which is often hopeless), but rather to answer questions, for example:

• Will the system settle down to a steady state in the long term?
• If so, what are the possible attractors?
• Does the long-term behavior of the system depend on its initial condition?

Note that the chaotic behavior of complicated systems is not the issue.

Meteorology has been known for years to involve complicated—even chaotic—behavior. Chaos theory has been so surprising because chaos can be found within almost all trivial systems.

Chaos: Although there is no universally accepted mathematical definition of chaos, a commonly-used definition says that, for a dynamical system to be classified as chaotic, it must have the following properties:

a) it must be sensitive to initial conditions;
b) it must be topologically mixing, and;
c) its periodic orbits must be dense.

Sensitivity to initial conditions: Sensitivity to initial conditions means that each point in such a system is arbitrarily closely approximated by other points with significantly different future trajectories. Thus, an arbitrarily small perturbation of the current trajectory may lead to significantly different future behavior.

Sensitivity to initial conditions is popularly known as the “butterfly effect,” so called because of the title of a paper given by Edward Lorenz in 1972 entitled Predictability: Does the Flap of a Butterfly’s Wings in Brazil set off a Tornado in Texas?

The Lyapunov exponent characterizes the extent of the sensitivity to initial conditions. Quantitatively, two trajectories in phase space with initial separation diverge. The rate of separation can be different for different orientations of the initial separation vector. Thus, there is a whole spectrum of Lyapunov exponents — the number of them is equal to the number of dimensions of the phase space.

Topological mixing: Topological mixing (or topological transitivity) means that the system will evolve over time so that any given region or open set of its phase space will eventually overlap with any other given region. This mathematical concept of “mixing” corresponds to the standard intuition, and the mixing of colored dyes or fluids is an example of a chaotic system.

Topological mixing is often omitted from popular accounts of chaos, which equate chaos with sensitivity to initial conditions. However, sensitive dependence on initial conditions alone does not give chaos.

Density of periodic orbits: Density of periodic orbits means that every point in the space is approached arbitrarily closely by periodic orbits. Topologically mixing systems failing this condition may not display sensitivity to initial conditions, and hence may not be chaotic. For example, an irrational rotation of the circle is topologically transitive, but does not have dense periodic orbits, and hence does not have sensitive dependence on initial conditions.

Lorenz and butterflies: An early pioneer was Edward Lorenz whose interest in chaos came about accidentally through his work on weather prediction in 1961. Lorenz was using a simple digital computer to run his weather simulation. He wanted to see a sequence of data again and to save time he started the simulation in the middle of its course. He was able to do this by entering a printout of the data corresponding to conditions in the middle of his simulation, which he had calculated last time.

To his surprise the weather that the machine began to predict was completely different from the weather calculated before. Lorenz tracked this down to the computer printout. The computer worked with 6-digit precision, but the printout rounded variables off to a 3-digit number, so a value like 0.506127 was printed as 0.506. This difference is tiny and the consensus at the time would have been that it should have had practically no effect.

However Lorenz had discovered that small changes in initial conditions produced large changes in the long-term outcome. Lorenz’s discovery, which gave its name to Lorenz attractors, proved that meteorology could not reasonably predict weather beyond a weekly period (at most).

Mandelbrot and snowflakes: The year before, Benoît Mandelbrot found recurring patterns at every scale in data on cotton prices. Beforehand, he had studied information theory and concluded noise was patterned like a Cantor set: on any scale the proportion of noise-containing periods to error-free periods was a constant – thus errors were inevitable and must be planned for by incorporating redundancy.

Mandelbrot described to effects. The “Noah effect” in which sudden discontinuous changes can occur (e.g., in a stock’s prices after bad news), thus challenging normal distribution theory in statistics (aka Bell Curve). The “Joseph effect” is where persistence of a value can occur for a while yet suddenly change afterwards.

An object whose irregularity is constant over different scales (”self-similarity”) is a fractal (for example, the Koch curve or “snowflake”, which is infinitely long yet encloses a finite space and has fractal dimension equal to circa 1.2619, the Menger sponge and the Sierpinski gasket). In 1975 Mandelbrot published The Fractal Geometry of Nature, which became a classic of chaos theory. Biological systems such as the branching of the circulatory and bronchial systems proved to fit a fractal model.

Distinguishing random from chaotic data: It can be difficult to tell from data whether a physical or other observed process is random or chaotic, because in practice no time series consists of pure ’signal.’ There will always be some form of corrupting noise, even if it is present as round-off or truncation error. Thus any real time series, even if mostly deterministic, will contain some randomness.

Statistical tests attempting to separate noise from the deterministic skeleton or inversely isolate the deterministic part risk failure. Things become worse when the deterministic component is a non-linear feedback system. In presence of interactions between nonlinear deterministic components and noise, the resulting nonlinear series can display dynamics that traditional tests for nonlinearity are sometimes not able to capture.

Logistic mapping: In the case of the logistic map, the quadratic difference equation (1) describing it may be thought of as a stretching-and-folding operation on the interval (0,1). This stretching-and-folding does not just produce a gradual divergence of the sequences of iterates, but an exponential divergence (see Lyapunov exponents) as evidenced also by the complexity and unpredictability of the chaotic logistic map.

In fact, exponential divergence of sequences of iterates explains the connection between chaos and unpredictability: a small error in the supposed initial state of the system will tend to correspond to a large error later in its evolution. Hence, predictions about future states become progressively (and exponentially) worse when there are even very small errors in our knowledge of the initial state..

It is often possible, however, to make precise and accurate statements about the likelihood of a future state in a chaotic system. If a (possibly chaotic) dynamical system has an attractor, then there exists a probability measure that gives the long-run proportion of time spent by the system in the various regions of the attractor.

Conclusion

Based on Quantitative Relativity, if market trading functions as a multi-dimensional system, distinguishing between market situation processing and market strategy operation for order execution may provide the optimal performance of systemic applications of open and closed strategies.

The Theory of Quantitative Relativity distinguishes between control rules (or proof planning anticipatory systems) for correlating that “nexus” of the matter observed as energy transformation and transference, constituting nonrandom sequencing of combination structures within electronic exchange markets of financial instruments.

In a dynamic system, outputs depend on present and past values of inputs and must define the concept of a state. Therefore, an open system would be indicated for state-input-output processing.

As the state of a system makes the system’s history irrelevant, some dynamic systems are modeled best with state equations while others are modeled best with state machines. Therefore, market situation processing indicates open systematics, whereas market strategy indicates closed systematics.

A strange attractor can only arise in a continuous dynamical system (specified by differential equations) if it has three or more dimensions. Linear systems are never chaotic; for a dynamical system to display chaotic behavior, it has to be nonlinear. In that market trading may be multi-dimensional, it can be chaotic; therefore, quantification of strange attractors requires open systematics for state-input-output processing.

The term Open/Closed Principle is that once completed, the implementation of a class could only be modified to correct errors. New or changed features would require that a different class be created. Therefore, to achieve a linear system for order execution, a closed system is required within a rules-based subsystem of a state machine that quantitatively defines each state.

The dynamical system concept is a mathematical formalization for any fixed “rule” that describes the time dependence of a point’s position in its ambient space, such as the flow of water in a pipe. Therefore, closed systematics for (rules-based) function integration is required to quantify space and time correlation of price action (as a form of energy).

As (a) a dynamical system has a state given by a set of real numbers (a vector) which can be represented by a point in an appropriate state space (a geometrical manifold), and (b) small changes in the state of the system correspond to small changes in the numbers, therefore, open systematics are indicated to quantify state transitioning (or state-input-state), whereas a closed system is required to define rules-based excitation for state transitioning.

Iteration to determine the state for all future times is solving the system or integrating the system. Once the system can be solved, given an initial point, it is possible to determine all its future points, a collection known as a trajectory or orbit. This system operates as the (state-input-output) processing of the market situation; therefore, based on Quantitative Relativity, the solving of the system indicates open systematics, whereas the collection as a trajectory requires a closed system to establish linear processing for nonrandom storage and recall – being pattern recognition and connection of intelligence.

Linear dynamical systems can be solved in terms of simple functions and the behavior of all orbits classified. In a linear system the phase space is the N-dimensional Euclidean space, so any point in phase space can be represented by a vector with N numbers. Therefore, as solutions for the map are no longer curves but points that hop in the phase space, a closed system is supported for binary processing of order execution protocol.

The qualitative properties of dynamical systems do not change under a smooth change of coordinates (this is sometimes taken as a definition of qualitative). Therefore, as the incongruency of averaging is minimized during market strategy processing, efficient operation of a closed system is viable for state transitioning.

If coordinates are the position and the momentum and the volume is measured in units of (position) × (momentum), phase space may be invariant. Therefore, as open systematics are required to quantify price action as energy coordinates of a market situation, a closed system may achieve state transitioning of patterns during unpredictable behavior, which might seem to be random – within completely deterministic systems (or being the chaos of market exchange behavior).

Hyperbolic systems are dynamical systems that exhibit properties of chaotic systems and may be separated into two parts: one with the points that converge towards the orbit (the stable manifold) and another of the points that diverge from the orbit (the unstable manifold). Chaotic behavior of complicated systems is not the issue but for defining rules-based applications of market trading; therefore, quantification of the stable manifold for convergence of market strategy supports closed systematics, whereas divergence of market situation requires open systematics to define and quantify state transitioning.

Sensitivity to initial conditions means that each point in such a system is arbitrarily closely approximated by other points with significantly different future trajectories; therefore, open systematics are indicated for market situation processing to both define and quantify state transitioning.

Topological mixing (or topological transitivity) means that the system will evolve over time so that any given region or open set of its phase space will eventually overlap with any other given region. Therefore, to effect binary processing of synchronous-oriented state transition functions, closed systematics are indicated.

Exponential divergence of sequences of iterates explains the connection between chaos and unpredictability: a small error in the supposed initial state of the system will tend to correspond to a large error later in its evolution. It is often possible, however, to make precise and accurate statements about the likelihood of a future state in a chaotic system.

Therefore, open and closed systematics are required to both define rules-based quantification and operate function integration for optimal performance of market trading programs.

Attribution: Please see wikipedia for research excerpted herein.

Jan

28

Elephants are doing the Lobogola thing. Nice London Bridge shape too. Here's a conundrum. Chair has rightly said that it is hard to quantify geometric chart patterns. Part of the reason is decimals do not easily describe geometric patterns, or even fractions for that matter accurately. That is why Pythagoras' discoveries about geometry were such a great breakthrough. This is why sines co sines are used with success to describe and predict geometric patterns. What algo easily describes a bridge, a set of waves, a triangle? Yet the eye easily see it. How do you catch a ball, throw it back. Its a complex math problem, but a kid can do it.

I suppose you could quantify a Lobogola, or a bridge pattern. I'll leave it as an exercise for the reader. The patterns just happened to catch my eye, and frankly took my breath away with its ferocity. I believe the movement and vol is good though. Its better than when the government tells us what the price is supposed to be and it just sits there without motion. I saw some cool triangles, flags, waves, head and shoulders also. My hypothesis is that these things are coming back. Old time stuff is coming back. The 50's and 60's are echoing back.

Jan

26

Stuyvesant Town/Peter Cooper VillageWe have seen a massive transfer of private debt into the public arena during the past two years. Governments the world over have socialized huge blocks and market segments of previously held individual and corporate debt. Even the recent default by the borrowers on Stuyvesant Town / Peter Cooper Village will add enormous tabs to already bloated government deficits. High profile holders of the deal’s subordinated debt and equity include sovereign wealth funds and banks that are assumed to be backed by Uncle Sam and his overseas cousins. Of course, the taxpayer is always left holding the bag. The alternative (let the banks go bust) could have been worse and I guess and hope that we never will know. Markets are rightly worried that these policies will ultimately lead to hyperinflation or staggering devaluations of the major fiat currencies. What is missing from the recent discussion is that all this may be very good for government and high quality agency bonds! It is the other side of the hyperinflation / devaluation argument.

Governments the world over can and may raise taxes and cut spending. Team Obama has already proposed spending freezes to limit and ultimately reduce the deficit. Sure, it tough to put your faith and money behind any politician but we have already seen a massive tightening of policy. Proposed curbs on bank activity, bank restructuring and enforced sovereign fiscal discipline (e.g., in Greece) and higher taxes. Confiscated wealth may ultimately compress economic activity and lead to less red ink for government’s budgets. Sure it is a long shot but it is certainly one of many potential outcomes. The point is that the last two years were all about adding support and liquidity to financial sector. The next two may be about reversing that support. If that the is case, you want some bonds in the box.

Jan

26

"Sucker's rally" — I heard this term on financial TV and in print all the time in March, April, and May of '09. Then the term disappeared until this latest selloff last week. Now it's popping up in bear print — not so much TV yet.

Jan

26

On "progressive visionaries", by a fellow I know:

"[The author] went to college with these people, and for a brief time 40 years ago was one of them. He recalls their thinking. They have been striving to gain real political power for all these years, and in the process have carefully taken control of the unions, public education, most big city governments, and much of the underlying federal bureaucracy. The election of 2008 was the culmination of their lifetime of strenuous effort, and it awarded them the Presidency, insurmountable majorities in both houses of Congress, the prospect of soon controlling the U.S. Supreme Court, and one or two serviceable crises by which to justify hurried and drastic action.

This is the Golden Opportunity, the one they have been working towards all their lives. They will never, ever again have such an opportunity. If they let this slip away, all is lost, possibly for generations. But more than that, their lives will have been utterly wasted, their very identities shattered."

Alan Millhone comments:

The British Navy at the dinner table is best approach to politics.

Stefan Jovanovich returns:

The sagas about the British Navy during the Napoleonic Wars are wonderful; but the notion that there was an absence of the discussion of politics at the ward room table for reasons of civility alone is a part of the fiction that has no basis in fact. The very purpose of the British Navy was political; and the men in the Navy were unambiguously candid about what the politics should be — mercantilism, not free trade — and ruthlessly dismissive of anyone who did not agree with them.

Politics was not "discussed" precisely because the only political argument of the day was about whether trade should allowed to be "free" — i.e. restricted only by tariffs and not by gunpowder; and the British Navy was, for reasons of understandable self-interest, "agin it". It very much helped their cause that most of their political opponents were no more in favor of "open" trade than Napoleon was. Instead, like the people whom Dan described in his post, they were believers in a "rational" authority that would have made a Marxists proud.

Here is how Henry Dundas, Stephen Matarin's fictional father, and First Lord of Admiralty saw the purpose of the Royal Navy:

"…be the causes of the war what they may, the primary object ought to be, by what means we can most effectually increase those resources on which depend our naval superiority, and at the same time diminish or appropriate to ourselves those which might otherwise enable the enemy to contend with us in this respect… I consider offensive operations against the colonial possessions of our enemies as the first object to be attended to in almost every war in which Great Britain can be engaged."

One interesting aspect of this is the extent to which abolitionism in Britain was an extension of mercantilism and the slavery patrols off West Africa were, in fact, a jobs program for the Royal Navy whose cannons could no longer thunder and men could no longer plunder. James Stephen is known to our age as Wilberforce's brother-in-law and as an abolitionist; but, like Dundas, his prominence came primarily from his devout support of the idea that British commerce should always be the handmaiden of the British Navy. You can detect a whiff of that nostalgia for the good old days in what James Stephen wrote in 1802:

"To impoverish our enemies used, in our former contests with France and Spain, to be a sure effect of our hostilities; and its extent was always proportionate to that of its grand instrument, our superiority at sea. We distressed their trade, we intercepted the produce of their colonies, and thus exhausted their treasuries, by cutting off their chief sources of revenue, as the philosopher proposed to dry up the sea, by draining the rivers that fed it. By the same means, their expenditure was immensely increased, and wasted in defensive purposes. They were obliged to maintain fleets in distant parts of the world, and to furnish strong convoys or the protection of their intercourse with their colonies, both on the outward and homeward voyages. Again, the frequent capture of these convoys, while it enriched our seamen, and by the increase in important duties aided our revenue, obliged our enemies, at fresh expense, to repair their loss of ships; and when a convoy outward bound, was the subject of capture, compelled them either to dispatch duplicate supplies in the same season, at the risk of new disasters, or to leave their colonies in distress, and forfeit the benefit of their crops for the year. In short, their transmarine possessions became expensive encumbrances, rather than sources of revenue; and through the iteration of such losses, more than by our naval victories, or colonial conquests, the house of Bourbon was vanquished by the masters of the sea."

James Stephen, War in Disguise of the Frauds of Neutral Flags (London, 1805)

Jan

26

wheatThe commercials seem to be weighing in (or large speculators weighing out) on Chicago wheat. In tonight’s COT report, on a rolling 18 month basis, this market was at the greatest polarization of commercials vs specs where the commercials are taking the long side. Slightly above that is also natural gas.

I’m not saying wheat’s going up tomorrow, because COT data are too coarse for short-term trading, but it seems like a good price range within which to start a longer-term accumulation.

For all the specs that are dumping wheat right now, I’m trying to imagine the trading desk conversation – “Food? Who the heck’s going to buy that?”

Bud Conrad writes:

I usually like to trade in the same direction of the Non Commercials. That is because the speculators (Non C) are big enough to drive markets. So I would interpret your data differently from conventional wisdom as saying grain could be driven down more.

The fundamentals on all the grains were made worse in last weeks USDA WASDE report, and they are in adequate supply. Wheat is probably the worst.

I hold no positions.

George Parkanyi responds:

I still have a substantial gas position and with the trading in and out of a portion of it, it’s now a little profitable; nothing huge – still waiting for the “move”. My main argument though at the time, with gas under $3 and everyone saying that there were record amounts in storage, was that the energy from the gas still had economic value, and that storage means nothing for gas, because whether it’s in a tank or in the ground, it’s all storage. The stuff flows like water. The determinant for prices is what comes out of the spigot at the other end. To me, industrial usage being down was the bigger factor. But for gas right now, this is exactly the price range where you buy the dips (as long as you’re not uber-leveraged). I’m thinking the same thing for grains, though I know I’m early, and I know that wheat has spent a lot of time in the $3 to $4 range in the past and beans $5 - $8. But China is now the elephant in the room as far as commodities go, including agricultural products. If they can’t meet their 8% growth objective to mitigate their population and urban migration problems, they will probably have to import and subsidize a lot of food to keep the lid on things. There should be a steady demand for soybeans at least. Corn is now a dual-purpose crop (energy as well as food), so with planting shifts and volatile weather conditions that may affect other crop seasons, wheat will certainly have its day - sooner than later methinks unless we get a really nasty reprise of early last year in all the financial markets (not unlikely).

I’m not using much leverage, so when I talk about accumulating a position, I’m talking about months, with my sights on the longer-term eventual recovery.

Ken Drees asks:

Do you believe nat gas price can overcome demand destruction factors:

  1. Industrial production down
  2. Household demand down based on homes not being used / versus colder winter
  3. Commercial property down — less gas use there

Seems like more fundamentals are against nat gas.

I like long grains, if a cooler spring/summer happens-which seems possible due to the cooling trends, yields could come off. Cooler summer also impacts nat gas, less energy used for A/C.

George Parkanyi replies:

Even if it stays in this range or lower, its choppiness works for me. It’s had two decent rallies since last September and a couple of useful wiggles. Could be a tough summer, who knows?

Rocky Humbert adds:

Ken wrote: "Seems like more fundamentals are against nat gas."

Agreed. However, in the short-term there are substantial bottlenecks in the domestic Natgas market and a near-absence of elasticity of demand. Additionally, with natgas massively cheap to heating oil, natty could double with no substitution effect. This structural situation explains why natgas can and does spike 100%++ in a short period of time. If you are on the right side of one of these spikes (or declines), with even a small position, it pays for a multitude of mistakes. Conversely, if you are on the wrong side with even a modest size position, it can result in ruin. (It's analogous to spot electricity pricing during peak summer months…) Accuweather just forecasted a "top-ten" cold February — No forecast from me on where natgas will trade over the next 60 days, however!

Larry Williams writes:

Extreme short positions by the large specs (as now in wheat) most often lead to rallies. More important is the relationship between open interest, the Commercial net position and price levels where Commercials have supported/sold the contract. It is not just levels of COT buying selling that matter, as I see it. Open Interest is a critical component to understand who is doing what and the consequences.

Wheat is getting set up to rally.

Jeff Watson comments:

Unless the new crop comes in at less than 1.22 billion bushels of winter wheat in the US, with the current carryover, I wouldn't be too bullish on the futures. Cash wheat at the elevators and ports has been hammered as of late and looks pretty dismal. However, my prognostications as of late have been less than reliable.

George Parkanyi adds:

"It's not an extremely risky call 'getting set up to rally'"

Isn't that what I said when I started this thread? The risk-reward looks pretty good for wheat - not tomorrow morning maybe, but in the next few months. I know there's supposedly plenty of supply, but in the past I've noted that many a rally began when all the news was "We'll never dig out from under the stuff." And, uncannily, when specs are going crazy at one extreme or the other, the market tends to reverse against them at or not too long after those COT inflection points. I think it may have to do with the fact that specs need to get out as well as in, and are building up latent selling/buying liability against themselves as they all run to one side of the boat with the trend. If everyone's shorting a market, then they eventually have to buy back to get out or roll, and if everyone's long, they have to sell to cover. The hedgers don't care - they just take the other side, and may not have to cover at all if they are delivering or taking delivery (thereby not feeding the trend). They also have the advantage that if their hedge works (beyond just locking in the original price), they can always lift it when they see their risk now to be low in doing so, and if the market reverses again, can put the hedge on again and capture the delta to increase their profit. (So that's why you might have commercials lifting hedges after big declines and willingly buying as speculators sell. If they do it in size, it can set off the specs going the same way to cover and ignite sharp reversals).

Larry certainly does a lot more justice to these calls than I do. If not for his books, I couldn't even spell "COT" (Though I wouldn't use me for a testimonial or anything, Larry. I wasn't exactly one of your model students.

Anatoly Veltman writes:

Regrettably, George, (cause I love you bro) you are missing all points:

You quoted me out of context; I simply implied that this particular Larry's call lacked precision/resolve.

You complain about getting bashed re: your COT application — but problem is not in you or in bashers. At issue is application; your one-dimensional application of COT simply doesn't make the cut. You steadfastly believe what you've explained below — and it's not incorrect; it's just not sophisticated enough to trade on… COT application is multi-dimensional; one should view COT with great deal of skepticism vis-a-vis other tools, given COT latency, arbitrary week definition, poor categories' definition and other arcane factors, which 99% of people who "can spell COT" still fail to consider, including all who attempted to quantify COT and talked about their attempts (I'm prepared to make exception for those who might have succeeded, and kept their success secret).

George Parkanyi rebutts:

Now that you mention it, I guess I am a one-dimensional kind of guy. My strategies are keyed on price –- don’t really care about much else except maybe time (for rate of return). As long as a market fluctuates and is not 0-bound, there are strategies that can be put in place on price action alone. In theory, anyway. (Usually it’s when I try to put a rationale behind a direction or a position weighting that I get into trouble. The short ETFs I’ve held and added to since the summer have certainly overstayed their welcome.)

I still like wheat (and I’ll like it a whole lot better $2 lower.)

Jan

25

Looking at the S&P 500 Index monthly through 2000 to present, I separated the monthly maximums and minimums by “Large Moves Up” and “Large Moves Down”..

Each month I calculated the “Max Move Up”  =  (Max of Inter-day max for month – Open for month)/ Open for Month.

Likewise:

“Min Move Down”  =  (Minimum of Inter-day min for  month- Open for month)/ Open for Month.

And then sorted them by size.

The Highest 12 (90th Percentile) Max Moves Up the following stats:

    Concurrent Month

         Returns:

         All Positive
         Max+ 9.2%   3/00
         Min +0.28
         Avg. +6.9%

         Range:
         1st biggest Max Move Up = 13.7%
         12th  Max Move Up = 6.6%

    Next Month’s Returns:

        10 of 12 Positive Next Month Return
         Max  +9.0%  3/09
         Min  -5.5%  8/00
         Avg: +2.5%

However, doing a little data mining it looks like this positive “trend” disappears if the Max Move Up is less than 6.5% the 13th highest move up . Under this Up range the next month returns start having some large down months. I will leave it to the reader to determine how much.

The Biggest 12 Min Moves Down has the following stats:

 Concurrent Month

          Returns:
         All Negative
         Max  -18.6%   10/08
         Min   -3.1%    4/00
         Avg.  -9.6%

         Range:
         1st biggest Min Move Down = -28.0%  10/08
         12th  Min Move Down = -9.4%
        

(The 13th Min Move Down was -9.3% and overlapped the 2nd biggest move up occurring on 3/09 with a 9.0% next month return)

    Next Month’s Returns

         6 of 12 Positive Next Month Return
         Max  +8.3%  9/02
         Min  -18.6%  9/08
         Avg: -2.5%

So it appears that negative volatility can have positive next months, but they are overwhelmed by the much larger relative size of negative next months. Again doing some data mining it would appear that this negative signal continues until the negative -6.5% Min Move Down.. Again I will leave it to the reader to determine how much.

This suggest the strategy of simply getting out of the market and staying out when a Min Move Down is < - 6.50% and then getting back in when the all clear signal is given by the months Max Move Up > 6.5%.

Even with staying out in 04/09 since 03/09 first was both first < - 6.50 and then > 6.50 for the Move Down and Move up: This strategy would have placed you in the right position for the 4 major trends in 2003 up and in, 11/2007 to 04/2009 out and 5/09 to now in. Again I will leave it to the reader to count the gains of this strategy. But obviously this assumes the trends up or down will be long and steady one direction for it to work.

Jan

25

I keep wanting to write a piece about politics, but then I sit back in my chair and sit on my hands, looking to write something better.

My early chess friend/teacher told me to sit on my hands and that would slow everything down, stop impulse moves–and yield better overall chess.

In markets, using chart points–waiting to enter or exit, sticking with the plan is usually best. However, in fast conditions if you are waiting for xyz to hit a round number, sometimes I just let it go at 991 for example–I mean why wait for those extra ticks like every other bloke? I could reload and shoot by the time they are still massing.

Which yields another idea–is it good to learn how to use tools/skills with both hands (ambi)? I was thinking of say archery or shooting for starters? In some sports its almost a given that you have to be equal with both sides.

Jan

25

skiiersI spent the weekend at Massanutten, located 2.5 hours west of Washington DC, with my family. We had a great time, and the girls were very excited to go skiing for the first time in their life. I decided to sign them up to the ski school program called Slopesliders. They got their buttons with their names on it, and started their first day of lessons. I am a very good skiier, but I wanted them to go the ski school. Why? Because instructors have the right method to teach and because my girls would never listen to me: "Stop it Dad, we always have to do what you say! Let us do it our way….". Instructors were very good, they were teaching about: "pizza wedge" and "french fries", increasing the difficulty step by step and visualizing concepts and ideas. They managed to build up the kids' confidence with their new tools (the skis) and themselves. After only two days it is amazing what these girls could do on the slopes (like any other kid anyway). They managed to replicate movements and develop their own style so quickly. (Actually pizza wedges reminded me, triangles and french fries sideways moves in the market, and the importance of visualizing patterns and trends). Finding good teachers is very important to give you the basics and tools on which you can then build your own style and approach.

Jan

25

(Caveat: easier said than done)

SPY monthly returns (1993-present, with div) were checked for a normalized proxy of intra-month range = (H-L)/C. The series was then ranked by range, along with corresponding monthly returns. These monthly returns were multiplied for the entire 17 year period, which gives a total return of 3.35 ($100 became $335). This was then repeated after successively skipping first the highest range month, then second, all the way to skipping the highest 100 range months. This allowed evaluation of the effect of being "out of market" on final compounded return - whether or not the high range months were up or down.

The graph below shows the effect. Cpd return is the green line, which rapidly increases by skipping (and investing in "cash" = multiplicative return of 1.00) the highest range several months, and continues to outperform B/H up to 100 months skipped. Range of skipped months is plotted in red; for scale on this graph multiplied X10 (eg, range of 0.34 shows as 3.4).

Here are the compound returns, successively skipping the top 20 range months, with dates:

Date             ret       H-L/C     CPD
10/01/08    0.83    0.34    3.35
11/03/08    0.93    0.29    4.01
07/01/02    0.92    0.24    4.31
09/04/01    0.92    0.21    4.68
03/02/09    1.08    0.20    5.10
02/02/09    0.89    0.19    4.70
08/03/98    0.86    0.18    5.27
09/02/08    0.91    0.17    6.14
01/02/09    0.92    0.17    6.77
10/01/98    1.08    0.17    7.38
03/01/01    0.94    0.17    6.83
10/01/02    1.08    0.16    7.23
10/01/97    0.98    0.15    6.68
01/02/08    0.94    0.15    6.85
09/03/02    0.90    0.15    7.29
08/01/02    1.01    0.15    8.14
04/02/01    1.09    0.14    8.09
03/01/00    1.10    0.14    7.45
04/03/00    0.96    0.14    6.79

In fitting with decline = volatility, only 6/20 biggest range months were up.

Steve Ellison writes:

Using Dr. Zussman's results as a starting point, since I am not very good at determining the monthly range before the month begins, I checked what would happen if one skipped the month after a month with a high range. SPY total return including dividends from the end of 1993 to the end of 2009 was 3.14, for an average monthly return of 1.0060. If one held cash in all months following a month in the top 10% of ranges to date, and held SPY in all other months, total return would have been 1.98, with 140 months in the market and 52 months out. Average monthly return would have been 1.0049.

Since the end of August 2007, however, the average monthly return following a month with a range in the top 10% of historical values has been 0.9707, while the average monthly return of other months has been 0.9992. Thus, substantially all the losses of the last two years occurred in months following months of very high ranges.

Example:

                         90th
                                pctile
 Month ending   H-L/C   H-L/C Position Return
    9/30/2008    0.18    0.13     in     0.9058
   10/31/2008    0.35    0.13    out   0.8349
   11/28/2008    0.30    0.14    out   0.9303
   12/31/2008    0.12    0.14    out   1.0098
    1/30/2009    0.18    0.14     in     0.9179
    2/27/2009    0.19    0.14    out    0.8925
    3/31/2009    0.21    0.14    out    1.0833
    4/30/2009    0.12    0.14    out    1.0993
    5/29/2009    0.08    0.13     in     1.0585
    6/30/2009    0.08    0.13     in     0.9993
    7/31/2009    0.13    0.14     in     1.0746
    8/31/2009    0.06    0.14     in     1.0370
    9/30/2009    0.08    0.15     in     1.0354
   10/30/2009    0.08    0.14     in    0.9809
   11/30/2009    0.08    0.15     in    1.0615
   12/31/2009    0.04    0.16     in    1.0191

Rocky Humbert asks:

Is this study and its results more than a reflection that (historically) a higher VIX → lower return?

Bill Rafter comments:

VIX is simply one form of volatility. It is logical to assume that some of the other forms may lead VIX, and that those may be causative and have predictive value. If they have predictive value for VIX and VIX is coincidental with declining equities, then you have something on which to build.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Jan

25

For a great Christmas movie, try The Lion in Winter. Probably best after the extended family has gone home. Katherine Hepburn and Peter O'Toole — all you might need. But the rest of the cast is so good, too. Just the exuberance and the machinations. The Great Man theory of history, packed tight in an old castle. If it's been a long time since you've seen it, it's worth watching again.

Dean Davis agrees:

I second this. The supporting cast includes Tim Dalton and Anthony Hopkins, too. All in all a fine film with some mature themes.

Jan

25

Edwin LeFevre's works, while ostensibly all fiction, are based on the personalities and newsmakers of the Street at the turn of the last century, and are filled with nostalgia, as well as notions of "Le Plus Ca Change… Le Plus C'est La Meme Chose."

Easan Katir adds:

Those interested in father-son relations might enjoy Edwin LeFevre's "To the Last Penny" , an illustrated short story published in 1917, currently out of print.

Jan

24

Sandra Bullock from The Blind SideTHE BLIND SIDE

Directed/Written by John Lee Hancock Reviewed by Marion DS Dreyfus

Cast: Sandra Bullock, Tim McGraw, Quinton Aaron, Kathy Bates

Some people never see a normal, happy, intact family in the entire Follywood of Hollywood. Here we have a corrective that warms most people's hearts. Sandra Bullock and crew bring to astonishing life the true! tale of Michael Oher, a traumatized, abused and illiterate boy who became an All-American football star and first-round NFL draft pick with the remarkable, unstinting support of a feisty woman and her cooperative, loving family. One doesn't know which is nicer, the all-American family with a smart, sexy wife and loving, supportive husband, great kids who know how to study and behave properly, or the poignant tale of the emergence of this remarkable talent who overcomes so many social handicaps to triumph where that simply (you figure) does not happen in the real world most people inhabit. I know reviews like this give you cavities, maybe, but THE BLIND SIDE is enjoyable on many levels-script, story, acting, outcome. So if you don't cotton to really great endings, avoid INVICTUS, CRAZY HEART and this one. Bullock's been winning all sorts of awards for this, probably not so much for her usual adorableness and full-on no-BS performance as much as for the delight of seeing such movie-movies can still in this age of cynicism be made. Was everyone in the home office on the slopes when someone green-lighted this one? (Full Disclosure: Bullock herself produced.) Fun fact: Quinton Aaron trained with the Georgia Tech football team in the spring 2009 to ready for the role of Michael Oher. (Though he's a mammoth size, Aaron is a lot flabbier than the real Oher, rest assured.) marion d s dreyfus . . . 20©10

Jan

24

I could not make the game tonight so I was looking to sell my tickets. It will be a sell-out crowd.

1) First, I got some inquiries from insiders (neighbors, friends, etc.) if I was going to use my tickets. I would never accept an offer above face from a friend due to social reasons, so fortunately I delayed and they made other plans.

Trader Lesson: Insiders always call early and expect a great bargain. In fact, the final difference was about a 1/3. If selling to an insider wait, if buying buy along with them. Just like when the market fell hard insiders bought with great abandon. After all, if you are on the board of the New York Fed it would be impolite not to buy Goldman when the shares were in the 70s from over 200. After all you are friends. Do not befriend your brokerage firm.

2) The opening offers were on average extreme. Bargain hunters.

Trader Lessons: Patience can pay. Follow the Senator's advice and look for an early extreme.

3) After a couple of hours prices settled into a tight range, with a couple of extremes, but these bids were false as they found other tickets.

Trader Lesson: Be quick and skeptical of those good offers — they are just running stops.

4) On average prices were lower the more convenient the geographic distance between buyer and seller. Watch out when too much foreign money piles into a market.

Trader Lesson: Look at markets using various base currencies.

5) Finally, on a rainy day, watch the game from the comfort of your own home as only the young need to stay up late when tip-off is 9pm and the game is on ESPN.

Jan

24

William PoundstoneThe Myth of Fair Value (and How to Take Advantage of It) is a new book by William Poundstone that looks to be interesting based on a perusal of Mr. Poundstone's blog and You Tube appearances.

An excerpt:

"Though a price is just a number, it can evoke a complex set of emotions—something now visible in brain scans. Depending on the context, the same price may be perceived as a bargain or a rip-off; or it may not matter at all. A few of the tricks are timeless, like shrinking packages and prices ending in the magic number 9. But price consultancy is more than the latest chapter in flat-world hucksterism. It draws on some of the most important and innovative recent work in psychology. In the mundane act of naming a price, we translate the desires of our hearts into the public language of numbers. That turns out to be a surprisingly tricky process."

Jan

24

IRVING FISHERHere is a great article: "Thoughts on the End Game" by John Mauldin

The brilliant U.S. economist Irving Fisher first highlighted the fact that an economy's debt level could have a deleterious impact on economic growth if it is, in fact, excessive. At $3.70 of debt for every dollar of GDP, U.S. debt is excessive (Chart 1). Fisher pointed out that the unwinding of debt levels results in prolonged economic distress, and we certainly agree. In 2009, the book This Time is Different - Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.

Jan

24

Statistics without TearsComing to you live from Borders, it seems Derek Rowntree — of 'Statistics Without Tears' fame also has a text, 'The Manager's Book of Checklists'.

It looks thorough. An interesting overlap given DailySpec's statistical bent and recent discussions of checklists.

Jan

22

lamb in the grassResponsibility for recent financial history is being projected on to the banks and investors, whereas in reality the issue is one of individual choice. Every person who is a party to a risky mortgage can say — this trade does not meet my criteria, I shall rent instead (and would that education enable every child to know how derivatives can give a safer alternative to owning the underlying outright).

Yet some Eliadean beliefs are so cherished anything will be done to protect them. Banks are not too big to fail unless governments decide they are. The concept of ownership of land is so much part of an underlying religious belief that people cannot see it as such, along with its cousin, a belief in ownership of animals.

Trading is an age old art, like music, and is as impervious to legislation (and the fashions of the day) as the laws of addition.

Jan

22

What is the equivalent of an open versus a closed game in market trading, and under what conditions is each better or worse?

Nigel Davies writes:

An open game is a volatile one in which the ball comes onto the bat very fast.

Laurence Glazier comments:

Perhaps it can be quantified by the amount of risk the trader is taking, as the greater number of possibilities in an open game steer the players closer to the cliff edge. But there the analogy finishes, as in chess the reward/risk is ultimately for the same prize, whereas in trading, more risk increases the stake.

Jan

21

It's an absolute stew of variables now. Safe harbour time — or more see/saw. Nine months of bull complacency have given birth to what?

I am watching GS stock price for direction of Obama bank bite. GS cutting back bonuses is like Grandma giving you the eye when she watches you grab three cookies. You give back one to be polite and take the other two, knowing you will be back for more later anyway.

Somehow the money must flow. We all must be allowed to take water from the well.

Jan

21

A daily loss of 2%, erasing this year's gains, is nothing compared to the political and cultural shift that happened today.

The following is not meant to be romantic — simply a reflection of my feelings on today's news, nothing more.

Many readers of this site have been attracted to bank prop desks, "sponsored" hedge funds and merchant banking as career paths. Much of the attraction to these roles was because of the enormous entrepreneurial opportunities and intellectual satisfaction offered by such lines of work. I would say, for the right types of people, the net compensation was just a side benefit to the job satisfaction and freedom.

That the wholesale writeoff of a great economic engine has happened in the United States — of all places! — is truly sad and cause for great concern. What has happened to the nation that has posessed the birthright of capitalism and opportunity? Why has it now seen fit to discard one of the very engines that made it so powerful, respected and venerated? This is the nation that has produced, for better or worse, such (financial) cultural icons as Wall Street, Liar's Poker, the legend of Soros and the Sage, of our very own Chair — and now it has turned round to bite the hand that has so often fed its dreams. Such a move would have seemed unfathomable in 1985, 1995 or even 2005, yet here we are.

So a few thoughts and anecdotes:

1. PL is pure. There's no fudging performance. You are graded in the market every day by an unusually rigorous and ill-tempered teacher who never gives praise lightly. In trading, one cannot hide behind a sharp tie and a nice suit, cheap talk or family connections. It's entirely on one's own shoulders how one performs. Every day, every week, every year the bottom line is green or red and you own it. To discard and stigmatise such objectivity is a blight to reason itself.

2. I have had the privilege of working in some of these banks - the cultural and geographic diversity in the average internal hedge fund is deep, very often scholarly and high in camaraderie and positivity. The backgrounds are varied and are cause for many profitable interactions and learning. Many bank prop traders can come from the darkest, most depressing areas in the world and - with hard work and effort - transform both their own lives and the lives of those closest to them. Sure, there are the odd bad apples and obnoxious, attention seeking loudmouths - but what line of work doesn't possess such types?

3. Duly noted that there ought to be new, well thought through, sensible regulation; this should be of little concern if done properly. The best players want the most level playing field because they enjoy the challenge of playing within the rules and having security that everyone knows where they stand. Perhaps these new rules should focus on the leverage used by an institution as a whole rather than simply singling out particular activities. Was it really prop traders / internal hf's to blame for this crisis? Or were balance sheets leveraged 30-40x a more likely villain? Or, in the alternative, why not require higher professional standards and testing? Doctors and lawyers spend many, many years taking qualifying exams with very high vigs which encourage and ensure a largely compliant and responsible membership. Perhaps, if one handles client money, there ought to be far more extensive educational and testing requirements (perhaps having completed a professional qualification like the CFA first)? Not a solution, but at least helps to raise the professional standard and provide disincentive to those out for the quick buck.

4. Why not go after the media? Media - especially in the United States -is constantly selling people dreams that are near impossible for them to achieve given education, skills and income. Why not ban shows like MTV's Cribs that encourage poor economic behaviour? Why not ban any form of lifestyle TV programming? Why allow seductive ad campaigns? Is it more irresponsible to glorify and encourage conspicuous consumption, or to attempt to facilitate people's dreams (however foolish or unlikely) via the transference of risk? An open question for the reader to ponder.

5. Will taking speculative risk from banks and placing it in the hands of hedge funds or private investment vehicles alone really protect the world from financial calamity? Have we forgotten LTCM? What about counterparty risk? It's not so long ago that rafts of good hedge funds had to liquidate and pile in on the selling - not because their own performance was bad - but because the bad performance of others forced redemptions that sank them. 

6. Efficient use of capital. Much of the general public prefer to have the professionals do the thinking for them in complex matters - fair enough. If someone wants a (relatively) risk free return, they can have it for 3-5% a year….problem is that such a return is not particularly sexy or accelerative toward Ferrari ownership. The real problem is greed and overconfidence - a 25% return sure sounds good - but the concept of the variance required to achieve such returns is, at best, largely ignored. Banks and financial institutions are able to help facilitate financial goals by (theoretically) making good decisions with capital that is otherwise sitting dormant on their balance sheets.

7. Redundancy of capital, systems and process is key; not knee jerk reactions. More slack needs to be built in at all levels of the economy. People ought to save more. Risk takers ought to carefully consider their use of leverage and have more of a buffer. Risk methodologies need work. Shooting the messenger has never, to date, had much historical success in solving anything. All of the above would be nice, but I'm just old enough to appreciate that dreams are free. 

8. A conversation with a fellow spec this morning helped to crystallise in my mind that envy and resentment are not mutually exclusive. The evidence of such is all over today's news.

I thumbed through an old copy of Liar's Poker this morning. Maybe tonight I will watch "Wall Street". Sure, they're cheesy and it's silly. But it's like saying goodbye to someone I might not see again.

Jan

21

A picture from the Google vs. Ebay cricket matchWatching cricket (or the same could be applied to baseball for the Americans or football for the Europeans and Brits…and South Americans and…) I have often considered how structured and polished the performances are– clean batting, clean bowling and clean fielding.

When is a risk taker going to be coach? When will some one bring the advantages of risk and a polished team into play?

Indecision must bring opportunities.

Why couldn't a fielding team (that's getting flogged or maybe not flogged) start to miss EASY field returns, but have a back up plan–thereby allowing for the batting team to be lured into a second run and capitalise on the often poor communication between batters looking for a run out.

Many other ideas and ways of creating opportunities to take advantage of a situation could be put in play. It seems most areas are not being explored.

Markets certainly don't have those problems with a muliple of false break outs catching everyone on the hop, and whether we like it or not, keeping the game interesting.

Jan

21

Wes Anderson--director of Fantastic Mr. FoxAVATAR

Are you kidding? Who cares what I or anyone says? As a flick 12 years in the making, by the director of the budget-busting TITANIC, Jim Cameron made a $500 mm movie most everybody regards as must-see –-and you will see it even if we all unload a truckload of bovine manure over the darn 23rd century sci-fi thing.

It’s 3-D! It’s exactly what you and your darkness-loving chums hanker for on a holiday week with gravy and giblets still dense in your tummies. Heavy-duty futurism, slim animatronic females with substantial breastage! La la la. Be on the lookout for Cameron’s signature anti-American jabs, here in the form of American military stand-ins coming in for disrespect and unwarranted opprobrium.

IT’S COMPLICATED

Streep can read the Blimpy recipe guide to the dispossessed and you’d stick around for her to finish up. Steve Martin has that whole expectancy thing going, where you expect him to flop into the wild ‘n’ crazy guy. But he’s nerd central throughout, except where he slips up during one sequence and dances in his usual jackrabbit on speed wackiness. Alec Baldwin gamely bares more than this viewer cared to see, threatening to let some of us revisit our lunch. Last week’s lunch, to be more specific.

To be sure, there are funny bits and LOL sequences.

In the main, however, it’s a cynical and condescending bid for the Boomer bunch now heavily divorced, re-dating again, and impaled on the slippery scree of finding their footing anew among a dazzling array of electronics.

Meryl’s divorcee, however, is about as realistic as the current health monster in the House: She’s wildly popular, fantastically successful in her restaurant, money is no object (there’s a realistic note, huh?), close to her three adult kids, setting up to spend a bundle on a house addition to die for (though with all her kids out of the house and no mate underfoot, and a current kitchen gorgeous enough to hock both your liver and pancreas for—why? Why build a second house not onto but next to the first totally adequate and salivation-inducing first Calif-mansion?–and frantically attractive to her near-stalker ex, Alec, re-married to a rhymes-with-witch hottie of the statuesque school of no-way! As well as the near-perfect available man, her architect, Steve Martin’s understated swain: diffident, appreciative, longing for recommitment.

Sure: This is e-x-a-c-t-l-y the story of millions of 40-ish and 50-ish divorced women in California today, right? It’s Boomer envy. Like as not, there is possibly the plot point that people actually hunt for ‘easy viewing’—give the peeps the predictable pat answers. Be in other words predictable.

We found it too long by a half hour, indulgent, repetitive, annoying and unrealistic. OK, it’s supposed to be a fantasy? So what. It reads like a heartbreak-grad-school HEARTBURN (Nora Ephron’s more affecting, and more honest, dramedy of rocky marriage/successful divorce, starring the ever-steadfast Streep and the cheating Jack Nicholson in the naturalistic Mike Nichols episode of once-great marriage gone terribly Tiger Woods). Even the score evokes that earlier film. Scenes in COMPLICATED ring hollow and absurdly wrong, as when all three grownup offspring learn of the affair their divorced parents are having, and take to (one!) bed in childish retro petulance. Their mother owes them no apology or even explanation. Yet there it goes, as if she hadn’t learnt what being a liberated adult is all about. This is a small but irritating Dr. Spockian infusion into what one has the right to consider a modern story. It is not: It is Carrie and her girls, 15 years later, tossed salad with a few post-coital afterglows, and an anemic starter romance without evidence conducted with a near-catatonic Steve Martin.

FANTASTIC MR. FOX, story by the inimitable Roald Dahl, is Wes Anderson’s hilarious animated adaptation of the children’s fable of a wily fox outfoxing a local farmer with the able and arch amusing assistance of other barnyard creatures. Take the kids if you must—they’ll delight in its silliness, dazzling movement, color and animated imagination—but you will enjoy it far more than even they. A fun-filled delectable hour and a half for everyone.

PRECIOUS. It will probably sweep the awards shows. It has already swept up 29 noms, 3 Golden Globes, and numerous Best of the Year Top Tens. But this grim narrative of an overweight, illiterate Harlem teen unwillingly pregnant with her second child enrolled in an alternative school so her life might head in a better trajectory is tough and ugly slogging. It is probably one of the most under-lit films of the decade. But it offers a script that is scathing and blue with harrowing filth and invective against its protagonist, poor, obese Precious. Hailing from a novel by Sapphire, PUSH, this prize-capturing documentary-feel story is plain hard to sit through, despite staggering performances by the entire cast, especially stars Mo’Nique as a plug-awful jealous mother; Precious herself, played by newcomer Gabourey (Gabby) Sidibe; and tamped-down, de-glammed rock-star Mariah Carey, as a no-nonsense, sensitively played social worker; and luminous Paula Patton’s warmly beautiful guardian angel, Ms. Rain. Though you leave feeling virtuous for having eaten your broccoli-and-spinach of movies, it’s hardly going to send you out clicking your heels, Mr. Kelly.

Jan

21

Here are some thoughts on deception in the stock market:

1. It is a known signal that when the broker gets an odd number of shares to buy or sell, it is the last part of the order. Why not start with the odd number instead?

2. So as not to signal panic, always cover the short going against you with a limit order, not a market order.

3. Don't always ask why xyz stock is up ( or down) just because the position is going against you.

4. When you meet the management of the stock you're short, play extra nice to charm them and commend them on all their accomplishments.

5. Pretend you do not know anything about the stock when speaking to the analyst. This way you will find out what he/she really knows about the company.

6. Emphasize your losses and hide your winnings when talking to people outside your firm.

7. When meeting your broker tell him or her that you haven't been active in his or her region lately but that you're about to enter it shortly. Then continue to use dma.

8. Call the analysts with the opposite recommendation of your position first to find out their story.

Jan

21

Logo of Ice cream storeThis is Mumbai's best ice-cream maker . No preservatives, all natural.

Their largest selling flavour (Kesar Pista, i.e. Saffrons with Pistacchios) that must have been easily producing more than 50% of their sales was disbanded by the company. Only recently when my daughter was fuming as to why they should be stopping producing their best ice cream I realized that it must have been many years since we have been eating only this one flavour.

Perhaps they launched in 1994, just a year after I immigrated into Mumbai, that this city lapped up a small non descript store in the far off Juhu locality that was selling many different varieties of Natural ice-creams. The diversity was the USP that propelled an ice-cream company with a shoe string budget to push every other larger player out of the business.

For years, friends and relatives flying out back to their home towns have been having a Naturals thermocol box full of ice creams as a key luggage to far and wide places all over the nation.

This is a near shock. Kesar Pista is no longer going to be sold by Naturals. An enquiry at one of the nearer stores revealed that the owner of the business decided that this one flavour is killing away the sales of all other unique flavours they created. Yes, Kesar Pista is a favoured flavour for the Indian palette.

This sets one seriously wondering what a unique situation it must be where a company kills a 50% plus revenue producer as a business strategy to expand its business! There may be analogous situations with the financial markets. What does the self-perpetuating institution called the Stockmarket do when more than half of its total trading volumes get concentrated in a stock called Citibank?

What may be happening in those markets where a handful of stocks capitulate away more than half of the total market capitalisation? I would surmise such are ripe conditions for Ms. Market to build a new genre of darling stocks.

Jan

21

There are multiple methods of measuring investment risk. Several popular methods utilized by investment managers:

VAR (historic, variance-covariance, and Monte Carlo)

Sharpe Ratio

Modified Sharpe Ratio

Standard Deviation

Shortfall

Ulcer Index

Information Ratio

Intra-Portfolio Correlation

Drawdown

For investment capital attached to future outlays such as pension obligations and retirement account distributions, surely Shortfall should be included in the risk assessment tools mix. For those asset managers who are not tethered to an Index, Information Ratio is of little use and is clearly inferior at measuring absolute risk. Furthermore, for all but the most stoic of investment managers, Standard Deviation and Sharpe Ratio are deficient because they don’t differentiate pro-position and counter-position volatility.

Although each remaining method has strengths and drawbacks, all successfully measure risk. Maybe, a combination of methods throughout the investment decision-making process will permit a more comprehensive analysis of risk. Consider it ‘risk analysis diversification’, if you will.

One potential avenue could be to first figure out which individual strategies to deploy within a multiple strategy portfolio. This can be accomplished by using the relatively simple to compute and compare, and fittingly named, Ulcer Index (at least to those whose gastric ailment is not rooted by a H. pylori infection). Ulcer Index is apposite because its formula contains, instead of standard deviation as is used in Sharpe Ratio, the sum-of-root-mean-square of all periods’ percent-drawdown. Vital to maximizing precision is using long-term historic data. Importantly, data should include periods of extreme price excursion. If there is no long term data, generate a synthetic long term series, or if possible, select

a highly probable highly and positively correlated surrogate asset. Normalize the surrogate to the actual asset’s volatility over a comparable time period (compare periods after regular high volume has been maintained in a new issue). Next, Ulcer Index can be computed for each strategy’s returns over a uniform time period. Then, rank and check for correlation among strategies and choose accordingly.

Lastly, to engineer the desired overall portfolio risk/reward profile, optimize expected Intra-Portfolio Correlation and Modified Sharp Ratio. For accuracy, Modified Sharp Ratio’s (which incorporates VAR) inputs should be projections, partly extended from historic and if necessary synthetic data. Do expect to make regular revisions.

Of course, there are other combinations of methods to achieve risk analysis diversification benefits; this is but one example

Russ Sears writes:

The problem with these measures are they cannot measure the risks of cannibalizing the future for short term gains. The more a model is used, the clearer it is to all those involved how to tip the scales in their favor. Remember the chaos of the gyspy moth, overbreeding until the trees cannot regenerate leaves quick enough for the last generation.

Take VAR, its lack of liquidity measure, and do a cursory scan of the role it played in the overallocation to sub-prime, mortgages, real estate and structured credit or rating agencies, AIGFP, SIV's, banks and insurance companies required capital. Even those titans of business Havard and Yale fell for these gapping holes in measuring risks and performance. Soon everybody is overallocated to the same thing. Then suddenly everybody is surprised when the door is not big enough when the liquidity fire alarm is pulled.

For diversification of risks measures, I have had much more luck understanding the weakness of the model and trying to prevent myself or a company taking my advice from letting the weakness of the model predetermine my allocation or strategy. The genuis of Chaos Theory, in my estimation, is clearly understanding what a model does not and cannot measure. Then you won't expect it to measure all risks and are not alarmed by those that cannot see they stepped off the edge of a cliff. 

Anton Johnson responds:

Mr. Sears makes exceptional observations, and to extend on those, I would add that the endowment funds’ problems were exacerbated by inexcusable errors in basic portfolio management. By simply monitoring the portfolio and maintaining prudent volatility adjusted component size limits and intra-portfolio correlation level, much of the funds’ losses engendered by the managers’ usage of VAR, and their apparent ignorance of its shortcomings, would have been mitigated. Of course, the root cause of their problems was unfortunate asset selection and poor foresight; and that is an entirely different topic.

Jan

21

Gouverneur MorrisI am reading Theodore Roosevelt's biography of Gouverneur Morris; the book is proof, if one needed any, that Roosevelt was a true Renaissance man, even if his politics were almost as lunatic as Morgan feared.

Morris was not only the actual author of our Federal Constitution but also the greatest political observer among the Founding Fathers. At a time when Jefferson, Thomas Paine and others were celebrating the Revolution of 1789, Morris was deeply saddened by what he saw first-hand in Paris; and he urged President Washington to avoid favoring the Revolutionary government against the British.

But, if Morris thought the French Revolution was destined to failure and folly, he never lost his appreciation for France. Neither should we. It is footless for any of us, at this late date, to continue to take the Band of Brothers version of the Normandy campaign as an accurate military history. The Free French, along with the Poles and the Canadians (whose contributions are also conveniently forgotten) did more of the actual ground fighting in the Falaise Pocket than Americans did; and they paid a terrible price for it. General Leclerc , who understood and practiced tank warfare better than Patton did, was a brave enough man to understand that the Vietnamese wanted the same freedoms that Americans had fought for in their own revolution and that "anti-Communism" could not, by itself, be sufficient justification for the continuation of direct colonial rule. But for his untimely death (much like our own General Abrams' being struck down by cancer), it is likely that the Indo-Chinese wars would not have happened as they did.

P.S. It is also worth noting that the people of Normandy have never once complained about the thousands of civilians who were killed by largely indiscriminate high level bombing by the American Air Force before, during and after the D-Day landings. Instead, they thank us every year for what our soldiers, sailors and airmen did to liberate their country. Perhaps it is time we thanked them as well.

Chris Tucker writes:

Rallyn and I spent our honeymoon in France and loved every minute of it. Of that, a week in Provence, stayed in Gourdes and had delightful wines from a small local vineyard called La Canorgue in Bonnieux. Decided to go hunt them down, beautiful, beautiful drive, found them, sign on gate says "Back in ten minutes". We wait, proprietor arrives in a few, takes us into her little shop and is just lovely. We buy a bunch of bottles to take home and enjoy a splendid day roving around the countryside, visiting the market in Aix-en-Provence and the lavender at the Cistercian Abbey at Sénanque. Also Avignon, the Pont du Gard. Amazing, history fills every square inch, beautiful country, beautiful architecture, beautiful people that know how to enjoy life.

Flash forward a few years. We are at home watching "A Good Year" and slowly it dawns on me that I've been to the vineyard in the film. Château La Canorgue is the vineyard, just as I remembered it. Wonderful. The film isn't awful either, although the trading scenes in the beginning leave quite a bit to be desired. Crowe's character is a heavy hitter in London. Albert Finney is spectacular.

Jan

20

Bill James--SabermetricianAn interesting article by David Friedman on his blog — which is very worth reading, as is Steven Landsburg's blog –  talks about why relative income is important for utility mazimizers. He makes an evolutionary argument that for men competing for scarce woman resources, having a higher income in your class is more likely to get you a mate, especially in polyandrous societies.

It brings up the subject of team standings in major leagues. I always thought that major league standing of markets should be ranked like baseball teams — stocks, bonds, gold, oil, beans — and the team leaders and losers and their paths each week should be quantified the same way baseball standings are analyzed. I'm going to do something like this on Daily Spec and think it will be fun and dare I say it useful.

I am looking for a set of The Ticker magazine, especially 1907 and 1909 and all issues besides 1908, which I think is very useful to see how they handled the aftermath of 1907, which is so similar to our 2008. The quality of that magazine is amazingly good, in accord with Nock's dictum that as financial literacy improves, the lowest common denominator keeps getting lower and so does quality.

It is amazing to see that the auctions went so well, and I will be looking closely to see if the annual hunting season of Central Banks on Interest rates starts earlier than the traditional April date. Out of the depths comes a Hispanic from Florida, former Florida Majority Leader who combines the appeal of Jack Kemp, Arnold Schwarzenegger, and R.R. If I had any daughters interested in politics, I would suggest they go intern for him.

The Baseball Abstract by Bill James is beautiful and full of intriguing analysis that is directly applicable to markets. Amazingly the trend follower hired him to improve the baseball team's performance, but somehow it is clear that he hired him for the wrong field. If I am ever a rich man again, I would offer to hire him to set his sights on markets, and give him the data to let him go at it.

The reaction to the win in Massachusetts reminds me of the reaction when the Senate passed the first stimulus bill. Oh thank goodness, frustration, and uncertainty relieved, here we go down 10% in a second.

Jan

20

The Sage of OmahaThe Sage of Omaha has always been on record of never splitting shares, giving a multitude of reasons, (which I personally agree with). That's one reason BRK.A is so expensive. Now, BRK wants to split their B shares 50 for 1. That's hypocrisy. It also might be a tell, but my crystal ball is a little cloudy these days. Buffett purportedly wants to greatly expand the investor base. This whole thing smells like something out of the play book of Vanderbilt or Gould.

Stefan Jovanovich writes:

The comparison might be with Merrill Lynch in the 1950s. "Throughout the bull market of the postwar period and the 1950s, Merrill Lynch continued to be an innovator and a popularizer of financial information. The firm erected a permanent Investment Information Center in Grand Central Station, distributed educational brochures, ran ads with titles like "What Everybody Ought to Know About This Stock and Bond Business," and even sponsored investment seminars for women. These new ideas made Merrill Lynch the best-known investment firm of the day. Charles Merrill's reputation soared to such heights that shortly before his death in 1956 one Wall Street historian referred to him as "the first authentically great man produced by the financial markets in 50 years." Berkshire is being structured to become the stock that all "good" people should own and keep forever.

Kim Zussman shares:

Fanfare for the Common Man. 

Jeff Watson adds:

In the 1800s, consuls and other forms of gilts were considered safe investments that all "good" people should hold forever.

Jan

19

Obama's wedding picturesWhen Hillarycare finally died in the fall of 1994, the DRG (drug stock index) rallied about 70% over the subsequent twelve months with almost no corrections, with the first serious top occurring when Newt took back the House with Contract With America. By the time that happened, the DRG index had doubled from its pre-Hillarycare low.

Admittedly, it coincided with a bullish stock market, however, there are more than passing similarities between then and now, noting also that long-dated calls on XLV are very inexpensive. A double of the March 2008 low in XLV would take this healthcare ETF from $32 last to about $44 for another 33% upside from here.

I'm not making any predictions, but it's not difficult to imagine Pfizer's p/e going from 9x to 12x, so the upside is really there for the bullishly inclined with a longer term horizon.

Jan

19

Stephen SondheimI am reading Stephen Sondheim's biography, and I just noticed he composed the "Stavisky" movie music:

The core narrative of the film portrays the last months in the life of Serge Alexandre (Stavisky), from late 1933 to January 1934. We see glimpses of his operations as a "financial consultant", setting up a mysterious company to deal in international bonds…

Jan

18

Chuck BerryAlthough Chuck Berry could not be considered 'Soul', he surely influenced the genre. At 83, he still plays regular gigs and his guitar skills have not diminished. Normally, when a guitar player gets to an advanced age, he will do a few riffs and let the second lead carry the load. Berry plays his 90 minute concerts from start to finish without a second lead. He is the consummate showman, an individualist, and has never let his legal and personal problems get in the way of putting on a great show.

He's probably one of the best guitarists alive, especially since Chet Atkins is no longer with us. Jimi Hendrix, the Beatles, and Eric Clapton all cited Chuck Berry as a major influence on their work. Chris Spedding (a very underrated guitarist) paid special homage to Berry in his seminal Guitar Jamboree.

Besides being a great showman, Berry really entertains his audiences and mingles with the crowd, unlike the current crop of superstars like Sting and Bono. A Chuck Berry concert makes you feel like you really got your money's worth. Chuck was considered to be so good by his peers that he was in the first class of the Rock and Roll Hall of Fame. I've seen his concerts in every decade since the 1960s and have left every concert totally uplifted. He is the definition of a true showman, with as much presence as Elvis in his prime.

Jan

18

cherry blossomsThe new year is like a new meeting that begins with many fine horses coming in from all areas, and the public is at sea with their picks.

SPY came into the new year in sure and steady rally mode and at 3/2 odds, stumbled early in the new year's races, recovered to win a few and is now coming in last. Setting itself up for a future win? Public always loves SPY and can't seem to not say nice things at all times. Odds are still not long.

TLT came in on a losing streak one a race off the bat and continued losing ramping the odds to win, now at middle odds TLT is winning. The puiblic ignores TLT even though it's been making steady money lately.

GLD came in at mid odds one some short odds races, then one a big purse, came in dead last the next time out and is now at mid odds. The public doesn't trust GLD, much less know when to bet it.

USO came in the favorite, won a few at lows odds thanks to the heavy betting, and is now consistently losing. Definately out of favor and now at long odds.

EWJ came in at long odds and has been winning consistently, now at shorter odds and still winning there hasn't been a cover story yet and no one seems to care much. Look for that horse to wear the Japanese cherry blossoms this spring in a full cover garish victory circle photo shoot.

Jan

16

David Lee of NY KNicksHere are some market studies suggested by a recent Knicks game:

"They scored 30 points in the first quarter, before mustering only 38 points combined in the next two."

"No team led by more than eight points and the game featured nine lead change and 10 ties."

"The evening carried the characteristics of a typical Knicks defeat. Their offense sputtered. Their modest lead vanished."

"We got a lot of stops. Which is the way we love to win," Lee said.

One can imagine the locals at the high frequency robot controls saying something similar.

"The Knicks went to a zone defense in the second half and Iverson went scoreless in the fourh quarter," said NT Times reporter John Abrams, who should be one of us as he has the right mindset. The article contains a beatiful Stubby Pringlesque appreciation of David Lee: "We just didn't knock down some open looks, and they did a good job of putting a zone in, getting us out of rhythm," Iverson said.

I can imagine Duncan Coker telling a fellow angler that casting by the isolated stones was no good, and they were much smarter to fish by the parking lot, and not take any chances.


Archives

Resources & Links

Search