May

8

I am exploring the concept of circumnutation and tendril movements as a model of universal spiral movement in all parts of the plant world and markets, and found an article that is a good jumping-off point.  I would be interested in readers' ideas on the horizontal and vertical aspects to which markets cling and go around in clockwise and counterclockwise direction.

James Sogi replies:

After a tendril winds up high and breaks and falls on its own weight more than some percentage of its height, it might take a day or so of random waving around before it finds some support towards the end of the day and can try climbing back up.

One thing these tendrils that fall down to the ground in Hawaii do is if they touch the ground is they start to send out roots and morph into a new plant. A gardener can to take that new start and grow some new plants and reap some fruit. After January's big fall, the markets fallen tendril was able to grow some roots and some fruit into the spring.

Asparagus roots grow foliage, gather energy, and produce edible shoots, but after some production, run out of energy and need to recharge. Seems to be a common natural cycle.

Phil McDonnell adds:

PhilWe grow a vegetable garden with many diverse varieties. I am always amazed at the strategies different plants seem to use to survive. In particular the legumes seem to particularly favor circumnutation and tendrils. Most peas and beans are grown on some sort of support like a pole or trellis. For the really tall pole beans that grow to six feet I have learned to use their natural circumnutation to advantage.

One form of this is the tendency of the tendrils to wrap themselves around some convenient support. But there is another form of circumnutation this gardener has learned to use to advantage. It is well known that many plants turn themselves toward the sun: heliotropism. Clearly this is an adaptation to maximize their light gathering ability but it also allows them to compete with neighboring plants and potentially block them out. One aspect of this is that the stems bend toward the sun in the morning and tend to track it as the day proceeds finally bending to the west at night. Curiously at night the stem proceeds to bend back through what is nearly a full circle so as to face the rising sun in the morning. One can use this type of circumnutation to train the plant to wrap itself around a pole. Each day another wind on the pole will be added.

The smaller bush varieties of legumes tend to rely more on their tendrils. Effectively when they are planted densely the tendrils connect to the other plants and form a complex structure of multiple stems with cross connected supports from the tendrils. Together the complex is stronger than the individual parts.

When the market is in an uptrend it seems to spiral around its basic trend channel. Clearly this resembles the helix like structure of circumnutation. One is struck by the similarity to other similar patterns. For example in a fluid flow in a cylinder there is a natural tendency to spiral inside the fluid channel. This behavior is predicted by the differential equations which describe this process. In a similar analog the Earth Moon system causes the Moon to describe a helical structure as the system orbits the Sun. One wonders if there is a common model which underlies all of these processes.

Scott Brooks expands on this theme:

ScottThis applies to what we do on my farm as well. Every year, I plant food plots for the deer, turkey and other wild game. In our warm season plots, I want a variety of plants to grow that complement and "assist" each other. For instance, I like to mix together creeping soybeans, cow peas, lablab and other creeping growth plants that create tons (literally tons) of forage on their own per acre. But if I sow into the mix a moderate amount of corn, milo, sudan grass, or other such "stalky" plants, it greatly increases the amount creeping forage that grows!

These stalks greatly increase the ability of the creeping plants to circumnutate around the stalks. If you put enough of the stalk type plants in the mix and they are close enough, you can actually see where the vines jump from stalk to stalk creating bridges. Other plants then "hitch hike" across these bridges, growing the diameter and strength of the bridge. Vines then grow up from the ground into these bridges.

After a rain storm, especially one with wind, some of these tendrils will break away from the bridges or stalks and fall to the ground. Fear not, for other plants will use those fallen tendrils to climb to the sun. One tendrils misfortune is 10 other tendrils opportunity!

As weeds move in, the weak tendrils are killed off. But the strong ones push ever higher to fight for ever elusive sun light. This growth has an interesting effect on the ecosystem. The new growth is tender and succulent with a lignin content (lignin is the woody/stalky back bone inside plants that is not easily digestible). These tendrils are tasty morsels for the local wildlife.

Deer especially like to move in and eat these succulent tendrils. Conversely, deer also love to eat new growth on the weeds that the tendrils are competing with (actually weeds are one of the main food sources for deer). Deer also the thick cover that the tendrils, weeds and stalk plants provide. Being genetically programmed to conserve energy, deer will eat their fill and likely just bed down in the thick mess.

This bedding down and walking around thru the food plot causes the weeds to get smashed down and the tendrils to be broken and driven to the ground. This allows new tendrils to hitch hike up the old broken tendrils and allows the the tendrils that weren't broken to grow even more.

As the summer progress, the ligin content increases in the plants as they near the end of their lives. This is when they really start to bear seeds. Many of these seeds fall to the ground to lay dormant until the conditions are right for them to bloom. Some of these seeds are eaten by birds. Many times these seeds pass thru the digestive tracts of these birds still intact to be "deposited" elsewhere, laying dormant until the time is right for them to make an attempt to grow.

Then, just when the creeping plants are nearing the end of their useful life, the stalk plants begin to bear fruit. The "seeds" of these plants are full of life giving energy in the form of carbohydrates. The corn or milo seed or the seed at the top of sudan grass (which looks like a really tall version of milo…..fyi: sudan grass is also referred to as grain sorghum) is available for the wildlife during the hardest part of the winter when other main food sources are no longer available. Throughout the spring, summer and fall, the deer have built up their fat reserves by eating a lot of food high in protein, but to survive through the winter, they need lots of energy, especially to build up their depleted reserves from the fall rutting/breeding season.

As you can clearly see, the tendrils and their tendency to circumnuate around the stalk plants play a very important role in the overall synergy of the ecosystem.

As I've watched my food plots grow, it's hard not to notice the connections between them and the markets and economy. I see staunch stalky plants and they remind me of the big blue chip companies. They provide the back bone upon which the economy is built. But they are now more important than the smaller companies which account for the majority of the economy employment. These smaller companies grow around and circumnuate around the stalks of the big companies.

Recessions and market corrections come in and damage or destroy some of those companies and push them downward. But their misfortune or stumble is the gain of 10 other companies as they come in snatch up the lost employees, assets, infrastructure or ideas.

The strong companies grow in the midst of this dangerous highly competitive environment. Some are beaten by weeds. Weeds especially become a problem once a plot has established itself and is successful. Bad businessmen, dishonest businessmen, and less competent businessmen spring up on this fertile ground and environment, trying to hitch hike on the backs of the stalks and gain prominence/market share on the bridges that were created by the honest smaller companies.

But ultimately, these smaller creeping companies and larger stalky companies really only serve one purpose: To feed the consumer. Like the deer, consumers move in do business with (eat) the products of the small and larger companies, including the weeds. When a consumer finds a comfortable food plot they usually bed down there (i.e. use their products regularly and become a frequent shopper of the company).

But ultimately, things change. As companies grow, they become more rigid and less flexible in their ability to adapt changing environmental conditions. Their lignin content (rigidity) becomes such that they are no longer growing.

However, in business and the markets there really is no season stagnation. Sure, sectors and whole asset classes may lay dormant for a decade or more, but something somewhere is always flourishing and growing.

Out there, at all times, there is no "winter" in the markets and economy. Sure, we can have periods of time like 1968 - 1982 or 1929 - 1950 which sure seemed like winter in the markets and economy. But the reality is that somewhere, at all times, there is a tendril forming and growing. It is circumnutating it's way up some stalk of some established company or idea. But it doesn't even have to have a blue chip company to grow around! That's the beauty of capitalism!

May

7

I just now honked at Officer Davis as he tries to direct the crush of traffic at our local Belpre Starfire that is still selling gas at 3.62 .

Down the street Speedway and Kroger gas lots are empty as they are now 3.89/3.99 and finally , 4.09 for premium . I say finally because the news media has pushed hard for 4.00 gas in their reporting for the Summer driving season.

Now I see talk of a second stimulus package !

May

7

The market is smarter than ever. [Comment from a Trader.]

The market isn't 'smart', it just is. A huge amazonian flow of human consciousness.

There's a danger in ascribing intelligence to this thing, tempting as it may be. For the thought that it's 'you against the market' stems from the ego, a false belief that we are in some 'mano a mano' battle and need to 'outwit' an opponent. All we are doing is outwitting ourselves.

The market does not care about our existance, it just continues. And the best we can hope for is to hitch a ride without being swallowed up in its ebbs and flows.

May

6

I enter Nicaragua, a country I know little about except for a reputation of being the poorest and most rewarding spot in Central America, in a motorized canoe at the remote port of San Carlos. A yellow canvas awning shades two dozen jabbering Latinas with their stores and me from the blazing sun and whatever may drop from tropical trees. I see baskets-size epiphytes bow the trees, 4’ chameleons on overhangs, wading birds, 1’ turtles sunning on the banks, two 6’ crocodiles, and a stout branch that conks my forehead sending the ladies into giggles.

On a further bend sits a ragged encampment of thatched huts where three Nicaraguan military youths duck a clothesline of their underwear with AK-47s in hand to wave the captain over for a list of the passengers’ names, a head count to verify, and we are passed.

An hour later, the river opens into Lake Nicaragua with a barely discernable far shore. My favorite thing is to enter a new place, and the feeling of pulling away from the edge of civilization into the mysterious. The canoe putts into a squall that pelts with rain and gust for five minutes, abates, and soon on nearing a port the captain shouts, ‘Put on lifejackets!’ (to satisfy the officials). The sun breaks through over San Carlos, a swampy shoreline of ramshackle structures teetering hardly above the water on wooden stilts. Children swim and laugh at our approach to a pier with missing slats like an old man’s mouth, our rosy portal into Nicaragua.

I step mightily up under my pack and trundle the swaying dock to a weathered wood door signed ‘Immigration’ and wait until it cracks after a knock as kids splash and scream underfoot for coins through the slats. An equally cheerful agent beckons me forward, speedily stamps the passport, and I take a deep breath to brace and exit the far side of the hut.

Before me left and right stretches a cobblestone main street flanked with flimsy, busy shops, and I doubt there has been a distressed port in any century. I duck into a café that’s the front room of the cook’s home and toss down a parade of $.25 fruit drinks while paging the guidebook to make a plan. This is the way the nomad moves through daily storms of possibilities, and on learning that I know the present location only by name and not the month, the cook kindly suggests a river visit to a 17th century castle ruins built on the bank to thwart pirates.

An hour later, the ferry, a thinner, shorter motorized launch, departs with a few Latinos and slices the jungle toward the Caribbean. It occasionally drops and takes on fares like a usual taxi except the car pools are horses tied to trees at wide spots where trails meet the rio.

At sunset, the canoe swings into a tributary held tight by trees and vines and motors a few minutes to a timber dock to tie on. Passengers fore and aft climb out, and I eagerly follow for a glimpse of the jungle castle in green filtered light, don’t spot it and muck the muddy town square and up a sole road into the hills until the forest and dusk close behind. I stop in my tracks, pull a penlight, but am struck with a queer thought and rush down the hill.

The boat is gone! There is no castle for I’ve prematurely disembarked. Lost and curious, I snap a flash photo of a 6’ statue of a fish with a sharp nose pointing upward when the seeming one town truck batters past to the dock, and I follow to a 70’ steel hull elderly freighter with peeling gray side-paint and weighted under burden. Five young stevedores, grinning teens in oily rags, jump the tailgate, crank the truck radio, and dance while off-loading five cubic yards of 120lb. sacks of rice.

They look shorthanded, what the heck, so I leave the fish to help unload lighter items including 8’ spherical black plastic solar water heaters. The boys, like me at that age growing in spud-rich Idaho, are wary of a vocation that requires new clothes more than once a year, and are pleased to earn $8 per 12-hour day, 365 days a year. They take turns trying on my ankle weights until the captain of the ship advances and I hit him up for a ride. Batting nary an eyelash, he will ferry me downstream to El Castillo for $1.50. We momentarily push off with our feet for a slow ride down a moonlit stream as I recline on life preservers with hands clasped behind my head thanking my lucky stars. The unknown is the best pillow where I gaze at the stars between passing overhangs and smile that dreams do come true because in Idaho I read Bomba the Jungle Boy and here I am.

I must have dozed, for next the cap’t yells, ‘Get off!’ I edge to the boat side that bobs three feet from a darkened pier, and toss first my pack, then ankle weight with thumps, and leap…

Gazing up at the castle in the shadows of moonstruck trees, I nod sleepily on hands and knees, and rise to trudge up to it. Just think, it began by carefully putting two bricks together three centuries ago and now it’s a touching hump of a hundred weathered bricks. No town should be larger than a walk from a castle to a hotel on a wharf over jungle rapids next to a pool hall of hangers on. I get a key and candle for $6, and fall asleep listening to the water rush beneath.

People in jungle outposts rise at godforsaken hours, so I catch the 5am launch back upstream to the port of San Carlos. There, next to the dock, the mud slick bus lot steams under the sun. I grab a cucumber from an adjacent market stall to munch and think and, sure enough, thirty minutes later wipe my Chucks on the first step of an ancient orange school bus. It so crams with Nicaraguans and their stores that I’m pressed to the back above the rusting floor atop a dozen rice sacks. The driver cries ‘Vamos!’, mud flies and the heavenly ride slides out of town.

I look down and around at the passengers and out the windows with some concern that there’s not a fat person in Nicaragua, nor a real thief. A grain or two at a time, with each bump along the road, a rice sack with a rent of my throne leaks to tinkle to the floor. A beatific ten-year delights in scraping one fallen grain at a time and sucks a la grime, and grins shyly. The bright eyes in mine express wonderment, softness, pride and a touch that I don’t join the table. Other riders squeeze the aisle to take pinches off the floor and thrust into hungry mouths. Savages we have called them around the world because their manners differ from ours.

I study them. Travel magnifies human emotions. Every seat is stuffed, and thirty more stand the aisle in their sadness and wisdom- and I might mention eternal yak- until the temperature soars to 100F at our heads that sometimes bump the roof. They stand stoically and chat affably for hours until I must be grateful as the sun heats the metal so hot the air thins beneath until they cannot find wind to continue.

The yellow antique averages 20mph for ten hours over the worst main route I’ve journeyed, stops hundreds of times- often at hundred feet intervals- for passengers at slim towns or paths erupting from the jungle, plus two flat tires. A huge volume of adventure is filled within the span of a bus glass by taking a keen interest in everything that passes. This, and more windows, will shine a theater of jungles, towns and peoples struggling for existence with all they can give. It’s showtime, forget the mosquitoes!

I spread a map for the first time against the hot glass to discover where the bus is going. A country’s psyche is the roadmap thrown into an upright position, and I’m delighted to see the paths and lanes are earth. I shall become enamored over the next month with the notion that the poorer the place the higher the adventure.

May

5

This web site's contributors and readership consists of astute individuals looking to make informed investment decisions (or perhaps, more appropriately, trading decisions). However, it's worth remembering that many participants in the market maintain positions based on less objective criteria.

While taking a break outside today, I encountered an older gentleman returning to his workplace (a large diagnostic laboratory where he delivers lab samples to and from doctor's offices). He asked me what I did, and I replied "Investing", without going into great detail. He then asked me jokingly if I could get his investments back out of Enron. He then proceeded to explain that he had lost the majority of his 401K as an employee of Enron (he had been a petroleum engineer at a company acquired by Enron for over 20 years, then spent several stints with Enron in Houston). He reminisced that many times he had ridden on the same elevator with Ken Lay and Jeff Skilling, and had been told repeatedly, "Make sure you're buying that stock, T*****!" Now, at 76, he's a delivery driver, happy that his diabetic wife gets free lab work, but unlikely to retire any time soon. One can only hope that his eyesight and reflexes enable him to retain his current position for the foreseeable future.

After he walked away, I thought about my own fortunes. My first job in finance was with a firm that will soon cease to exist, and my immediately previous position was with a firm that recently announced substantial job cuts worldwide. Both firms pushed their risk boundaries past what might be considered reasonable bounds. Neither appears to have engaged in the fraudulent activity associated with Enron (as far as we know), but they may have arguably breached their "duties" to their stockholders in their pursuit of profits with insufficient regard for downside risk. I'm fortunate to work for a small firm that engages in high risk investment (seed and early-stage venture capital). The risk is high, but transparent and straight-forward to those who participate.

How often do we as investors/speculators encourage risk-taking behavior that bundles up participants who are unaware or uninformed about the risks involved? We can argue that anyone who takes an equity stake in any enterprise has the duty to inform themselves about the nature of their investment. If that is really the case, though, does some type of duty exist within the corporation to insulate and diversify their rank and file employees who serve in functional positions with little strategic input? Would doing so cool the market for high growth stocks, and would that chilling effect ultimately prove less expensive that the potential social burden that results from the destruction of shareholder value if and when things blow up?

Many people here have made and lost fortunes (some more than once). The difference would seem to be that the DailySpec readers were probably easily classified as willing participants. Does a duty exist to make a firm's members aware of the risks of stock concentration at least, and risk-taking strategy implications at most? I think many will state that we are all willing participants. However, we should remember that when things go the wrong way, collateral damage occurs. The question I suppose that I'm posing would be how much of that damage is needless. I can only thank reason and fortune that I'm in a good position now, and hope my new friend finds a way to enjoy some part of his golden years, even if they're not turning out as he planned.

Stefan Jovanovich adds:

"Everybody cheats" (See Breaking Away). Allowing companies to adjust the forecast rates of return on their defined benefit plans' portfolios was the way everybody in management cheated under the "old" pension plans. Allowing companies to contribute their own paper to 401(k) plans instead of cash has been the way everybody in management has cheated under the new pension plans. But it would be disingenuous to claim that the knavery is only in the board rooms. The poor, lowly employees in Enron had their own part in their financial ruin. The cheating in Enron was not just done by the senior managers of the company; it was endemic throughout the company. So was the boosterism for the stock and its price. The peer pressure to "buy the stock" came as much from lower and mid-level employees as from Lay and Skilling. Once "ordinary" (sic) employees come to "believe" in their company's stock, they become the most emphatic preachers of the new financial faith. People know when they are being greedy or lying to themselves; the question is what they do about it. Some or none or all of this may apply to the poor soul Jim Rogers met. 

Russ Humbert expands the scope of the analysis:

Why risk management is taken for granted or ignored:

1. Everybody is a genius when things are going great… It couldn't be that you got lucky. A good risk manager reminds everybody they are not as smart as they think they are. A good risk manager tells them to walk away from the table, or at least take some chips off of it. Which is always interpreted as "you are preventing us from making money". It is very hard to argue with success, if it's the gambler that just threw 4 straight 7s to Buffet at his annual meeting.

2. When everything has gone to Hades a good risk manger can't win. First he has to convince them that there are no excuses, take your losses like a man. Certainly there will be someone to blame, from the con-man to the incompetent fool; the loss could have been avoided. Learn from it. In investing, everyone has a choice. In 401k a good variety of choices with proper accounting for $ should be the only obligation from the business. Second, he has to direct them to the opportunity in the panic, rather than look for the scapegoat. When things are bad, risk is always overestimated by someone needing an excuse to cope out of making scary calls and implying nobody is to be trusted. Hurricane and earthquake insurance premiums increase after the fact. Try convincing managment now is the time to be in earthquake business when everybody is wanting to buy it.

3. Many believe risk management should be free. (For an example, look no further than nationalized health care). Nobody wants to pay for the research and personalized understanding that takes time and money. Ask your superiors for resources, on something they consider a sunk cost that constrains them, and they are not interested.

4. Many believe investment risk management is simple common sense, which can easily be regulated. Working for an insurance company, and seeing the high regulations imposed on insurance companies investments, it's clear regulations and common sense don't mix.

5. Many believe risk is not a personal choice and a cookie cutter approach for everyone works fine. Think of the millions that have suffered and died due to FDA's approach. But with personal choice comes personal responsibility. Tell this to the risk addict. Or tell this to the insanely paranoid.

6. The Lake Wobegon effect where every child is above average, clearly applies to investing. In a investing/business you can always find a area where your business does a better job of managing risk than the rest of the industry. Or if not the industry average, you can find someone that does a more shoddy job than you. Hence, you are above average in every aspect. Further it never occurs to you that everybody may be lemurs headed for the cliff. Try being the risk manager to a disfunctional buisness, I think I would rather tell a Mom her son can't move on to the next grade.

7. A close kin to Lake Wobegon is many believe they are "blessed" and therefore can ignore purdence. While risk management applies to the masses, they got G*d on their side. If its simply because they were born to the right parents that their luck can't run out. Or it could be the opposite, they have had such a string of bad luck that the Big Guy owes them. Pity the poor risk manager arguing with this.

8. The Rating Agencies are thought to be better than internal controls. Nobody considers that the ratings are a game and are often exploited. This has many parts:

a. As I wrote in an earlier post, the subprime mess is largely due to socialist industry averaging of risk management.

b. When the game is to get the rating, not to manage the risk, there are a million loopholes. Simply learn what they review, and take your risk elsewhere (hopefully this increases your returns). Hedge funds/Sharpe ratio, go with liquidity. Investment banks balance sheet, move them off balance sheet with SIV's. P&C companies, do reinsurance with side contracts like AIG and GenRe. Life and Annuities insurance companies, use variable annuity guarantees and interest rate guarantees (which are now being monitored after large loses)

c. It seems Enron bought their rating. From the magazine ad claiming "Car of the Year" to Nobel Prize. You should assume raters have some price: dollars, political, or connections and you should not consider them totally objective.
 

May

3

I have been reading the autobiography of Marion Davies lately and she has a quote from Hearst that "make sure that the youth like it, and the rest will take care of itself." I am wondering if youth oriented stocks, Google et. al., perform better than others or whether the ratio of price to age of average employees or executives might be a better indicator than P/E. I would be interested in other youth oriented stocks, other than the toy companies, or readers' thoughts on this trickle-up theory. In particular, Hearst didn't like "kissing" in movies, as kids 12 and under hated it, and he especially didn't like it when Marion was involved in such activities in any way, though from a reading of the book, with her giving up her career ultimately so she could take care of the great man, she seems to have been perfect in her role.

Russell Sears replies:

Today I ran a 20k run (12 miles) with an young hopeful marathoner, Jerry Faulkner. He was taking an easy day and I was running hard. He had recently switched coaches an his new coach has him running much higher distances per week, longer hard days, an only picking key dates to race. Much more like I used to do.

After hearing him talk about his training and his coach, it dawned on me why you are seeing a surge of young USA guys finally having a chance at medaling… it's the availability of coaches now. For guys like him, a recent college grad with potential, but an unproven record, living on a shoestring, 20 years ago few coaches were available… When I was starting, comp race entries and free or cheap shoes where available from local specialty running store for the local champs. Now the coaches are seeing the benefit of comping a young local kid with potential, since coaching is bigger business than just schools and colleges. Becoming a personal trainer has gone beyond just the weight lifting guys, obsessed with making a living with what they love. The new coach sees helping the young guys out as their way of staying connected to the action in the sport as well as generating a buzz about their business.

But much credit must be given to the youth of today also… 25 years ago, I would not have thought of inviting a deteriorating 45 year old on a 12 miler… Plus they are much more aggressively seeking those coaching/mentoring relationships than I ever did… Part of why thrived after undergrad school was because I enjoyed calling my own shots in training. But experimenting without supervision often caused me to learn my lessons the hard way… blowing up.

So it may be both: "if the youth like it" is necessary for success but "the rest" have to be part of the potential of the company also.

My hypothesis  is: take the standard deviation of the ages of officers of a company, or the board of a company. I would suggest the CEO if both the CEO/president or chairman of the board age counts twice. Regress this with the standard dev against 3 or 5 year returns and see if they are correlated.

Steve Ellison adds:

This credo appears to be a central operating principle of the advertising industry. Just this week, I received a phone call from a man conducting a survey about television. The first question he asked was my age. It was also the last question he asked. When I responded that I was 46, he said, "Thank you very much for your time." I was not surprised. I already knew that I was an "undesirable demographic".

Sam Humbert complements:

And it's a timeworn idea in ladies' retailing that women will buy clothing aimed at the demographic ten years younger.. Probably there's a Zeno's Paradox in there somewhere.

Steve Leslie extends:

Vic has brilliantly raised a magnificent subject to discuss and debate and I hope that the thread continues onward and upward. As with all stocks, timing is important. With respect to "concept stocks," buys and sells are critical to a speculator's financial success. These are not grind 'em out stocks that move 8-10% a year. You have to be ready to buy and ready to sell. I know it sounds like a cliche but it is imperative here to remember. Even the great Apple was overpriced at $220 but offered value at $120. A good exercise is to examine Apple vs Microsoft and look to the esprit de corp or their raison d'etre for insights. The great thing about Apple is that Jobs came in and had the vision to discern what the consumer wanted. He went outside the box with the iPod. It was the same with the computer, the Apple brand always had the slickest, fastest, coolest best stuff around. But they were not content to sit on the computer. They were looking for more innovative concepts and other worlds to conquer. He listened to what his legion was telling him. Part of the struggle with Microsoft's stock having gone nowhere in five years is that they are now sitting on their dominance with the operating system. Although very profitable, throwing off massive cash, their stock is not embraced like Apple's. They could have done the same or similar things as Apple but did not transcend the culture. An insight into their mindset is their recent attempts to purcase Yahoo. I am totally flummoxed why this deal has not been done. Who's to blame: Yang, Ballmer, Wall Street, the lawyers? The deal may ultimately be done but at what cost? And at what price? Final suggestion: One company that merits study is Garmin, the leader in GPS hardware and software. Much too early to purchase in my view, but that view could change.

May

3

Jim Lackey

REDMOND, Wash. - May 3, 2008 - Microsoft Corp. (NASDAQ: MSFT) today announced that it has withdrawn its proposal to acquire Yahoo! Inc. (NASDAQ: YHOO).

Paying 5X sales makes sense for a media company? The only other one that baffles me is calling amazon a tech company. The entire techie list is cluttered with either media or commodities, like chips or software that is bundled but offered for free elsewhere.

I am not a techie. Yet I see what the kids are playing with, video. The free MSFT XP downgrade is the joke of the year. Yet I see so many bullish on MSFT, which is wild in the first place, but how in the world did it make sense to buy YHOO? Why did MSFT fail or did they fail in the media/e-mail markets. How can you fail giving things away for free?

I don't have a Linux machine. We still run XP here. I am not anti-MSFT. I notice how many have moved back to XP WM type file systems on many of the sites we use for music and video. Frustrated by the never ending paying/renting of songs, constant reloading of rights for the hand held music players I shut down the Napster. It was great, just sick of it.

I just dug out a box full of old CD's. funny the CD's date from my Army days in 91 until 2002 when file sharing/renting downloads began to work well. Anyways I remember back in 99/2000 ripping CDs to the PC and trying to rename or move files up down load them etc. Oh yea, like back in the 80's making mix tapes.

Hades, I've had my win update off for a while now. So I have media player 9 on this machine. What a breeze. I just went through 25 CDs in a couple of hours, made all sorts of play lists. Its not that its that much easier vs Win NT or 2000 years ago, it's just faster.

So in the past 9 years what has been created? Everything that was dreamed and promised in 1999 is here. Nothing new really, it just works now. Vid-edit file sharing Utube hand helds cell phones, 3g and GPS.

I know "they" say tech stocks have never been a better value. Well that's because there is nothing new. Yes all the toys are better and cheaper. Yet how will they command a premium in the future? Tech traded at 100X earnings a decade ago for today. Today is here. Why are some trading 2-3 times the present for today? Nostalgia pricing?

Yea I understand the branding and all that Jazz. That is why GOOG failed at video and bought U tube. Yet "tech" was futuristic. It was a computing story. A making people lives better story. No doubt there will be some more improvements but the big picture seems to have been played out.

Well one great internet idea left. High speed WiFi the entire country.

May

3

GregIncreasing wealth around the world drives demand for particular products, and early speculators in those key goods can get rich. Western European wealth and population grew in the 1500s. Total population was up 50% over 100 years at the same time as average wealth rose 15%. Not impressive at all by today's standards, but major progress compared to earlier centuries. Demand for spices to flavor food and hide the odor in meat (and kill microbes), grew dramatically. Plus nutmeg was believed to help cure the plague and other grave diseases.

The book "Nathaniel's Nutmeg: The True and Incredible Adventures of the Spice Trader Who Changed the Course of History," tells the story of European merchants establishing direct trade with the Spice Islands–trade that had for centuries gone through India and the Middle East. English merchants in 1602 present a letter from Queen Elizabeth to Ala-uddin Shah, the powerful Sultan of Achin in Sumatra. After two pages of praise for Ala-uddin and attacks on Portuguese and Spanish pretensions, the Queen requests opportunities for commerce, writing: "Trade not only breeds intercourse and exchange of merchandise .. but also engenders love and friendship betwixt all men." (p. 88)

Trade may engender love and friendship, but competition among state trading monopolies tends to spill much blood first, sending sailors, soldiers, and merchants alike to their graves. The Dutch, with their superior capital markets, raised more money and sent fleets faster and larger to roust out the Portuguese and set up trade networks.

Nutmeg and other spices were valued pound for pound far more than gold in Europe, and nutmeg was the prize of the early spice trade, growing at first only on tiny Run island. After long battles between the British and Dutch, the Dutch gain control of Run island by treaty, in exchange for British control of New Amsterdam.

I am rereading too "Nutmeg of Consolation" and reflecting on the Aubrey's ruse to draw a French ship close in for battle. Edmund Scott, the British East India company's factor on the spice island of Bantam, had somewhat the opposite problem: "Scott soon realized that one of the main reasons why they faced the constant threat of violence was that the native Javanese were unable to distinguish between the English and Dutch. The Hollanders, who lived in Bantam in considerable numbers, paid scant regard to the sensitivities of the local population and thought nothing of staggering home through the streets of this staunchly Muslim town after a lengthy drinking bout. … The situation was made worse by the fact that some of the Dutch would pretend they were English if they thought it would be to their advantage when buying spices."

The English came up with the idea of staging an elaborate celebration for the anniversary of Queen Elizabeth I's coronation, dressing themselves up in white silk and scarves of red and white, to "make 'a flagge with the redde crosse thorow the middle." The fourteen English traders marched up and down the town streets attracting hundreds of curious Javanese. The locals asked why the other "English" were not celebrating, and were told they were Hollanders and had no King. "The day ended in triumph. As a constant stream of shot was fired in celebration from the English factory a procession of children wound through the street shouting "Oran Enggrees bayck, orak Hollanda jahad," which is "the Englishmen are good, the Hollanders are naught."

We hear today of securities markets seized up because investors can't tell reliable securities from dodgy ones. Maybe it is time for a major advertising campaign by British firms who can claim they answer to a higher authority, and another Queen Elizabeth.

May

3

JasonI've been re-reading parts of two terrifically enlightening books on the Federal Reserve this week, "The Creature from Jekyll Island" and "Secrets of the Temple".

In the course of my review, I was reminded of a gentleman who once was the head of the Federal Reserve System who believed in sound money and hard banking, William McChesney Martin. Appointed by Truman in 1951, Martin would last through 5 Presidents, finally retiring in 1970 during the Nixon administration. A Yalie that had concentrated in English and Latin, McChesney Martin had deep family ties to the Federal Reserve. His father, William McChesney Martin Sr., had been both the Governor then President of the St. Louis branch of the Fed as well as helping to craft the original Federal Reserve Act of 1913. Junior himself was instrumental in the 1951 Accord, the agreement that is seen as re-establishing the Fed's independence.

Harry S. Truman thought that by appointing Martin Jr. to head the Fed, he could over-ride the agreement. Despite being a Democrat and growing up in the bosom of the private-public power duopoly of NYC and Washington D.C. elites, William Jr. did not play ball. Instead he ran monetary policy in a strong, counter-cyclical manner and was very mindful of inflation - refusing to return to the practice of debt monetizing as Fed Chairman Eccles had been apt to do.

He was a hard-nosed real money man who lectured Congress sternly on what he saw as excesses in spending and a growing lack of appreciation of the two-sided nature of capitalism. In August of 1957 he told the Senate "We are dealing with waste and extravagance, incompetence and inefficiency; the only way we have in a free society is to take losses from time to time. This is the loss economy as well as the profit economy."

50 years hence the man that occupies the seat at the head of the Fed's table is completely devoid of such character. Instead of warning Congress that inflation causes mal-invest, encourages excess speculation (NASDAQ, real estate), and particularly afflicts "hardworking and thrifty… little man on the fixed income who could protect neither his income nor the value of his savings. Often, he was also the unemployed victim of the collapse", B.S. Bernanke recommends easy money and opening the spigots of government largess.

The history of the Fed is intriguing and insightful, giving generous lessons to those that would heed such knowledge. The obvious message today is that the current Fed is much like that of Arthur Burns or George Miller, men who would quickly acquiesce to the whims of politicians. In stark contrast to William McChesney Martin, Benjamin Bernanke wants to be loved and accepted and is willing to commit grave errors in monetary policy to achieve that aim. Speculators and pensioners beware!

Edward Talisse adds:

The most recent offering of Grant's Interest Rate Observer includes a witty cartoon. A local motorist pulls up to his nearest filling station and exclaims to the station attendant that "the recent price increase in gasoline is outrageous." The Greenspan-Bernanke schooled attendant coyly replies "yeah, but is not a core increase!" Correctly assessing the medium to longer term inflation outlook has always been a key to investment success and preservation of wealth in real terms. The problem is that inflation forecasting is a tall order and even the pros cannot agree on an appropriate methodology. Today's CPI readings are met with much cynicism and skepticism. The bond trader's lament "that of course when you take out everything that went up, it goes down! Anyway, here is a PDF that explains the difference between the CPI and the PCE. CPI typically runs higher than PCE. Chose your poison carefully.

May

3

I like to revisit "My Life and Loves" every couple of years. Written in the 1920's, the book is an autobiography of Frank Harris who at different times of his life was a scholar, cowboy, hotel manager, professor, lawyer, adventurer, trader, cattle rustler, and finally the editor of London's "Saturday Review." Harris was a brilliant man with a strong memory for detail, and had a total recall for verse. He was born in 1851 in Ireland to a Naval officer and spent a few years at a public school in Wales. At the age of 13, he won a scholarship and used the money to book passage to America. Landing in America, he got a job constructing the Brooklyn Bridge. His entrepreneurial spirit led him to form several successful business ventures in New York. Saving his money, he landed in Chicago, where he ended up as a desk clerk at a hotel. His passion for detail and profitability, led him to ultimately run the place. His wander lust led him to the plains, where he became a cattle speculator and cowboy. He participated in several cattle drives, ultimately bringing 5000 cattle from Texas to Chicago, just after the Chicago Fire where he made great profits for his own account.

Harris then ended up at the University of Kansas, where studied the classics and law, and also successfully speculated in real estate. Harris passed the bar exam and practiced law for a short time. Eventually, his passion for learning took him to Germany, where he studied for a couple of years, and later Paris. Harris lived a pseudo Bohemian life in Paris, where he partied, wrote, and hung out with notable authors, poets, artists, politicians, speculators, and royalty. He did several tours of the continent, went to Africa, and eventually ended up in London. Harris took junior positions at several newspapers, restoring their bottom lines, culminating with being the editor of the "Saturday Review." His speculations in Consols led to huge losses. He took those losses in stride, and maintained a very heavy social calendar. Harris was a lifelong friend of Oscar Wilde, Emile Zola, Cecil Rhodes, Guy de Maupassant, Emerson, and others too numerous to mention. He described his encounters with all of his friends in great detail, and provided great insight into the culture of the early 1900's. Harris knew everybody, and was described as a boastful rogue with a very voracious sexual appetite. His many descriptions and exaggerations of his seductions led to "My Life and Loves" being banned in most places. Frank Harris was a stand up guy with his friends, passionately defending Oscar Wilde when his scandal became front page news. Harris collected art, being friends with most of the Impressionists, and getting pieces of their work at very low cost.

"My Life and Loves" is a great work, despite the exaggerations and boastful sense of self importance. Harris really understood the classics, and his thorough knowledge of Shakespeare led me at an early age to give further study to the Bard. Frank Harris was an amusing story teller, bon vivant, and had a great sense of wit. He accepted criticism without malice, and always was up for a good debate. Despite the fact that Harris was a total reprobate, he still managed to maintain a sense of dignity, even when he lost his entire fortune and was reduced to penury. Oscar Wilde once quipped, "Frank Harris has been invited to all of the great houses… once."

At the twilight of his life, Harris ended up in Spain, where he wrote the first few volumes "My Life and Loves." His autobiography was meant to restore his bank balance, and also to provide a record of his interesting life. Harris died broke in New York in 1931, surrounded by a collection of fine Impressionist art.

Frank Harris was a very controversial character. His friends staunchly defended him, while his numerous enemies plotted his ruin. He was a seducer of women from a very young age. He was boastful, often to the point of intolerance. However, he had the goods to back up his boasts.

"My Life and Loves" is an autobiography that should be required reading for any speculator. It contains far more lessons for speculation than Lefevre's "Reminiscences of a Stock Operator." In fact, this book should be required reading for anyone who has a love of history, art, and the humanities. "My Life and Loves" is a broad, sweeping book, that could easily be compared to a Cecil DeMille production.

May

2

Lest we make the same mistake as everyone else, let us look at prices as signals rather than looking at past seasonally adjusted random numbers about announcements, anecdotes, et al. Note the 15% drop in last 2 weeks in gold and most commodities, and the comparable rise in the dollar, and consider whether the markets see less inflation or more inflation ahead, with all the finger pointing, imprecations, and critiques of the putative inflationary bias of recent activities.

Let us also look at the slope of the yield curve and calculate expectations going forward since 1960 or so when the curve was  upward like this, the same way that doomsdayists would look at downward sloping to predict recessions, (as if that was bearish for stocks).

Many forms of dynamic behavior can be modeled by difference equations that reach a fixed point. I hypothesized that after a market hits a fixed point, where the change in the last 10 days is less than 1/3 of the moves in the previous 10 or 20 days, that a new equation might develop with trend following working much better. After testing this with various parameters I concluded that there is not much to it, except that the market doesn't like small moves, i.e. the old idea that rates of return are highest when risk is highest gets one more instantiation.

We had an interesting talk last night by Ed Hudgins of Atlas Society about measuring economic freedom. They have this down to a pretty rarefied state now, and consider most things that people might consider, like property rights, service rates, regulation, corruption, and time and ease of starting business. They conclude that freedom is responsible for everything good from gdp to growth to peace to longevity. However, like The Stages of Growth, all the stages and attributes are retrospective, tied in with past gdp, or expectations for the future thereof, and non-predictive. Their work in trying to measure economic freedom by state might be of investor interest, and things similar to Laffer's efforts in this field might have investment merit. Hutchins himself wants now to measure an index of individuality cross country wise and this brings to mind Sam Otis's remark in Johnny Tremaine, well worth reading for any kid or adult, that the simple reason for giving up life and liberty was " the ability to stand tall ". I believe this the key to economic prosperity also.

May

2

From the NY Times:

"After the terrorist attacks of 2001 deflated the economy, Mr. Lauder noticed that his company was selling more lipstick than usual. He hypothesized that lipstick purchases are a way to gauge the economy. When it's shaky, he said, sales increase as women boost their mood with inexpensive lipstick purchases instead of $500 slingbacks."

Rather than shoring their mood with inexpensive cosmetics, I believe heavier lipstick purchases is a way to attract men, which is hard-wired in times of loss and stress: Women seek the protection and nurturant love of the male, and lipstick, a red sign of sex, replicates arousal — males respond to red signals on lips and elsewhere on the body. Even without realizing it, the male sees 'aroused female' by certain cues, and instinct starts to take over. Hormones are exchanged and generated.

Thus a surge in lipstick purchases underlines perceived shortage and scarcity, and marks the start-gun of a hard-wired survival strategy. Men for their part would seem to be looking at a revival of females-becoming-more-female in affect, clothing and outward lineaments.

That is much more to the point than a mere 'boost in mood.' It is also a direr indicator of societal dislocation.

Scott Brooks confesses:

I've always been attracted to a women with very little or, preferably, no make up. There's something about a woman who has the confidence to go natural.

Marion Dreyfus replies:

Sure, sure: 99% of men aver they like the natural look. But if you saw most women without make-up, you would be shocked. The subtlety of make-up is that it appears to be natural, yet improved. And it makes a woman feel good, actually, to be enhanced subtly, so her eyes are more defined, or her lips are moisty-colorful. And her partner usually has no idea how it is done.

May

2

The knowledge contained in textbooks is simply not at all unique. There's no practical or ethical reason to knuckle under to the publishing industry and pay $150-250 per text for knowledge which is readily available for free elsewhere. Many people just copy or download the textbook for free.

Russ Herrold replies:

Hogwash. If so, use those free sources alone. The act of taking steps to obtain and use the publisher's source data confirms that value exists.

It is a denial of reality to assert a right to be the 'free rider' (as the torrent users do by their actions) on the backs of those who do not violate copyright restrictions. To me, it does seem to be an ethical matter, that the torrent users are on the wrong side of. It is certainly wrong as a matter of law.

As a practical matter, starve the publishers of sales, and they will raise prices higher still for legitimate users who cannot in good conscience be using 'stolen property'.

Jeff Sasmor adds:

My wife has worked for two different publishing companies that published college textbooks, and she once told me that one reason that the books are so expensive is because they often don't sell a lot of them due to copying. In years past teachers would copy sections of the books and hand them off to students (or the students would copy the books themselves), and now digital copies make it even easier.

People don't attach much value to the publishing process, they don't want to pay for it, but there is value added. The whole system (like many others) is very messed up.

Adam Robinson predicts:

Perhaps it is time to rethink the viability of textbooks regardless of price. I speak of their pedagogical value here, but in any event they will go the way of encyclopedias, swept aside by collaborative contributions a la Wikipedia. I got through Wharton having purchased only a few textbooks first semester my first year, after that I realized it was cheaper, and more effective to master the material, simply to go to the library and digest the assigned chapters on my own.

Distinguished former intern Chris Hammond recounts:

I'm finishing my PhD in math, and I have recently needed to learn techniques from a different area. I tried to learn everything by reading papers. However, each paper would focus on one aspect of the theory, leaving many questions unanswered. I worked very hard to resolve some issues on my own, not learning until later that it was done in some other paper whose existence I was unaware of. Further complicating things, one of the most important references was in French. I finally stumbled across what seems to be one of the very few textbooks (perhaps the only one) on this subject. Had I found this earlier it would have saved me so much time it makes me sick to think of it. I would have gladly paid a hefty price for it, if it was not available through the library.

Stefan Jovanovich reminisces:

I stopped following the internal fortunes of the publishing business more than 35 years ago when my Dad and I had one of our more spectacular disagreements. My brother Peter is the expert. He worked with my Dad until they lost control of Harcourt Brace Jovanovich and then he worked for McGraw-Hill and Pearson. My few comments about profitability and publishing being a "hits business" come from what I know about the history of the business in America and Europe. The inescapable economic logic of print and press runs has not changed since Gutenberg: you lose your shirt on the first copies and make your fortune on the last ones. That is the reason "free" copying has always been such an attractive proposition for the copier. Before they turned to semiconductors the citizens of Taiwan were masters at book piracy; and, as I noted recently, Thomas Paine went from being a lover of America to something quite different out of bitternes