Today is the anniversary of the death of "Grandfather" Michiel de Ruyter– the greatest of all the admirals.

Paolo Pezzutti writes:

His fame was not built as a bureaucrat in the government palaces where power is managed, but it was earned in an impressive number of actions and battles. This is very good. Like a successful trader with an edge, his wins were so consistent in time that they could not be random.

Interesting how, over the past three weeks, the sequence of colors
related to bonds and S&P has been exactly the same: blue, green
yellow, green.



 It's amazing, once again, how Apple drives market sentiment:

A large spike in sales of Mac computers, driven by the refreshed MacBook Pro, beefed up March-quarter earnings. Apple said it sold 3.76 million Macs, up 28 percent from a year ago. It also sold 18.65 million of the high-margin iPhones, which is the technology company's most important product line. ….Apple's iPad sales in the quarter fell well short of Wall Street's expectations: some analysts had projected shipments of closer to or even more than 6 million… It moved just 4.69 million iPads.

I don't think this hype is so deserved. I own an IPhone and I think its fame is way too much for what the object really provides (nice apps vs poor battery and poor signal).



 I would like to give a book to the young officers of my ship when I leave my command in a few months. The idea would be to transmit the idea that one should look at opportunities today having a vision, a road map for tomorrow's journey.

As Randy Pausch said: "It is not about how to achieve your dreams. It's about how to lead your life."

Basically it is all about the curiosity to experiment and explore your dreams. Mistakes made are not about being good or bad. Don't be afraid to pursue your dreams. Opportunities occur randomly. If the environment is favorable there is a great chance that these opportunities will be favorable. Work to create this environment. If you are not happy, change. Do something. Don't whine. Do things with passion. Exploit and realize your potential and talent to the maximum extent.

Could you please give me some advice? What is the best book?



George Parkanyi writes:

Hello Paolo,

Yes Man
by Danny Wallace is a lot of fun. It's very funny (not sure if its translated into Italian though), but the central idea is that Danny wasn't happy with his life as it was and decided to see what would happen if he simply said "yes" to every opportunity and request that came along, without filtering. The book documents what happened. This addresses the curiosity/exploration part of the message you wish to convey, done in a fun way.

Think and Grow Rich by Napoleon Hill is an excellent book. It has many very good, uplifting life messages and very practical prescriptions for success.



Scott Brooks writes:

I agree with George that Think and Grow Rich is a must! It had a huge impact on my life.

Since part of vision is proper communication, I also recommend Dale Carnegie's, How to Win Friends and Influence People. I know the officers of a ship aren't there to "win friends", but communicating properly and in a manner that is receptive to the listener is a vital characteristic of all great leaders.



 1. "There is no such thing as easy money"

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]

3. It's bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

Mark Schuetz comments: 

A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?

Victor Niederhoffer replies:

Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.

Ralph Vince writes:

What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…

1. There is no such thing as easy money

This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."

11. All higher forms of math and statistics are useless in uncovering regularities.

Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it. 

Jim Lackey writes: 

About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!

Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.

Alston Mabry adds:

 12. One should not make one's analysis more precise than one's actual trading could ever possibly be.

If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.

14. Never go on vacation with open trading positions.

Or, zooming in:
<click> home

<click><click> to lunch

<click><click><click> to the bathroom 

Paolo Pezzutti writes:

One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Alston Mabry comments:

Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Chris Tucker adds: 

Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.

Anton Johnson writes:

15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.

Jeff Rollert writes:

17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.

Rocky Humbert writes:

The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.

The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants

Jeff Sasmor writes:

About Jeff R's # 16:

16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.

Happened to me yesterday…

Ralph Vince comments:

With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."

Victor Niederhoffer adds:

Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.

Jay Pasch comments:

No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…

Ralph Vince adds: 

Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…

T.K Marks writes:

Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:

"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"

Jim Sogi writes:

Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.

Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.

James Goldcamp writes:

One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).

Ralph Vince comments: 

 Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.

They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.

They're looking for girls in the wrong dark alley.

It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.

They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)

If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.

Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.

Jeff Rollert adds: 

Amen. If it doesn't hurt a little, you're wrong.



 I have always been optimistic about the long term prospects of the global economy. However, since the 2008 crisis I have radically changed my attitude. Strong forces within western countries are greedy and willing to retain their privileged access to resources and easy money. More simply, it could be that politically in our democracies it is paramount not to make tough choices that require sacrifices to voters. The result is that in the name of keeping the economy going (that is keeping the standard of living excessively high compared to what we can afford), we have indebted ourselves to an unsustainable level. What makes things worse is that we have done this at a moment when interest rates were artificially kept at historical lows. This looks like committing suicide. Or setting a time bomb. It is only a matter of time before we have to pay this expensive bill. This folly is continuing. They do bailouts borrowing money for the bailout. Does this make sense? When is this huge scheme going to fall apart? What is going to be the trigger? I find it interesting to see how Japan, the US and Europe are all running fast toward beyond a point of no return. It seems, however, that in the alternation of bad news about the European sovereign debt, the US debt ceiling and the tragedy in Japan, focusing the attention toward the weakest link of the chain is paramount. It is not matter of avoiding collapse, it is a matter of letting (or inducing?) others to fall first as the only way to survive…a kind of economic warfare for survival. Right when difficulties in the US budget fuel speculations about a US default and a free fall of the dollar, you have once again maneuvers to put under the spotlight the Greek debt situation and even the elections in Finland…

Jim Sogi comments:

It's the same mistake consumers made after the boom was over. In order to continue their extravagant life style, they continued to 2nd mortgage the house, kept high fancy car payments, used credit to finance life style, clothes, dinners, travel. The US is using high debt to finance its lifestyle under the rubric of high employment. Like the overspending consumer, it refuses to cut out spending. It relies on debt rather than production to finance extravagance. The consumer got hit and was forced to cut back. Can the US cutback?



The last 2 paragraphs of this article about US servicemen on a french carrier has an interesting fact: the Op Tempo for each of the U.S 11 carriers is 4x what it is for France's 1 carrier.

Paolo Pezzutti writes:

Please keep also in mind that the ships are VERY different so it is not mainly an issue of training. The French carrier can carry less than 50% of the planes (35+ vs 75+), it is smaller (255 meters vs 335), the complement is SO MUCH smaller (1350 vs 4000+). Let's be careful not to compare apples with oranges. Sorry if figures are not 100% correct, I am quoting from memory.

There are similarities in trading when the press wants to give resonance to a certain idea providing numbers that are correct but not put into context and so misleading readers.



 We have discussed the role of government in the economy and during crisis many times on this site. Greenspan writes about this topic with the paper "Activism" that I recently read. He writes:

The current government activism is hampering what should be a broadbased robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.

Equity values, in my experience, have been an underappreciated force driving market economies. Only in recent years has their impact been recognized in terms of 'wealth effects'. This is one form of stimulus that does not require increased debt to fund it. I suspect that equity prices, whether they go up or down from here, will be a major component, along with the degree of activist government, in shaping the U.S. and world economy in the years immediately ahead."

Considerations about the wealth effect are in my view interesting, but well known to those who tried (and managed) to steer a recovery from the crisis.

The wealth effect has supported the economy so far. How much compared to the "stimulus" is hard to say however. "Manipulation" of markets in order to favor a continued move to the upside concerted by strong hands was (and is) in the interest of many forces who have a prominent role.

Victor Niederhoffer writes:

The wealth effect was very big in the 1960s and before, and Latane had good papers on it. Everyone at the Fed has believed in it for 70 years, to the exclusion of looking at interest rates themselves. And Bernanke often times his qualitative announcements with market lows or highs. A good way to trade. 

Phil McDonnell writes:

Most of the so called wealth effect is really artificially induced by the QE programs. If the price of your stock rises but the value of the dollars the stock will fetch falls then are you really wealthier? How rich do the folks in Zimbabwe feel? 

Jeff Watson writes:

One only has to look at the Weimar to see how the business class in Rhodesia feel. In 1913, the German stock market was at 126. Fourteen years later, the German stock market was at 26,890,000. At the index peak, the value of the Daimler company was only worth 327 of its cars. Interest rates were 900% and the exchange rate went from 4-5 marks per dollar in 1913 to 4+trillion marks per dollar in 1923. 

Ian Brakspear writes in:

My portfolio in 1994 was worth aprox ZIM$10 million in 2005 worth ZIM $ 44 billion.

Victor Niederhoffer comments:

What they did to the farmers makes one cry. Brakspear is the guy that posted the funniest spec post ever. He ordered 2 beers for lunch. It was 10 million Zimbabwe. Then by the time he finished lunch, he ordered two more. The price had risen to 15 million Zimbabwe.

Kim Zussman asks:

So does inflation illusion work? What does it feel like to be a billionaire?

Ian Brakspear comments: 

I have in my wallet 2 fifty billion dollar notes, a one hundred billion dollar note and one ten trillion dollar note-worthless.

Today the main currency in the streets of Zimbabwe is the US$– how all these US$ notes got here is anyone guess.

They are cleaned regularly in washing machines to prevent the spread of diseases– and hung out to dry on washing lines– always with someone on guard.



Here is an interesting article about oil: "we are in the middle of an epochal tectonic shift" by Lars Schall.

The hegde funds and banks, who control and own the NYMEX, the ICE Futures and the Dubai Exchange, are using the Middle East events. I think they want to try to use that to push the price up to maybe $ 150 to 200 per barrel over the next months. And why? In order to put massive political pressure on Germany and the European Union.


Since the end of the First World War, I would say, that the quality of the strategic economic thinking in Germany has become significantly reduced, especially after 1945 and the US-guided German "re-education" efforts. How well the Berlin government understands that this is a currency war against the euro, because the euro is the only currency on the block today worldwide, certainly not the Chinese Yuan or the Japanese Yen, which could challenge the hegemony as a reserve currency of the dollar, I can only speculate. That euro challenge has to be eliminated from the game. The next target will bw Spain. If they can crack Spain, then they will move on to Italy – and then it will really escalate into a colossal mess for the euro as an alternative to the dollar.

Stefan Jovanovich writes:

The numbers for U.S. energy consumption suggests that the U.S. might only need to put one knee on the ground. 37 years ago, with 214 million people, the country consumed 6,453,000 Barrels per day of Gasoline and 2,552,000 Barrels per day of Diesel Fuel. The most recent numbers have consumption of Gasoline at 8,779,000 Barrels per day and Diesel at 4,099,000 Barrels per day for a population 50% larger.

Dylan Distasio writes:

I found your original link very interesting, and hearkening back to the 70s energy shock, I would not put anything past Henry Kissinger, but I don't know what to make of Engdahl's theories, quoted above. The conspiracy nut in me finds them appealing, and after what we've seen happen over the last few years of the "financial crisis," nothing would surprise me.

That said, and this may simply reflect my naivete, but I don't believe the oil market can be easily manipulated long term. I'm sure speculators help trends in motion stay in motion until the positive feedback loop breaks down and the music stops, but I am skeptical of his beliefs that this is a coordinated effort to bring down Europe and China.

This may be my ugly American speaking, but I think the only thing propping the Euro up is the interest rate differential between the USD and it, and the perception that the Fed will continue to allow easy money to flow while the good burghers are tightening the reigns. I don't see the underlying structural issues with the PIIGs going away anytime soon, and despite the US's fiscal mess, still believe it will end up growing faster than the Eurozone ultimately. I don't think it is going to take $150 oil to bring down the Euro.

But concerning this: 

CNG has always been 40 percent cheaper then gasoline," Oldham said. "Everyone fears that gas will hit between $4 and $5 a gallon, while CNG is expected to remain steady.

I guess Mr. Oldham, in that article, has not heard of the concept of supply and demand. Granted, the shale finds have changed the face of domestic NG supply, but if the demand were to change radically for NG, the price is going to go up significantly. There is still the issue of the cost of building out a national infrastructure as mentioned also.

I'm not arguing CNG is a bad idea, just that it is foolish to assume prices are not going to move towards a new equilibrium compared to oil if we start to get power plants converting over to NG on a widespread basis combined with this hypothetical fleet of CNG vehicles on the road.

Paolo Pezzutti writes:

The issue is about using energy as a strategic weapon to win currency "wars" and much more… Does it make sense or is it a delirium of pseudo opinionists or worse "conspirationists" at any cost?

Ken Drees adds:

"The conspiracy nut in me finds them appealing, and after what we've seen happen over the last few years of the "financial crisis," nothing would surprise me."

Do we all have a little conspiracy flake inside, the need to believe an extreme idea, the need to see one more card and maybe hit that straight, the need to go short against the trend, the need to date that "troubled yet sexy person", the need to get some action to offset the boredom of accepted reality, accepted principles, the correct fold of the hand, the trend is your friend continuation trade or the usual date or evening at home?

Our gambling flake needs to be rewired into a creative outlet that excites the spirit yet reshapes risky behavior into worthwhile enterprise. risky activity is rooted in ego and power–that force needs to be applied in a new direction instead of being repressed.




According to an article in Bloomberg today the sad and dramatic events in Japan should not stop the bull market. "Global Stock Rally May Withstand Japan Disaster". "Investors said that barring a nuclear disaster, the country’s worst earthquake on record is unlikely to halt the two-year bull market in global equities". You would think that it is because of the resilience of the global economy….

Here is the "real" reason: "Bank of Japan Governor told reporters he’s ready to unleash “massive” liquidity starting this morning in Tokyo to assure financial stability". And a fund manager said:"The purely economic consequences will be modest: some reconstruction, some more government spending".

Since the 2008 crisis it has become prevalent the idea that government spending is the holy grail of economies. You have a problem ? Pump liquidity and it will go away…. You do not grow fast enough? Just plan to increase your deficit and that's it….

How can they be wrong when the stock market doubled in 2 years? But when will we wake up from this dream….(or nightmare?).

Alex Castaldo adds:

Here is the latest news headline:


That is US$85.5 billion.



 The view of the bay was breathtaking. The evening breeze caressed her skin. She shivered. "I am sure he loves me," she said, "but I'll never manage to get out of this situation. It hurts so badly."

"I cannot command winds and weather," he started. "Nelson was the greatest Admiral of all times. He meant to say that you cannot change the facts of life. You have to adapt, understand the forces at play and use them to your advantage".

He would not follow the herd. When prices plunged 50% he bought those stocks although there was no real setup. From there the market panicked, the pain seemed to be unbearable. Nevertheless he did not close the trade. It would have been a blow to his self-esteem. Then the market printed a long rebound and he recovered half of his losses. The pain became less intense. With time wounds heal and only scars remind you what happened. Even if you are still losing big money.

He explained: "I learned from markets that taking a loss does not mean there is something wrong with you. Get rid of his ghost, wait for a set up and open a new trade. It is as simple as that."

He was lying to her and to himself. They were friends, but he had always considered the possibility of a different relationship. She was beautiful; there was something intriguing about her. But he was well aware there was no future. She would not be the right person. Her unhappiness, her attitude towards life would drain his energy and he was already exhausted. He needed a dreamer; someone that would give him strength, incentives to do things and not complain or regret something that had not happened or could never happen. Nevertheless, he stuck to this relationship. The same way he stuck to his loss in the stock market. It had been pretty painful at the beginning. Now he had scars to remind the pain and he was still uncomfortable. This would never go away.

Suddenly, as if she was reading his mind, she said: "I will love him forever. Nothing will change this. I must try to forget him even if I know it will not work. I need to replace him in my mind with someone else. That someone cannot be you". He had been awaiting his turn, sitting with his legs at the edge of an abyss and helping her whenever she allowed him to do it. It was like a flash, and he realized he had to do something about it. He turned on his IPhone, accessed the trading account and introduced a sell market order at the next day's open. He had decided to get rid of his long held position and to close a losing trade in his life.

Then he said: "There is no reason for me to be in this trade, I need to get out. I want to look to the future, to the next trade". He thought he would also be a better trader from now on. She looked at the dark sea: "It is your choice. I will not ask you to change your mind. Maybe one day…" He did not let her continue. "Hope is for losers in trading as in life. He managed to say, holding back his tears: "Once a trade is closed, you don't want to look back…to feel regret…or remorse."

He left without turning back. He could imagine her on the terrace, as beautiful as ever.

There was a lady in Sorrento wearing a pink dress at a party that night…

George Coyle asks:

This is great. I thought it might be literature but for the inclusion of the iPhone. The patterns in romance and trading are so similar. Good trades are easy to get into, they go in your direction almost immediately, and they require minimal effort and are a pleasure to have on. Thinking about them makes you feel good. Bad trades inspire doubt and rationalizing, can result in sleepless nights, and usually begin with immediate loss which results in more rationalizing such that even if you are down 50% a small rally inspires unwarranted optimism (even though you are still down 45%). And one generally winds up in emotional distress and makes rash decisions exiting at inopportune times. I have drawn the parallels many times; hope and human psychology seem to be at the core.

I think this is why systematic approaches are so popular in the short-term in trading, the human element is removed. But a systematic approach to dating doesn't really work. For one, by definition if you are in fact part of the dating pool, every relationship you had up until now has failed so it seems a fool's game to even play based on odds. It becomes worse if you have an adequate enough sample size to have approximated the population via the central limit theorem! And you could be viewed as cold and calculating, two things which seldom result in romantic success. Inevitably the initial honeymoon goes awry and a rolling stop results in the end of a relationship. And the vig can be very high so it might pay to approach relationships with a long-term hold investment bent post some initial time based rolling stop out (if one wanted to use a pseudo scientific method). But being a trader, one is always aware when the trade feels bad which can lead to dismay as the patterns usually don't lie!

Craig Mee writes:

The market mistress plays with one's inner demons. On a big turnaround, you can't help but get on, though your immediately exposed to the gun slingers, but as traders know the worst of the two evils is when that baby pops to the moon, and you're not on. To commit and face certain high winds or not commit and be left in the shallows. .. mmm I hate harbour.



Did people just jump in and buy the dip, or was that the result of legions of traders going flat overnight? Wasn't a huge move, but I kind of expected more of a panic.

Victor Niederhoffer comments:

One who was short and waiting could cover his shorts short of the big house.

Paolo Pezzutti writes:

…interesting to know if there is a ten minute effect…

Victor Niederhoffer responds:

Believe it much dissipated and changed in 2010.

Russell Sears writes:

What shocked me was the out performance of the Dow compared to the S&P, especially given the relatively low inter-day vol.

To check this out I did the following, took the ln close to close Dow - ln close to close S&P then ranked them. Today was rank 37th of the 2700 days I look at. Then I took this out performance divided by the max (interdayvol Dow, inter-day vol S&P) where inter-day vol is LN(high/low) for the day. This ratio placed was number one !

I do not know what this out performance means, but looking at the dates that "beat" today or came close did not bring pleasant memories back. They were 2000 to 2001 vintage then big time gap and appeared again in Sept 2008-Jan 2009 and another small time gap. This would indicate that when things get volatile and down it often best to be in the big Dow.

What this means with a relatively weak volatile period I do not know.

I will leave it to the reader to come up with a test to see if this is a indicator of Large over small cap shift that is reverse the small outperforming large gap the last couple of years.



In the Eurozone, Greece is downsided to junk and Portugal is trying to reassure markets (and political leaders) that they can manage without a rescue package. The "strong" continental countries are discussing how to politically make viable a rescue plan that would be paid by thier taxpayers. Aid talks are running in parallel with the effort to establish new EU legislation to strengthen fiscal restraints that failed. In this case, for example, Greece would be sanctioned for never meeting the euro area’s limit on deficits of 3 percent of GDP. "Some" countries are calling for “quasi-automatic” sanctions or for a political vote to fine high-deficit countries be left up to a political vote. In my view it is almost ridiculous, hypocritical and not credible to fine a country that is almost bankrupt when you have to lend the money putting together an emergency rescue package… In the meantime, the Greeks may complain that Germans want to make money lending them money at an inequitable interest rate and "control" politically and economically their country. …..and the Euro gained 3.7% last week on the dollar……



 Employees of FIAT, the Italian auto-maker, voted for the investment in the Mirafiori plant in Turin in exchange for measures to limit strikes and curtail absenteeism.

Today, productivity in this plant is about one third of productivity in a similar plant that FIAT has in Poland. At the same time in China inflation and the increase in salaries are a predominant theme. Global imbalancies are going to be coped with in 2 ways in the long term.

On one hand, if western countries want to remain (or become?) competitive they have to realize that the current labor conditions should be revisited. There is obvious resistance, but the agreement at FIAT (in Italy unions are strong) shows that this is the only sensible way ahead although it can be very painful. Workers are starting to realize that unemployment is the alternative to renegoniating their contracts as entrepreneurs move their plants abroad.

On the other hand production costs are increasing in emerging markets. This trend is accelerating and this convergence will continue to unfold over the next years. The problem is we could import higher prices without being able for quite some time to print significant growth rates (especially in Europe).



 This presentation of GaveKal's, which is about emerging markets, eventually derives conclusions exclusively from the analysis (very interesting) of China. It gives the perception (on purpose?) that China=Asia. It does not take into account specific local realities, but it may be correct because a bubble bursting in China would have effects all over Asia. Structural forces at work in China would influence the whole region (or better continent).

These forces are pushing toward higher interests rates and currency valuations in Asia. Agricultural prices should also go up because of an expected increase in imports. Eventually, it poses to investors (for the next decade at least) the dilemma of Growth (emerging countries) vs Value (developed countries) on a global scale. The answer is: go for emerging countries. There may be difficult times ahead globally and also regionally (a bubble in Asia?), but that is in the long term where money is made. Being long emerging markets and short developed countries could be an option. Especially Europe appears pretty weak with PIIGS chronically below average growth level and paying higher interest on their debt. How long can they manage? This could be the plan of financial forces (seen as evil, aka speculators) (with a lot of politics involved).



Side-channel attack on high-frequency trading networks could net a hacker millions of dollars in seconds– and leave everyone else much poorer.

Paolo Pezzutti writes: 

Looking for "technical" inefficiencies rather than "market" inefficiencies may be probably easier. However, both have the same characteristic: they are ever changing.



 Apple stocks more than tripled in just 2 years. Useless to say that I missed this move and that I did not triple my capital during the same period investing somewhere else. I am contrarian by nature, however I was "forced" by some type of compulsion to buy the IPhone4 (not the stocks unfortunately). I followed the herd. Now that I regret it (poor strength of network signal and a battery that lasts for half day at best…) I also understand how strong the AAPL trend is. They sell expensive products that sometimes do not meet expectations but that people are ready to buy at prices which are higher than products of competitors. What a money machine. Difficult, however, to keep the momentum…Time to short AAPL?

Marlowe Cassetti writes:

I will repeat my reply to the Chair's post of July 29th titled Mystical Ideas. I quote myself:

The chair has touched on a point of interest that has bothered me. I don't know about Lady Gaga, but Apple's climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let's look at the facts: There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn't produce stuff that the world needs just what they like to have, until something else strikes their fancy. It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.

Back to today, for Christmas I bought myself an iPod touch … my first Apple product ever. It cost only $58.00 plus some expiring frequent flier points. I was looking for a MP3 player and I got much more that a music player. I'm very impressed with its versatility and elegance. But at $300 retail it is certainly pricey. about what I paid for a very capable netbook for my wife.

Perusing a chart of AAPL it has relentless upward momentum. You cannot step in front of a freight train and short it.

William Weaver writes: 

Marlowe touches on an interesting point regarding AAPL v XOM; more specifically, how AAPL, as a consumer discretionary stock, has approached the market cap of a consumer staple, which supplies a needed good versus a wanted good. For the past 6 months I have been working on scraping purchasing data from thousands of domestic websites as a way to gauge consumer spending; at some point I am looking to sell this as research, but so far trading it has been very successful.

What I've found is that it is very easy to measure discretionary purchases and very hard to measure staple purchases as most of the latter are done offline. That said, the spending data of only discretionary purchases has a .44 correlation coefficient to the following one-month return in the S&P 500 using 69 non-overlapping months. To me this says that discretionary spending drives market returns, which begs the question, is the market ever really in-line with needed value, the value of what one needs to survive, not what one wants? Would a bubble then be any return over the risk free rate assuming the risk free rate is not in a bubble itself?

With that notion, one should never short a discretionary stock like AAPL, as the market is driven by such companies. (just for fun) Remember in 2007-8 when the Washington DC metro banned Crocs because they were dangerous on escalators? We all asked "with what shoe laces" and then a day later it was found that the head of the DC metro had held a large short position for many months as the stock climbed? It doesn't pay off; the risk is much greater than the reward. At best, one could buy OTM put leaps.



Over the past 5 years the Dow and the EURUSD have amazingly printed the same performance that you can see in the chart (about 6.5%). Until the end of 2007, a weak dollar was getting along with a rising stock market. From 2008 to Mar 2009 EURUSD outperformed stocks. When the Dow low was printed in 2009 things changed and then last year they moved in opposite directions (+10% the Dow and -10% the EURUSD). Different forces moved them during the various periods but coincidentally (?) and accidentally (?) they ended up at the same point. What to expect now?



UPDATE 1/31/2011:

Contestants Summary:

- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.

- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.

- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.

- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.

- The most creatively expressed entry of course has come from Rocky Humbert.

- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.

- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):

- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.

- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)

- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.

- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.

Contracts Summary:

- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.

- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.

- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.

- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.

- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.

- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.

Victor Niederhoffer wrote:

One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.

May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.

My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.

I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.

I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.

What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.

David Hillman writes: 

"I do know that a sagging Market keeps my units from being full."

One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference. 

Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:

 1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).

4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.

5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.

The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.

Market direction picks are wanted:

Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.

The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.

Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.

Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".

All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".

Bill Rafter adds: 

Suggestion for contest:

"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.

"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.

Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.

Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.

I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.

Ralph Vince writes:

A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.

If I were a Roman General I would take that as a sign to sit for next few months and do nothing.

I'm going to sit and do nothing.

Sounds like an interim top in an otherwise bullish, long-term backdrop.

Gordon Haave writes: 

 My three predictions:

Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.

The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.

Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.

The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.

The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.

In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of

Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.

Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.

Factor                  Prediction      t       N    R sq
US Treasury yield curve      1.162    2.17      30   0.143
30-year change               1.052   -2.28      52   0.094
Trailing 5-year E/P          1.104    0.92      18   0.050
US unemployment rate         1.153    0.90      30   0.028

Weighted total               1.118
SPY 12/30/10               125.72
Predicted SPY 12/30/11     140.52

Jan-Petter Janssen writes: 

PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.

PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.

PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.

Vince Fulco predicts:

 This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.

Additional points/guesstimates are:

1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.

2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.

3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.

4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.

5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.

6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.

Potential negatives:

1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.

2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.

3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.

4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.

A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).

Mr. Albert enters: 

 Single pick stock ticker is REFR

The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.

Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).

Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.

Dan Grossman writes:

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,


Gary Rogan writes:

 1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.

Wildcard: Short Netflix.

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

Equal Amounts in:

TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)

(Wild Card)
BONXF.PK or BTR.V (Long junior gold)

12/30 closing prices (in order):


Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today

I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.



Ken Drees writes:

Yes, they have been going up, but I am going contrary contrary here and going with the trends.

1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.

2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.

3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)


Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

My forecast for the S&P 500 for the year ending Dec 31, 2011;

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011

VXX Short moc 1-21-2011, buy to cover moc 12/30/2011

UBT Short moo 1-3-2011, buy to cover moc 12/30/2011

Scott Brooks picks: 


Evenly between the 4 (25% each)

Sushil Kedia predicts:


1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky

Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):

My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.

2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.

Tim Melvin writes:

Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"

Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.

 Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.

Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.

Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.

I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.

I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.

I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.

I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.

PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.

I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.

Other than that I am clueless.

Kim Zussman comments: 

Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).

Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)

short GLD (looks like a bubble and who needs gold anyway)

short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)

Alan Millhone writes:

 Hello everyone,

I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.

For myself I will stick with what I know a little something. No, not Checkers —

Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.

I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.

Happy New Year and good health,



Jay Pasch predicts: 

2010 will close below SP futures 1255.

Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.

99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.

SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.

SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.

The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.

Chris Tucker enters: 

Buy and Hold


Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

Mr. Ed Seykota once outlined for me the four essential rules of trading:

1) The trend is your friend (till it bends when it ends.)

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.



John Floyd writes:

In no particular order with target prices to be reached at some point in 2011:

1) Short the Australian Dollar:current 1.0220, target price .8000

2) Short the Euro: current 1.3375, target price 1.00

3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70

A Mr. Krisrock predicts: 

 1…housing will continue to lag…no matter what can be done…and with it unemployment will remain

2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3

3…with every economist in the world bullish, stocks will underperform…

4…commodities are peaking ….

Laurel Kenner predicts: 

After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.

Short the 30-year bond futures and cover at 80.

Pete Earle writes:

All picks are for 'all year' (open first trading day/close last trading day).

1. Long EUR/USD
2. Short gold (GLD)

MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)

PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8

J.T Holley contributes: 


The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.

Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.

Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.


Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.

Long lithium related or raw if such. Technology demands such going forward.


Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.

Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.

Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.


Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.

Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.

Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.

Sex and Speculation:

Look to see go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.


This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.


Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.

Long - Counting, you need it now more than ever. It's as important as capitalism.

Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.

Long - Common Sense.

Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.

Short - Politics. It isn't a spectator sport and it has been made to be such.

Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.

Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.

I had to end on a Long note.

Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.

Russ Sears writes:

 For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.

Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.

The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.

Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.

The stability or even elevated food prices will have some big effects on the heartland.

1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.

2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?

3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.

4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year. 

5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…

Yanki Onen writes:

 I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.

Now the ideas;

-This year's lagger next year's winner CSCO

Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.

You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)

-Sell contango Buy backwardation

You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.

Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.

- Leveraged ETFs suckers play!

Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!

If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!

Vic, thanks again for providing a platform to listen and to be heard.


Yanki Onen

Phil McDonnell writes: 

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.

George Parkanyi entered:

For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open

BUY SILVER at open

BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open

SELL and then SHORT SILVER at open

SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open

COVER and then BUY SILVER at open

COVER and then BUY CORN at open
Hold all positions to the end of the year

3 JAN BUY PLATINUM and hold to end of year.


. Markets to unexpectedly carry through in New Year despite correction fears.

. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2

- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)

. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas

. Also assuming seasonals will perform more or less according to stats

If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.

Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency. 

Marlowe Cassetti enters:

FXE - Currency Shares Euro Trust

XLE - Energy Select

BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:


VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than



In order to avoid a US dollar debacle, it is important [for the US] to defeat possible credible alternatives. The only one is the Euro. Therefore, the US may have an interest in the acceleration of the PIIGS crisis. How to measure the forces at work in this grandiose scheme and chess game. Who is the weakest? What is the role of speculators? Is there a way to "influence" speculators' targets?

Gary Rogan writes:

It's more likely that the US, or more precisely Geithner and Bernanke want to to prolong the PIIGS thing for as long as possible without it getting resolved rather than accelerate it. It's hard to imagine a good outcome for them if the Euro goes completely caput in a short time. It may also be bad if it falls too rapidly with respect to the dollar. The biggest question is if ANYONE is in control. As Roubini said today, Spain is too big to fail and too big to save, and of course Italy is even more so. I don't know how to tell anything in particular, but it seems like something is up with Portugal and it's worth watching exactly what noises the US will be making about it. It's also worth watching how the Irish population will be handling being told take one for the European unity team after having rejected the whole concept so many times.



 One wonders whether there is excessive pessimism at this time.

Vince Fulco comments: 

Where is the bolt from the blue story to save all the longs and squeeze the life out of the shorts? Something along the lines of "Berkshire asking for outsized allocation of GM…"

Rocky Humbert writes:

Forgive me for asking, but where is the excess pessimism? Last week's AAII Survey had the second lowest level of pessimism of the year. And, even after this bond market shellacking, the five year tips are still NEGATIVE 11 basis points; and yes, the commodity space is having a Niagra Falls decline– but from the highest levels since 2008. If one's time horizon is twenty minutes, perhaps this constitutes "excessive pessimism" but in my world, one hopes the Chair's barrel is waterproof and well-lined should this evolve into a real waterfall (not that I'm predicting anything). I'll see y'all down river … !

Stefan Jovanovich writes:

 There is still considerable pessimism in consumer sentiment, measured by the Conference Board and Michigan Surveys. But, at the same time, the general public has greater confidence about the possibilities of good results from the recent political change than the professionals in D.C. do.

So we have a Hugh Hendry paradox: as Rocky notes, the investor class continues to believe in the future of risk assets and is, at the same time, pessimistic about political change, while the common (sic) people know they are in hard times but have hopes that the Tea Party/Republicans will actually change things for the better.

That, and $8 will buy Vic the cup of coffee I will soon owe him.

Alston Mabry writes:

Everyone needs to fret for a while and then wake up one morning and think, "Oh yeah, the New York Fed is buying $6B a day! What was I thinking?"

Paolo Pezzutti adds:

In no way. Europe can be a better haven than the dollar as bailouts continue to be the only way to delay the payment of an expensive bill. The dollar found a wall at 1.40, which is too high even for QE.

Victor Niederhoffer responds:

Ultimately the public will go on strike. Enoch Powell predicted this so clearly 25 years ago. By what normal human instinct, can people in Germany or any other country be expected to spend their money and work, to give to visible needy in another country they've never met or who are not part of their family. When money is printed and given to a specific group, it reduces the value of everything that other people own, by that total I believe, the same way a discovery of a mineral reduces the value of every other holder of that minerals by the amount of the value of the find. Landburgh is good on this point, and I think I am correct in generalizing.

Stefan Jovanovich comments:

 The Second National Bank had been chartered to act as an American cousin to the Bank of England - a private bank that would be the nation's depository for the taxes collected by the Treasury. When Jackson campaigned for reelection in 1832, he ran on a platform of "an independent Treasury" - i.e. the nation's precious specie would not be under a single bank's control but would be held "independently". What that meant in practical terms was that the specie on deposit in Philadelphia and the Bank of the United States' branches would be transferred to banks that favored the Democrats. (My own theory is that this was the first of several wars between the New York and Pennsylvania bankers. Henry Clay's running mate, the Whig Vice-Presidential nominee, was John Sergeant was from Pennsylvania; Jackson's Vice President was Martin Van Buren, "the Little Magician" from New York.) After Jackson's landslide victory in the 1832 election, he issued an executive order transferring the Treasury's gold to seven state-chartered banks. By the end of 1836 the Treasury had accounts at ninety-one of Jackson's "pet" banks. Most of these failed in 1837, causing the Panic that ended Martin Van Buren's political career.

Jackson and Clay - the first two prominent American politicians from west of the Appalachians - thoroughly hated each other. There survives a letter that Clay wrote to Nicholas Biddle, the 2nd National Bank's President, before the 1832 election. It says volumes about Clay's inability to count votes (in the election he won only 6 of the 23 states and gained 49 electoral votes compared to Jackson's 219 and the anti-Masonic candidate's 7) and his and Biddle's naïve optimism that people actually like bankers: "You ask what is the effect of the Veto (Jackson had vetoed the renewal of the bank's charter). My impression is that it is working as well as the friends of the Bank and of the country could desire. I have always deplored making the Bank a party question, but since the President will have it so, he must pay the penalty of his own rashness. As to the Veto message I am delighted with it. It has all the fury of a chained panther biting the bars of his cage. It is really a manifesto of anarchy such as Marat or Robespierre might have issued to the mob of the faubourg St Antoine: and my hope is that it will contribute to relieve the country from the dominion of these miserable people. You are destined to be the instrument of that deliverance, and at no period of your life has the country ever had a deeper stake in you. I wish you success most cordially, because I believe the institutions of the Union are involved in it."

I stopped reading Griffin's book when I got to this explanation of the Second National Bank crisis: Biddle's bank "had promised to continue the tradition of moderating the other banks by refusing to accept any of their notes unless they were redeemable in specie on demand. But when the other banks returned the gesture and required that the new Bank also pay out specie on their demand it frequently lost its resolve." Whatever Nicholas Biddle's faults, "resolve" was not one of them. Biddle used his position as the de facto central bank to call in the loans of the "country banks" in the year between Jackson's veto of the recharter and the October 1833 when Jackson's executive order took effect. Jackson turned that to his benefit by announcing that the country should not come to him for money but should go to Mr. Biddle: "he has all your money." Biddle proved to be a better banker than the state banks; but he was unable to survive the ravages of the Panic of 1837. By 1841 his bank was also gone.

Gary's theory about xenophobia is interesting but it does not fit the facts. Before the Civil War "the public" was chronically short money; there was very little for a central bank to steal, and there was no central bank. The episode from the Resumption Act to World War I is the exception in our history, not the rule; it is the only time when both the people and the government were net savers and the New York Clearing House handled all the transfers now handled by the Fed without finding it necessary to try to reconcile the divergent needs of the holders of money and the buyers and sellers of credit.

Russ Sears writes:

 I guess we will see tomorrow if such a nice start deflating late in day to negative for S&P index yesterday was close enough to count.

Gary Rogan writes:

According to G Edgar Griffin, the author of "The Creature of Jekyll Island" (here's an audio link where he explains everything he believes) the only purpose of all central banks (from the government perspective) is to steal money from the public through inflation in order to avoid explicit taxation. All else is pretense. The mechanism is exactly the same: print, give to a particular group, dilute the value for all pre-existing owners. It's interesting that it takes doing this very thing, but giving the money to foreigners instead of the government which of course spends it on the favored domestic groups, for the public to become agitated. It takes xenophobia to make people care about what is equally objectionable in both cases. 

Stefan Jovanovich adds:

There is no question that the Panic of 1907 created a trans-Atlantic consensus that trade had to be "better managed" by the financial authorities in London and New York through coordinated central banking. What is usually omitted from the story is how much of that consensus came from purely mercantilist interests. Both the Brits and the Americans had been literally shocked by how effective the Norwegians and Germans had become as competitors in the North Atlantic shipping trade. (J.P. Morgan's one conspicuous failure was his attempt to create a shipping trust; the Hamburg-American Line saw no reason why they should abandon their Wal-Mart approach to fare pricing.) Cecil Rhodes and Teddy Roosevelt contributed their view that the "Anglo-Saxon" race should rule the world and its gold supply. Gary's comment about xenophobia is, If anything, too polite with regard to Aldrich-Vreeland and what followed. Our modern monetary system has its founding in a joint desire of the more leveraged British and American banks to create a permanent imperial preference that would allow them to be able to clip their own coins in the name of "the money supply". What is amazing is that this is - even now - considered a good thing by the same academics who shudder at the idea that people should be able to ship goods and send services across sovereign boundaries by paying an ad valorem customs excise and not bothering the WTO.

Read more here.

What is completely forgotten is that the pre-WW I Left in the United States and France agreed with laissez faire capitalists on the question of open trade and the gold standard. As Michael Polyani's brother Karl puts it, "where Marx and Ricardo agreed, the nineteenth century knew no doubt." The Socialists and peaceful anarchists like my grandfather agreed with their class enemies: both opposed the Federal Reserve Act because it would allow the government to spend money it had neither borrowed nor collected in taxes. Both agreed that the gold standard and trade taxed at value but not otherwise restricted were the foundations of the capitalist economic order. The Socialists like Jean Jaures assumed that the growth of international commerce would lead to a peaceful transformation of world affairs because it would make war financially impossible. They were right, of course. And a lot of good it did them.

Without the Federal Reserve's literal monopoly over international transfers, it would have been impossible for the Wilson Administration to allow the Treasury Department to (1) suspend the domestic gold standard, (2) close the NY stock exchange for 4 months, and (3) reach swap agreements with Britain and France that allowed them to run a bar tab for war supplies. If international exchange had followed the old pattern of individual banks dealing with their foreign correspondents, the more cautious American banks would very quickly have come to the conclusion that their correspondent's IOUs could no longer be discounted and they would need to ask for some gold bars to be packed in barrels and put on a ship heading west before they sent the next shipment of artillery shell casings from Pittsburgh.



 This article on Bloomberg provides good support to the Euroskeptics: "Euro Dominos Will Fall Until Currency Is Split"

The idea is that there is a domino effect at work. This process isn't going to stop until the euro is taken apart. First Greece went bust (is it over?). Now Ireland is on the brink of a bailout. Portugal is next, and why not Spain and Italy. In each country, it will be a different trigger that causes a collapse, but the root is the same. The economies are too different for a single central bank. This crisis will involve country after country. The only fix is splitting up the euro according to the author.

I think that what is happening in Europe is dramatic. With the slogan "the show must go on", in order to maintain the same living and welfare standards, each government for sound (?) political and internal stability reasons has decided (or there was no other choice to avoid a collapse?) to let the deficit grow, hoping that the crisis would go away after a reasonable time. However, what does "reasonable" mean? What we are missing is that the transfer of wealth toward other regions of the world is not temporary. It has become structural unless our countries are able to change significantly their social and industrial policies. Meanwhile, unless serious and unpopular measures are taken, the domino effect will continue sinking the Euro. We have to become "poorer" and lower our expectations.

This is the issue that also the US is facing. And Quantitative Easing is not the right answer. The question between the Euro and the dollar is who is going to sink first. So far, with the Euro at 1.36 it seems that a certain balance is maintained (agreed?). However, last May was the first attempt (and may be warning) that the Euro is the weak link of the chain.




 "Apple sold 4.19 million iPads last quarter, may have trouble hitting some analysts' estimates of 6 million sold in the fourth quarter".

Apple drop following to the news (may be this is an appetizer for what is going to happen this Christmas?) found new buyers at lunch time. If you read stocktwits or twitter now you can find Apple's fans brag about buying today's low. An indicator could be built using social networks' posts. The users normally are positively biased toward the stock they follow. They represent the "herd". Depending how large the group is, you could model their strength and ability to influence price in the short-term. Top trending tickers are AAPL, SPY, ES_F, GOOG, GLD. Does anyone know if this has already been tested?

Phil McDonnell comments:

A Googler did a research paper on the most searched ticker symbols on their engine and found that the top searches tended to go up for a few days. I do not have the link.



  "Disappointing sales and profit forecasts from Cisco Systems Inc. show cutbacks in government spending that pose risks for companies that rely on the sector for growth." "State government orders fell 48 percent in the last quarter"

It is interesting to see how the times of the bubble are behind us. Now that the precipitous pace of growth is over they have to rely on increasingly indebted governments to keep their business going…Who is John Galt?

Gary Rogan writes:

If you superimpose the growth in the US GDP vs. growth in public debt since a little after 2000 you will realize that the entire US economy has been relying on the increasingly indebted government to keep the GDP growing, and that process went into hyperdrive since 2008. The entire growth for the last decade has been just a glorified game of check kiting.

Rocky Humbert responds: 

GDP 3/31/01 = 10.3 Trillion
GDP 9/30/10 = 14.73 Trillion

US total Public Debt Outstanding 3/31/01: 2.10 Trillion
US total Public Debt Outstanding 9/30/10: 4.65 Trillion

Nominal GDP growth = 4.43 Trillion (43%)
Nominal US total public debt growth = 2.55 (121%)

Unless Mr. Rogan has become a Keynesian, one would have expected him to argue that had the US total public debt growth (and government spending in general) been smaller, the Nominal GDP growth would actually have been larger. It's peculiar that he's arguing the opposite.

Gary Rogan responds:

Rocky, take a look at the chart at the top of this article (a few months ago, but still) and you will realize that there is more than one definition of "US public debt" and some come closer than others to matching my statement.

I did not argue one way or another about what would happen had the overall government borrowing not been so large. I will argue, or rather state, now that in order for the free market forces to act to restart the non-subsidized GDP growth we would have had to experience a rather severe, non-government-corrected recession to clean out all the malinvestment of the last 15+ years. I will also state that not only had there not been any Keynesian multiplier on the government spending in a "greater than 1" sense for a while, but lately that multiplier has collapsed to a rather small fracton. Nevertheless, even now if you borrow and spend you will raise the GDP by more than if you don't borrow and spend. Nothing particularly Keynesian there.



 The solemn and ominous sounding bear cultists are bringing out the flaming hydrogen ballons. Several mentions today of the Hindenberg Omen– not talked about on this site since an April 18, 2006 mention (at a time when the market found helium and moved up roughly 20% over the next year). Nattering nabobs of negativism…

The traditional definition of a Hindenburg Omen requires that:

The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 79. (Source) The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day. The NYSE 10 Week moving average is rising. The McClellan Oscillator is negative on that same day. New 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

Paolo Pezzutti comments:

More about it on this chronically bearish site. To me it looks like a nostradamus prediction more than a pattern. Bears are trying to find new ammunitions…and last week was encouraging.

Victor Niederhoffer comments:

I can't tell if everyone is kidding or not about Hindenberg. But in edspec, I show how a run of 25 in one direction is not inconsistent with randomness, and Birinyi turning points and come up with an infinitely better indicator than Hinden.

Marlowe Cassetti replies:

But The Chair should admit that Hindenberg Omen has such a funereal appeal, an air of foreboding. Rather like the Mayan 2012 Prophesies. 

Russ Sears comments:

But could you come up with a better marketing name? It has great name recognition and implies that they know something that others do not, but will soon after the fact think it should have been obvious. It would seem the splashier the name of this or that indicator in the media, the more desperate their position and need to bring in the masses to offload their positions. May be profitable if one could quantify such an inverse correlation. 



base of giant sequoiaSequoias are often thought of as the monarchs of the Sierra Nevada ecosystem with good reason if you think how tall and old they can grow to be. The main cause of their death is toppling, since they are so resistant to diseases. Sequoia groves adapted to natural processes that must continue if they are to remain healthy.

As a reader of this site, I wonder if there are similitarities between the natural processes that help sequoias remain healthy and markets. These monarchs remind me of big banks and corporations that dominate and have dominated the markets over the past decades.

During a visit to the Sequoia National Park, one of my girls asked me why there were fires in the forest and no one was doing anything to suppress them. I was surprised to find the answer as I was not aware of the importance of fires for sequoias. Fire is actually one of the major processes essential to the health of giant sequoia groves. In markets as well, fires can be important for the health and growth of the financial markets ecosystem. Researchers have determined that low intensity fires swept through the trees approximately every 5 to 15 years. Sequoias rely on fire to release most seeds from their cones, to expose bare mineral soil in which seedlings can take root, to recycle nutrients into the soil, and to open holes in the forest canopy through which sunlight can reach young seedlings. Sequoias also need fire to reduce competition from species such as white fir and Incense cedar, both of which compete with sequoias for water and nutrients. A natural fire cycle thins these competing species, and provides suitable conditions for sequoia growth. That is why forest management policies are aimed at restoring fire to its natural role in Sierran conifer forests. This is accomplished by prescribed fires burning.

Here are a few more reasons why fire is so precious to sequoias and how this could relate to markets:

- Seebed preparation. In a sequoia-mixed-conifer forest, moderate to heavy surface fires provide soft, friable, ashy soil on which the lightweight sequoia seeds fall and in which they are buried. Each crisis is good to prepare the environment for the next trend and expansion. Companies restructure and reorganize, governments improve the framework for investors.

- Nutrient recycling. Fire plays a significant role in returning various mineral nutrients to the soil. The ash deposit increases available phosphorus, potassium, calcium, and magnesium. Entrepreneurs reallocate efficiently capital to increase their returns.

- Impact on succession. Species requiring sunlight, such as pines and sequoia, were favored over shade-tolerant forms such as white fir and incense-cedar; and fire-resistant and fire-dependent species and associations were favored over nonfire-dependent forms. Big banks and corporations are favored in this environment of small and moderate fires because competitors don't manage to upscale their operations enough before the next crisis arrives.

- Formation of a vegetative mosaic. Periodic burning causes development of uneven-aged stands, comprised of even-aged groups of trees of various age classes. Crisis and recessions create a landscape of investors and entrepreneurs which is rich and varied as old farts disappear and new players appear on the scene.

- Faunal relationships. The influence of fire on wildlife is largely related to fire's role in stimulating germination of plants and trees that are useful to animals for food or cover; or making openings in the forest that favor wildlife. Fires create new opportunities and inefficiencies that can be exploited by market players.

- Influence on insect-suscptible trees. Fire apparently has a sanitizing effect by thinning stands or eliminating old stands or old trees before insects and disease have overtaken them. I think here of the role of crisis to get read of scams and market cancers (see for example Madoff or the dotcom situations of Enron and others).

- Influence on fuel and fire hazard. It is believed that the worst enemy of a fire-suppression agency in this regard may be its own efficiency because "the longer forests go without burning, the greater the fuel accumulation and the greater the hazard". Trying to avoid recessions and suppress fires may eventually lead to bigger problems for the ecosystem as a whole. Through fire-suppression programs, the cycle is slowed and it occurs a higher buildup of fire hazard. The 2008 crisis came after a long time where measures were taken to keep the economy going (may be unnaturally?). The crisis was so big that almost burned even the big giants so resistant to fire. Only the government help managed to avoid a profound reshaping of the ecosystem with the "too big to fail" considerations that were made (except for Lehman).

Many other questions could be asked, such as:

- What is the role of regulkators in managing prescribed fires?
- Even after a big fire, the forest grows again. It is just a different forest. With no sequoias. Is it good or bad?



I am quite skeptical that nowadays it is enough to be a good programmer to make money on Wall Street. A very famous trader recently said in this regard that what is and will always be important is understanding human nature. However, it seems that successful programmers want to strike deals that give them the possibility to share profits and retain the ownership of the code they write. The companies they work for make $100K a day when they may be paid $150K a year. It is an intellectual property problem. When competition increases in high frequency trading, margins will decrease and programmers might want to go back to the old "safe" way they were paid. Sometimes I have the doubt that it is enough to have a piece of spyware, which can monitor information from programs that use certain protocols to make big money. A hacker could monitor someone's trades dropping a sniffer and intercepting trading programs. It would be a sort of real-time insider trading. A modern version of an old, and "sure", way of making money.

Read more in this article.

James Lackey comments:

Stick a trading sheet with a programmer's name on it with a 500k daily loss and see if he wants to enlist in the traders training program or go back to his desk. Ha. It's easy to target shoot but it's harder when they are gunning for you.

But Tony C on here years ago thought he discovered Spyware on his quotes from Enron. Drag your mouse cursor over the quote and see if HFT lifts their 100 share penny offer.

 Charles Sorkin writes:

I've often suspected that something like Tony C's situation happens in the options market. For instance, I can't tell you how often I've entered limit orders on an option with limited activity, and I get "pennied," so-to-speak.

For instance, consider a market for an equity call option that is quoted as $2.50 - $2.80, for a few hundred contracts on both sides. I enter a limit order to sell 10 contracts at $2.70, making the market $2.50 - $2.70, hundreds x 10. Hardly a second later, the market updates again, to something like $2.50 -$2.65, hundreds by 10. GRRR!!!!

Somebody/ something steps in front of me, on a contract that potentially has hardly any open interest, and very little activity in the whole series, perhaps with the expectation that I will lose patience and hit the original bid.

Very frustrating. Sometimes I pull my offer, and watch incredulously as the quote reverts to it's original level.



sales of iphone 4Of all the canards, snares, delusions, and misinformation about markets designed to put the investor on the wrong foot, to increase the flow and likelihood of resources from those at the bottom of the web to the top, surely one of the most destructive is the idea that sales are more important than earnings, an idea that seems to have the market in its grip. The reaction of IBM to an increase in earnings above estimate of 8% and sales below estimate by 6%, with the stock dropping 5% is just one horse from that dump heap.

Same thing happened to General Silo when it announced great earnings but sales declined. Must make all these proud CEO's shake their heads in disbelief when they tell their boards that they can't believe that the stock is down when they're doing so well, and their every sale is at a profit and they are only selling profitable products rather than just selling anything they can to get cash.

Indeed, the first item reported now from the traditional income statement announcement is the sales number versus the corresponding quarter, and the surprise factor of sales. Compilations of companies that beat the bogey for sales are now almost as numerous and useless as those for earnings.

Sales are the easiest thing in the world to manipulate. From economics, the buyers have a demand curve for a product, with alternate uses and utilities for it. The marginal utility of each additional unit decreases. At a low price, they will use it and buy it for many uses. For example, the traditional explanation in Heyne where water is used for plants and baths at low prices but only for drinking at a high price.

From a practical standpoint, every business person knows a million ways to increase sales at the expense of profits. you can sell to bad credit risks. You can dump inventory at close to cost. You can offer discounts for bulk orders or pre orders. You can reduce the price and ask your customers to store it for a rainy day or some other use. You can sell to a wholesaler or distributer instead of the ultimate customer, especially for a price. You can justs turn over your product to your customers with a "I'll take 5% on this. Just enough to keep me going". Or you can produce a higher quality product with better terms and tell the customers what a bargain they're getting by taking it out of your hide. Or you can buy a division or company to expand sales, or work off your inventory to change the number.

Indeed there's no item in the expense or revenue side of the income statement that can't be manipulated to increase sales. From a value standpoint, the stockholders desire an increase in wealth, not an increase in sales. What gives them wealth is earnings, not sales.

Okay, where do all these crazy reactions to sales come from? There must be some academic study, doubtless done with retrospective data that shows that sales provides information. And some earnings aggregator sellers must have shown that sales is a important signal with data from one of the retrospective data files that are so misleading and cause so much havoc. Or perhaps there was one period with a turning point where style investing based on sales had some information value.

Of course, companies are very smart, and it's so much easier to manipulate sales than earnings because you don't have to have the complicity of the accountants or move one item on the balance sheet to never never land to change sales. So even if sales were once of reasonable signaling value, now they will be changed in cycles in the typical Baconian way, and of course the public will be behind the form even more than usual.

But in the interim, what a fantastic opportunity to take advantage of this ridiculous malarkey and the reactions of stocks thereto.

The funny thing is what must go on before the release of the income statements these days. The insider and the outside flexions for the big companies must keep the earnings in the hip for a few weeks on a need to know basis only with smug satisfaction that they have beat the guidances they gave out to the analysts and the favored institutions and that they have pulled the wool over the eyes of the accountants to a reasonable degree to pull the earnings into the right territory. Then the horrible realization must come that they forgot to run a sale of buy that division before the quarter occurred and the sales numbers actually show something below the bogey must arise, and their smug satisfaction turns to the agonizing thought that even though business is great, they're going to have to do a lot of explaining to the board as to why the stock is down. 

Paolo Pezzutti comments:

There are also other ways to try and increase sales and earnings at all costs. Apple is in my view the last example of a company which is struggling to keep up growth prospects at all costs. And the bigger the company becomes the more difficult it is. The problem of the antenna of the iPhone indicates that they did not give enough time to their engineers to test and make sure technically it was all fine…because of the hurry to come out with something new as soon as possible. Eventually, however, this approach to customers might painful. Hopefully they understood. 

Ken Drees asks:

Do consumers get conditioned over time that products need fixes and patches and it's just the way it works in tech– so no problem–send me a carrying case and a patch and we love Apple just the same?

Plus, Apple prices their new stuff way high on debut and people can't get enough of it and then they lower prices to get sales goosed–which pisses off the early buyers yet they seem to forgive next time around.

Also, what is your general opinion on dividends? In my market lifetime, dividends were always poo-poohed and shunned as a way to lose capital. Friends in business always reinforced that concept the putting money back into the company was more prudent. However in my father's lifetime dividends were an important investment consideration and if the dividend was solid or not, or if it grew each year and thereby showed business health. High dividend taxation rates affect investor sentiment about holding div paying stocks. The repeal of tax cuts in Jan will hike div tax rates. I wonder how retired people structure their investments to throw off income these days–bonds don't pay much, energy patch only real div sector that comes to mind.

You can't fake a dividend. 

Rocky Humbert comments:

Ken: You are correct in all of your statements about dividends. However, while you cannot "fake" a dividend, you can "cut" a dividend.
The interaction between dividends and taxes, dividends and management stock options, dividends and corporate cash balances/reinvestment are well understood. Also understood is that fact that a substantial portion of total market returns can be attributed to REINVESTED dividends.

Notwithstanding this, whether you cut a pizza into 8 slices or 7 slices doesn't change the size of the pizza. However, if you have eight friends over for dinner, serving 8 slices makes you look like a good host. Whereas serving 7 slices makes you look like a miser. This illustrates nicely the investor preference for dividends from time-to-time. If you don't ever have friends over for dinner, it shouldn't matter….

One thing that is poorly appreciated– and which I encourage you to consider– is the relationship between dividends and the "duration" (to use bond parlance) of an investors' stock portfolio. Here's an example: If you buy the 7-1/4% treasury bond of May 2016 at a price of 129, the duration is 4.9 and the convexity is 0.29. Whereas if you buy the 2.625% of April 2016 at a price of 103, the duration is 5.32 and the convexity is 0.32. So, the lower coupon bond has more duration and convexity even though it's a slightly shorter maturity date and has essentially the same Yield-to-Maturity. I'm sure the quants out there will find fault with this analogy, but I believe there's a similar effect in stock portfolios.

Jim Lackey comments:

No they are not Mr. Vic.. mid quarter updates– TXN or IBM or any of them– say all good, and why stocks gap so much is insider selling and we all know it. It's not all that bad as they raise the full year outlooks and TXN book TI bill ratios fall as a certain handset maker is on the ropes. But the joke is now vs 99 they can contract out manufacturing and ramp up and down production so fast all the old school book to bills or updates are well, perhaps useless. But a few still have their own factories, and if they buy new fabs from Klac LRCX or Nvls… I don't know how it's bearish in the time frame your looking at, but AMAT is all in Solar and that reminds me of used car sales, and one guy on the internet who went to a solar show and he said it reminded him of used car salesman and I thought good! Perhaps some sales will get done.  

Stefan Jovanovich comments:

Samuel Butler scandalized his readers by suggesting that the banking system of Britain had replaced the C of E as the national church. I think he would have been bemused to find that the language of finance has now become completely theological, that wisdom takes expression in the form of discussions about "decent" returns on capital, etc. I know Butler would have laughed out loud at the discovery that in the 3rd millennium mankind had reached the point where money itself could only be discussed in terms of its moral meanings and the words "sinister" and "deflation" could seem perfectly compatible usage in a single sentence.

From Mr. Butler's pen:

"MANKIND has ever been ready to discuss matters in the inverse ratio of their importance, so that the more closely a question is felt to touch the hearts of all of us, the more incumbent it is considered upon prudent people to profess that it does not exist, to frown it down, to tell it to hold its tongue, to maintain that it has long been finally settled, so that there is now no question concerning it."

" I do not mind lying, but I hate inaccuracy."

"Life is the art of drawing sufficient conclusions from insufficient premises."

Those of us who do own companies - not just as thought experiments but as our accursed fate - truly envy Rocky his ability to find answers in the current MBA Book of Common Prayer; what we see on the street in California right now is that the only current action is being handled by the Lackeys and the few other over-traders who have never had the luxury of being able to ignore the current bid. Everything else is talk combined with (1) belief that the "cycle" will somehow continue as the Emperor peddles along on his imported energy-saving machine and (2) a desperate eagerness to get to the next meeting with the representatives of the official church.



 A million events coalesced this week to put the market in a highly precipitous state with the expected standard deviation for Tuesday, based on pre holiday lows of 32 being a good twice the normal 15 for any day. Without minimizing the seriousness of a loss of 50 points in a week, perhaps 3 trillion or more in wealth, perhaps one can find some order beneath the random happenings.

First , some quantitative things. Big minima before holidays occurred only 6 times in last 15 years, one on Labor Day 2001, and one 10 calendar days later, two on July 3, 2002 and 2008, and two on Martin Luther King day 2005, and 2009. Changes to the close of -60, -60, 35, 14, -13, and -46 followed those days with a stand deviation of 32.The situation a week later was even more dour, although in an interesting anomaly so typical of markets, the standard deviation of the 5 day change is 28 versus the naive expectation of 70 from the one day change.

On the other hand after big declines in a week, of 5% or so, a event that regrettably has visited us on 1 in 20 weeks that last 10 years, the market is quite bullish with a standard deviation of 35 the next day and a more expected but gargantuan standard deviation of 60 for the following week.

One also notes a string of exactly 5 consecutive losses in the S & P, an event which has occurred on about 1 in 25 days, as compared to its expectation of 1 in 64 days. Fortuitously, the standard deviation the next day is a mere 18, and the expectation is zero.

The situation with the Nasdaq is similar on a weekly basis. With its 120 point decline for the week, the expectations are not much different from random. However, with 11 consecutive days without a rise, that's never happened before. The highest run of consecutive declines was 10 on October 12, 2000, when the adjusted Nasdaq was about twice the current level.

More interesting is the failure of the market to rise a reasonable level in 13 consecutive days, an event that is a true rarity only having transpired on 4 occasions before. That event has again led to an expectation of 0 to negative in the next following days.

Turning to the always fascinating changing web between stocks and bonds, one notes that while the stocks declined 5% this week, the bonds went up about 4 1/2 points from 123 1/2 to 128 1/2, with 5 consecutive rises to Thursday, July 1, close… One would expect contrary to the upside-down sponsor's constant refrain that would lead to some reallocation to the stocks. And indeed to a reasonable extent that is true, albeit the expectation is only 1/10 of its standard deviation going out 1 week in future.

The variability of all these things is so great relative to its expectation that even if the future moves were drawn from the same distributions as the past, nothing here would be of any great regularity.

Thus, we turn to the qualitative. Everyone from the President to the upside down sponsor was on TV talking about the significance of the employment number, all from their own corner of self interest. I like the emphasis now that is placed on private sector jobs, the 63000 increase, a number that is becoming so much less relevant as government jobs gradually become more numerous, more attractive, and crowd out the jobs in the private sector. Along those lines, everything came together with Barton Biggs reporting that he sold his technology holdings. The news came out rite at the close, putting it in the pitching in the pinch category. It was the one thing that determined the market move for the day as just before the market had been up a 1/2 % on the day and the news caused it to decline 1% in the last 10 minutes.

It was the perfect thing as Zeus sat there at 350 deciding which of the Goddeses to favor with his kind attentions over the weekend, with the balance of the market on his scale. And then came the perfect announcement. Biggs is bearish because the intervention and the stimuluses mite stop. And it's particularly newsworthy because he made money in 2009 by being bullish on the stimuluses as if being rite one year has anything to do with being rite the next year. But it's the idea that has the world in its grip. And it provided the perfect backdrop for more interventions coming in the future. And of course the reason that the market is down so much is exactly that the interventions have caused all incentives and all desires to make investments with the increase in service rates of 100 % coming up , totally vanish. Thus, the news followed the price, and led to what is guaranteed to happen, a call for more jobs, more jobs especially for those organized in special groups that can provide votes and funding — but most important of all, a clarion call for taking from the common man to provide a greater need for intervention by those of superior knowledge and tastes.

I believe one gets the picture.

Paolo Pezzutti comments:

I already see those who will benefit for a second round of stimulus counting the big money they will make when borrowing at 0%… A nice and unfair advantage is about to come again for those on the right side. Especially for those whose risk in this "trade" is practically zero! Few, damned and now (!) seems to be logic (although for some it will be another windfall of earnings and bonuses). Politically this is very much convenient and powerful lobbies may already be at work to support similar moves. Someone else will take care of the next generations. We will not be here anyway, so why worry. However, the greedy ones who think that the game will unfold the same way, at least for equities and currencies, this time might be wrong. Mainly because few governments will afford this kind of move. The US could still do it and China. Europe not for sure…Different variables are at play. I was not clever enough last year to understand the magnitude of the implications related to the huge injection of money in the system made by governments. However, my skepticism that this is the right way to solve a problem that is structural in nature increases.

Ken Drees writes:

One item left out of the soup, the China market had a big drop that was partially erased–this drop happened after the recent won float plus labor issues arising. Also hundred year floods are still raging in the southern provinces as well as growth estimates being revised downward. There are some big possible trend changes in place in China right now that are not being looked at for the most part by the west.

I spied some interesting fin tv that was a little bit different from the norm–a la the new paradigm–China catches a sniffle and USA catches a cold. This concept ignored by most financial media and blogs all week. China chart looks likes SPY only a bit tighter.

I think we should look east short term for possible dislocation in the west.



 Something significant is happening for sure as market forces came to the conclusion that gold had to be liquidated so fast and the Euro had to be bought so aggressively. Maybe I missed some important development in Europe, but the crisis is still there as it was a month ago. Spain and its debt situation is the next challenge this summer.

The coming slowdown (or it is already here?) will only make things more difficult for European countries. In a few months additional fiscal measures will be required to try and stabilise budgets. So why this rush to buy Euros? At the same time, gold was heavily sold like if all the printing of money in western countries was over. Actually as we go down toward another slow down more easing will be required (for those who are still in the conditions to do it) the printing machines will become hot. May be what we are seeing is just the result of deception and it is a good trading opportunity.



 I was in Berlin recently and this opened my eyes to what is Germany today and what the Germans can do.  I visited this city right after 1989. There was a profound wound at that time that needed to heal and the eastern and western sides were so different. They had a lot of work to do on their infrastructure and mindset. 

Berlin is now a new city, completely rebuilt.  From public transportation to government buildings, roads, private corporations headquarters, you can see that everything has been done rationally and neatly. This city works pretty well. There is no traffic, there are excellent services. They restructured old buidings, keeping whatever was left from the old architecture. You can still see bullet holes from machine guns on the walls of some of these buildings. The American Embassy so close to the Brandenburg Gate, the iconic landmark of Berlin, is there to remind you of the past. 

The wonderful Reichstag, the seat of the parliament of the Weimar Republic between 1919 and 1933, was badly damaged during the war. In 1990 it hosted the ceremony of reunification and only in 1999 it became the meeting place of the parliament, the Bundestag. 

You perceive that Germans have a particular relationship with their history. Their past is not presented openly in all its dramatic aspects, but you can feel it in the air. Germany is now in a position of leadership in Europe. It is amazing what they did if you consider the situation of total destruction of this country after the war. They are the biggest economy in Europe. One of the few nations in Europe with a trade surplus. I think the current crisis has blessed Germany as the leader in Europe. In relative terms to other European countries, thanks to the crisis, they are further improving their position. Think of their role during the Greek crisis, and note how badly Great Britain is being hit by the financial meltdown.

They are getting stronger also with regard to the French, who are for sure uncomfortable with a too strong and influential Germany, although their continental ties from a political and industrial standpoint are quite good. 

 One of the long term trends I see in Europe is the consolidation of their leadership and an increased role of Germany in all European matters.  This might not be perceived well by those who look at the past history of the country, and also look internally in Germany.   Very recently, the Federal President of Germany Horst Köhler announced his resignation following heavy criticism about comments he made on Germany's military role in the world.  On May 22 upon his return from a trip to Afghanistan he stated that "in emergencies, military intervention is necessary to uphold our interests, like for example free trade routes, for example to prevent regional instabilities which could have a negative impact on our chances in terms of trade, jobs and income."  Some critics said that his comments indicated he would use the military unconstitutionally and for economic reasons. This is an important signal of the sensitivity of discussing certain topics in this country. 

Fiscal measures were decided recently; Berlin will cut the budget deficit by a record 80bn euros by 2014.  Some have been critical of German budget plans. With so many European governments under pressure, German budget cuts do not help the European economy to recover and the risk is that Europe goes back into recession. And I think it will.  Germany is also reluctantly providing the biggest national share of the euro rescue package and the bailout for Greece.

In summary, although Germany is now the recognized leader of Europe, they still are not fulfilling their role comfortably and their population is reluctant more than the political leaders are.



Kissing the Clay in victoryWatching the French Open Womans Final was shocking for any Aussie who had watched Stosur "Demolish", and that she did, three previous number ones on her way to the final. The Italian woman grabbed the opportunity and literally went for broke, and good luck to her, she got the result.

What is interesting is how absent minded Stosur appeared, What happened to her game, her intensity, and the aggressive tennis of the previous few games. Sure Schiavone combatted her well with some mighty deep top spin looping backhands, but there is no doubt bigger questions to be asked, in particularly how one's mind can be prepared for such a proposition.

For both woman it was their first Grand Slam final, and who's to know how they are going to react on the day. Stosur (who had beaten the Italian in their 4 previous meetings), had phone and text messages from all Australian past champions like Evonne Goolagong and Pat Cash, and no doubt many more. (The fact that Italy had no past grand slam champions in tennis ever, may have helped Schiavone).

Should Stosur have turned the phone off and concentrated on routine, discipline and more routine? It appears the case is evident that potentially there is the need for a head doctor, especially with someone totally new, to be brought in for BIG occasions, one off events like this, just to fine tune and set things totally straight.

Samantha StosurIt reminds me of traders who have just made a bundle of cash, p and l looking the best ever…and for some reason everything they have ever been taught or taught themselves goes out the window. They drop the bundle and give back what they made and more in a bout of careless trading.

There was a manager of a prop desk in Singapore who used to buy a book of local cinema tickets every month. If his traders just had their best period for some time, he dished out a ticket, they were off to see a movie. Likewise, if others were under the pump, then they were sent off to see a flick as well. He reckons that book of tickets was the most profitable management decision he ever made. Maybe Stosur could of done with a movie with a slow down of adrenaline, resulting in her accounts having a reval, before stepping on to court.

Paolo Pezzutti comments:

I was quite impressed by Francesca Schiavone's determination and resolution during the French Open Womans Final. Especially during the tie break. No fear to win. Focus on her strengths. Will to dominate the court physically and geometrically. No way for a self-defeated adversary to match the same hunger for victory and glory. Many similarities with trading where self confidence also plays a big role.



Happier timesAn excellent trader once told me that relationships are like trades. "Paolo", he said, "If it does not work, it is time to close it and move to the next one…". It is the concept of stop loss, of having the strength to recognize failure and accept its consequences, of learning from our own mistakes without feeling frustrated and miserable. In two words, it means being mature and responsible.

As a trader, I tend not to close my losing positions; it is my main problem. I think this is common to many "wanna-be traders". I want to wait for prices to go back where they were, I do not easily accept taking a loss. Most of the times this works well especially in a choppy environment, but if you find yourself in a fast market you can be badly hit.

Similarily, in life I care much about the friendships and relationships I establish. I feel "betrayed" when I lose a friend who is important to me. It happened recently, when a dear friend decided to discontinue any type of contact with me. At the beginning with some justifications. Eventually not even answering phone calls and emails. I know that with every ending there is a new beginning, that maybe I didn't realize what kind of person this was in the first place, that I may have contributed to the situation, that I don't need this person to be happy. However, you are aware there is something of you that has gone away and will not come back. It is complicity what you miss the most. It is the awareness of having wasted emotional energies on a losing investment. "Paolo, it is a closed book. It is time for the next trade" he told me. I know this is right, but I miss this friend.

Chris Tucker advises:

Paolo, You are not a "wanna-be trader" any more than you are a "wanna-be friend". In both endeavors we are all learners all the time. Setbacks will occur in all facets of our lives and they can be painful, sometimes extremely so, but they are not a reason to condemn ourselves or to give up. It's normal to feel frustrated and miserable as long as you don't dwell there for too long. Nor do I believe that you have wasted your emotional energy. Energy that is put into something or someone you care about is never wasted, it's just that sometimes it fails to yield the benefits we expected. So I don't see you as a "wanna-be trader" but as a "trader in training", just like the rest of us, even the spectacular successes. I find that devoting my focus to finding the lessons to be learned from such things not only helps to assuage the pain associated with them, but also prepares me better for similar scenarios in the future. Perhaps you can ask yourself questions like "What can I learn from this?" or "What positive outcome can there be to this?" 



 Recent cycle changes have been instantaneous rather than phasing in over time. The big recent drop changed the stultifying lack of vol and upward crawl which persisted over the last 15 months. Weather wise here in Hawaii we've had drought for 5 months, but since spring arrived, its been raining ever since. Another interesting and instantaneous change in cycles.

A related but different idea is the effect of cataclysmic events which have occurred historically with profound effects on dinosaurs and weather. We are seeing some recently such as Iceland, recent year's and recent weeks market crashes. A cataclysm is an obvious departure from recent norms which seem to kick off changes in cycles or make it clearly recognizable. Perhaps analysis of cataclysm or cycles norms rather than overall norms and means might be a good way to look at data. The dividing line might be tail events.

Paolo Pezzutti writes:

We are all used to changing cycles. In our lives, things go on routinely for months and years, when suddenly an event modifies things dramatically. It can be so disruptive to put into discussion values and relationships that have been quietly developing for years. Unpredictability, ironically, is what counts the most in our life. Most of us live their life striving for stability. We want a family, we want an indefinite contract job, we work to build a pension, we pay expensive health care insurance policies and so forth. Suddenly, a thunderclap, such as a death, a divorce, a new acquaintance or a new job opportunity accelerate the speed of our life. We find surprisingly ourselves making decisions with new parameters that we would have never considered only a few weeks before.

Similarily in markets, cycles changes suddenly, with no possibility to predict when they change. (Or is there any clue that this can happen?) Similarily, investors move from a low volatility environment to wild swings in a matter of days. At first, they are disoriented and react emotionally. Then they get accustomed to it and play according to the new rules of the game.

Also, robots seem to have the same approach– because they are built by humans. They slowly trade crawling up prices, printing higher opens and strong last hours for weeks, and then suddenly go wild selling all they can until the orders book is empty. I am not sure all this can be predicted. If one knew the logic with which robots (and humans) operate, one could try to anticipate… Alternatively, fast adaptation to the new environment is key. What are the parameters and signals that indicate that a cycle has changed? Is it possible to automate this process of monitoring and learning? Is it only a matter of volatility or is there something "less visible"? Visually, it was clear after a couple of weeks how the market was developing the up leg after 8 Feb. Visually, in fact, we noticed how the market changed pace during the past week. In this case, we should try and find quickly the new way of trading this environment post Eurozone sovereign debt bailout announcement. 



the euroActually I think Europeans are happy to have a weaker Euro. Especially Germans. it will help their exports in times of low inflation.

I am not sure the fund Europe wants to establish will help. Typically, the European reaction to the Greek crisis has been slow and fragmented, with states once again moving based on individual interests rather than a collective European view. In Germany local elections weighed also in how the leadership approached the crisis. The long term issue is that in Europe the imbalances between north and south cannot be reduced without a common European policy. In Italy we know well how difficult it is to reduce gaps between different geographical areas (north and south specifically) even under the action of a centralized government and a more or less homogeneous culture within the country. You can imagine the kind of challenge when the areas involved have different history, culture, economy, social structure.

The problem of this crisis is that Europe should accept the default of Greece. Sorry for the creditors. By the way: who are the creditors? Mainly French and German banks of course, already weakened by the crisis. The PIGS are not the only problem for a risk of contagion. Eastern Europen countries do not have much space on the news these days, but you my recall that they were the first to suffer a lot in 2008 at the beginning of the crisis. Their issues are still there.

It is the social reaction to the fiscal policies around Europe that can produce the biggest changes in the next years, as peoples of Europe will blame capitalism for what happened. The risk is that a bigger role of governments in society and economy will emerge together with some sort of nationalism and protectionism. Not good for growth… Although the US in the long term may have serious issues with their deficits and debt, it is Europe which is going to be weak for several years ahead.

I was in Italy last week and listened to discussions about the state of the economy. People complain that there are no jobs and it is getting worse. Most say that "the government should do something about it"…..

Alston Mabry writes:

The EMU is adopting the drachma. They will print more €'s to pay off the debt and save the banks. The Germans will benefit from a weaker € and better ex-EU export power. And it will be clear that Portugal and Spain can be saved the same way. Gold up! 

Ken Drees writes:

I remember reading an article about the palindrome when I was just learning about speculation, it showed him sitting and playing chess outside. It was after he had broke england out of the currency band and creamed the pound. He said something to the effect that england was going to amass some large number to defend the pound–and he was prepared to sell twice that amount for starters. I think its similar to europe now as they bluster and puff about in hopes of throwing off the currency attackers. They are in a losing position as Paolo points out. Nothing gets the juices flowing like lines in the sand. They have to have a plan for the entire string of piggies–all the way up the ladder or the wolves will chase them all the way to the end. The euro is surrounded by wolves and swinging the torch around in a circle only works so long. Eventually the wolves get more and more agressive and the attacks become more brazen.

So far it looks like their best attempt to date will be their announcement today/tonight. Anything hollow or doubted will be attacked ferociously or anything a little workable may have the wolves waiting and keeping their distance, following along. And if Big Al is correct than gold wins either way–massive QE or massive breakdown–time will tell.

Alan Millhone writes:

I want to see the US Dollar become King and overshadow the Euro et all.

I am bone tired of political correctness.

I build and remodel and rent apartments. Not an easy trade but one I understand. Not for everyone to be sure. Lumber has dramatically increased of late. One learns to not quote jobs too far into the future.



ava gardnerOne is amazed by the similarities between the market and the femme fatale. Especially when you continue to chase the market with expectations of a reversal that never comes.

The more you chase it, the more parabolically it goes up. No matter how you count or look at indicators and candles, it simply goes up. When you finally give up, that is when the market surprises you once more with a sudden reversal and drop of prices.

In same way, you chase the femme fatale and that keeps you hooked and brings you near self destruction and obsession. When you finally give up exhausted and frustrated, she gets back at you once again. Looking for her prey…



Eventually even the strongest, most resistant and adaptable species may disappear as well. Hopefully, the Darwinian selection will allow us to sooner or later get rid of a well known species of greedy predatory birds. However, I am afraid that even if that occurred, they would be replaced in the ecosystem by some other species with similar characteristics.



 This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.

Peter Grieve writes:

You've got to love a keg full of musket balls through the stern windows from the forward port side carronade.

Unless the free market you revere is on the receiving end, of course.

Alston Mabry writes:

With financial regulation reform next on the agenda, it's more like Trafalgar: What better way to start a battle than to cross the T on the enemy's biggest ship and rake them with a full broadside?



 I was in Oslo when they started to close the northern Europe air space on Thursday. I decided to take a lift by car from friends to Gothenburg, Sweden at least to get 300 km closer to Milan, Italy. Then I was faced with a dilemma. What is best the best strategy in such an uncertain environment? Wait for flights to go back to normality? Sounds good but how long could it be? Or take a train and travel 24 hours or more? Sounds good as well, but all trains are full now, so the only option is to book a train in some days from now. And what if in the meantime they reopen the airports? Why face a long journey when a plane would be much faster? Or rent a car, provided that they are available, and drive home? That's a long trip, and expensive as well.

It's like being caught in a losing position with limited capital available and having to decide if it is better to close it and accept the loss or hope for the market to go up soon. You cannot wait too long, as you risk losing all your money, but on the other hand it's difficult to sell when you lose.

I have put a stop loss on Tuesday, when I will stop to wait for improvements. Then I will sell and accept the long trip home, provided that it will be feasible. But new (reliable?) forecasts will be provided, and I will change my mind again, as I always do, being unable to fully implement the strategy I decided when I started the trade.

Ken Drees comments:

My father said to me so many times, "he who hesitates is lost". The trading relation lesson is that you first want to doubt the severity of the position going against you. Hoping for the best leads you right into crowd think–things will improve, etc. So here it seems like you at least acted by moving away, but then realized that you are still losing and that losing trades take up capital that can be deployed elsewhere, and losing trades take up time and mental focus and lead to less than perfect mental acuteness. Best to get your arms around the loss and remove it at any cost. 

All these stranded people are like people who have just received pink slips. They just lost their jobs (flights). So should they not take this opportunity to hike the back country, visit that winery, or linger in the cities that they always wished to see, but never had the time to? Some may do so who can afford it, others may not be able to afford to or are not skilled enough to be "re-trained". 

Paolo Pezzutti replies:

I have spent so many days traveling during the past 3 years in so many countries. Most of the times what I have seen is airports, hotels, and conference rooms. Very seldom have I had the opportunity to visit places and understand the culture of the places I have visited. It is like a standardized and artificial reality. For stranded travelers, I think the issue is the lack of choices. You can analyze the options what you want, but practically speaking, in most cases you cannot do anything but wait.

Victor Niederhoffer comments:

Many of us own individual stocks that are stranded, doing nothing while the world spins on its axis. What is appropriate to do in such situations? I would hypothesize that counting would help. Louis L'amour always said that the first moment of a life threatening situation is the best time to act.

Ken Drees replies:

I read once about an older trader, a simple man who simply said that at the end of the day if any one of his trades was "a loser" he would simply "kick it out" of the barn. At first take that seems extreme– or is it? The first time I read that I thought it was too black and white, now it's more of an essential idea for me–the taking of the first loss. Do you like the stock at that price today? Is the stock in a losing position? Would you buy that same stock today–double your position? If the answer is no then its a loser and a candidate for deletion. If every trader on Monday morning got rid of every losing deletion candidate, the force of the positive relief exhaled into the atomsphere would shift the winds over Europe and free the skies for all to get back to work, play, and normalcy. Sell your losers for the tired, the untrainable, the funflighted. 



I am wondering if anyone out there is familiar with a trading opportunity called by some, the Goldman Roll. As it has been explained to me, there is a large numbers of long-only commodity funds. As a given contract that they hold long, say oil is coming due to expire they need to sell that one and then roll into a long position in a further out contract. This creates a very definite trend in the spread that can be exploited. Sell the near one short and buy the next one out. As the roll transactions are executed the Far minus the Near spread has a very predictable and smooth rise. It is claimed that this phenomenon has not be widely recognized and thus remains in existence thus far. Any comments out there on this claim would be appreciated.

Dr. Aronson is author of Evidence-Based Technical Analysis, Wiley, 2006

Nick White comments:

Goldman Roll? More like market roll!

This has been around as long as futures have existed and is nothing sinister. However, as some here were actually around when modern exch. traded futures began, I shall defer to them.

You can maybe get some clue as to roll direction by looking at open interest depending on the contract, but it's not always a good guide. Worth bearing in mind that people hold offsetting positions and much also depends on commercials vs specs etc.Also, if it were that easy to make money, it wouldn't exist…

Michael Cohn writes:

There is index money invested in commodity Indices and a plethora of ETFs. For example, USO or UNG. These commodity ETFs hold futures and there is a need to roll the contracts in a somewhat predictable way although there is now more flexibility as to day. This long exposure always has to sell the near and buy the far contracts. It is fairly easy to see the amounts involved…

David Aronson replies:

Goldman Sachs

Yes, I am on the lookout for all of these creatures. But kidding aside for the moment, are you saying that the claim that such an opportunity exists is on par with sightings of Big Foot? i.e., it's nonsense?

Russ Herrold writes:

It is a safe statement that there are and will always be 'unknowable unknowns' out there in the woods, and that the 'Absence of evidence is not evidence of absence' (but rather sometimes, just a statement that we cannot prove a hypothesis with our current tests and tools)

If I had a Bigfoot in my basement that laid gold bars, I would never reveal that secret, and take great pains to keep that 'trade secret'.

If I had engineered a winning strategy, I would certainly consider sowing disinformation and negative results and disinformation, to lead people seeking to reverse engineer my results, down into blind allies.

I think as a careful investigator, all we can say is: We do not know of a public proof that such exist.

By co-incidence, I am wearing a tee shirt today of a Unicorn, feasting on roast leprechaun, and as she takes knife and fork to her meal, the magic rainbows are let out.

Ken Drees adds:

The idea of taking advantage of a robotic function (mindless ETF doing its monthly maintenance) makes sense; once you notice the ripoff, wouldn't a hunter now wait for the fox?

Tom Printon writes:

I used to fill the GS roll in the coffee pit. Locals typically positioned themselves one to two days ahead of GS. When and if profitable was usually good for few tics, but one had to have size on to be worth while. Off the floor trader's vig would be difficult to overcome.

Paolo Pezzutti adds:

This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.



 It is common sense that the stock market anticipates what will happen in the economy after some time. The invisible hand of the market driven by millions of investors who make decisions according to different quantity and quality of information eventually represent the best way to encapsulate and synthesize the current status and prospects of the world's economy. But is this always true? Or for some reasons markets are resilient to change and slow in timely reading the information available?

If this is the case, what are these reasons and when does this happen? Can markets be manipulated by strong hands or there are simply forces that render decision making viscous and create a breakout friction before markets actually change the course they are following? Like a ship takes some time before reacting after the wheel is turned.

These questions are relevant today as they were before the beginning of the crisis two years ago. As loan underwritings standards deteriorated, the securitized mortgage market developed a bubble in housing prices that continued for quite some time until it finally popped. Even if we now read on several reports that it was clear to many what was about to happen, until the very last moment almost everybody continued to play the same sheet of music. Investors, regulators, government. The markets went on with huge inertia along the tracked lines of unrealistic risk assessments, walking on quants' clouds and careless of gravity. The longer they continue the more violent is the reaction eventually.

It seems to me that currently markets are in a similar situation. After the impressive injection of liquidity in the system (like an adrenalin shot to the heart) aimed to restore confidence and normal functioning of shaken markets, prices of assets have reflated for over a year now. In order to do this, sovereign debt in Europe and the US is increasing to levels that everybody knows are unsustainable. Still, for political reasons nobody wants to take the bitter medicine that would be needed. The show goes on with cheap money poured into assets that go up with a regularity and pace that is almost unprecedented. Regardless of unemployment, housing prices that in some states are going down again, the contracting credit to consumers, some states and cities are very close to bankrupcy, banks continue to be seized by the FDIC, industrial production levels are still 10% lower now than at the pre-recession peak, durable goods orders are almost 20% lower now than they were before the recession began. Finally, equities are up 75% from the lows, but earnings are still almost 40% below their pre-recession levels.

Is this manipulation? When and how is this going to finish? Or actually this time markets are reading correctly what is going on and are simply anticipating a global recovery and the consequent future increase in corporate profits?

Laurel Kenner writes:

The wonder is that the market didn't go up much more, given the trillions of stimulus. Since '07, the market has made short-termers of all of us– at least, of everyone fortunate enough to still possess enough liquidity to trade. We're all dancing in the dark until the tune ends. Meanwhile, the music has changed in the bond market.

Russ Sears writes:

It is my contention that the markets are good at forecasting what is predictable. However, much is not forecastable, like the weather.

I will be presenting a paper Tuesday that Dr. Dorn and I have authored in Chicago Tuesday.

In it we content that faulty risks evaluations can cause neurotic outcomes, in individuals, companies, sectors and even whole economies.

The markets can become, and apparently did become, a mechanism to trade short term gains while coming at the expense of increasing long term risks from over-allocation of resources. The risks of over allocation is often a chaotic system, meaning it is impossible to predict specifically when and how hard it will crash. Statistically, this could be thought of as trying to predict when the correlations will become a self reinforcing mechanism approaching 1 . Or is more practical examples when would over- building of housing in California, Arizona, Nevada etc. lead to deflationary spiral and foreclosures and inability to refinance all across the country and world. Another example would be the over allocation of delta hedging and portfolio insurance in Oct 87.

I am hesitant to make predictions, especially after Bear Stearn then Lehman and AIG and a government run mortgage market in Fannie and Fredie. But I am not as pessimistic as many that this is only a short term bounce. This stems from my belief that while the mortgage markets securities economic value are difficult to predict… the markets are giving at least giving them a more realistic view of their worth given this uncertainty. If this discount for uncertainty is as healthy a discount as I believe; there is still considerable liquidity and value that can return to the markets once these values are realized and known. The markets, at least in my modeling, seems to still give a considerable chance to the deflationary spiral returning.

Mick St. Amour writes:

Paolo, thank you for sharing your thoughts. I like your comments on inertia because that is at work. I see this all the time with retail investors and as of right now that dynamic is at work in that those folks still haven t taken a bullish slant and have been slow to change their minds. most investors are slow to embrace a change in thought when conditions change and they tend to ignore what market prices tell them. They tend to get locked into some ideology and usually only change their belief until after bulk of gains are made. Best trades are made when you can find inertia still at work and market prices begin to shift in different direction opposed to prevailing view. I have found those to be the best low risk trades.



 Robert McTeer had an interesting post on StreetTalk. He responded to a TV commentator who claimed the recent BLS employment numbers showed: "Not a single new job has been created." McTeer called the claim misleading because it implied "a stagnant economy dead in the water." McTeer notes that though jobs have been lost on net over the last two years, "The gross jobs numbers behind the negative tell a far different story." Though 8 million jobs were lost in the second quarter of 2009, McTeer notes that "6.4 million were created (674,000 more than in the first quarter)."

A gain of 6.4 million new jobs in a quarter shows a dynamic economy. But I sent an email to Mr. McTeer suggesting there is more to the story. The 8 million jobs lost, I argued, are in some ways as good for the economy as the 6.4 million new jobs.

Eight million people losing jobs means eight million in the market for "better for the economy" jobs, if not at first higher-paying jobs. If these workers were destroying wealth at their old jobs (though no fault of their own), just stopping is good for the economy.

The huge number of union jobs lost in the auto industry is good news for U.S. economy as well as car buyers. Overpaid and badly organized auto industry workers are disruptive for a free society, apart from the problems of high labor costs and uneven auto quality. All these jobs were privilege jobs gained by connections and legal protections. Auto companies could have hired and trained workers at 1/2 or 1/3rd the pay, but were prevented by various labor law interventions from doing so.

The economy has to continue the adjustment out of industries like housing construction and related goods and services, and those resources and workers have to be redeployed into more productive industries and professions. Figuring out and coordinating redeployment to wealth-producing occupations has to be a complex and time-consuming process.

Though a great many job losses could be blamed on taxes and regulations of various kinds, and on uncertainty created by state and federal policies, the lion's share of unemployment was caused by adjusting to new realities after the real estate and financial bubble. What the new realities and opportunities are isn't immediately clear. That is what has to be figured out by millions of entrepreneurial employers and job searchers.

Losing a job creates trade-offs and potential benefits. People for a time lose productivity from established skills and business networks. But as they look for new jobs, the searching process, though labeled unemployment, is actually work collecting information and developing search and self-knowledge skills.

Think how many millions were likely underemployed or by accident in the wrong industries for their personal preferences and skill sets. Most wouldn't leave a secure job, even if they strongly suspected it was somehow not right for them. Though most would prefer underemployment to unemployment, most have probably also been surrounded by employment or entrepreneurship opportunities they lacked adequate incentives to investigate.

If an unemployed worker hired someone else to spend 30-40 hours a week searching for new employment, and to evaluate job-retraining opportunities, that would cost money and likely generate value. Those who lose jobs become self-employed in this informal home-based employment search industry.

Some of the unemployed are not working at job searching (or at "off-the-books" work), so they are taking advantage of opportunities for leisure that a wealthy society like ours affords. This can also have long-term benefits.

Losing my job at the Foundation for Economic Education in 2003 was one part difficult and disorienting, but nine parts a great opportunity to innovate and launch new economic education projects and programs.

Paolo Pezzuti comments:

I agree on the assumption that the economy has to continuously adjust to redeploy workers into more productive industries and professions. Old, low productivity and low added value industries have to be abandoned to move into more remunerative sectors. I do not dispute this because this is the tenet of growing economies and capitalism. This process may be painful for many workers laid off that have to retrain to find better or equal pays in their new jobs, but it brings progress and growth for the individual and the society.

However, I am starting to have doubts that this can be applied to the present situation of western economies, where jobs are simply cancelled to be created somewhere else in the world. This process is negative and is developing in parallel to the healthy process of adjustment I was referring. Jobs are transferred very quickly to areas of the world where labor is less expensive. Our economies cannot adjust adjust timely and fast enough to create enough jobs in the new sectors because the speed at which this transfer of wealth and jobs is occurring is unprecedented. This requires an impressive education system to adapt the professionality and retrain millions of workers very fast. This requires huge investments in high tech and higher value added areas. This takes time, capital, new infrastructures, a government that favors entrepreneurship.

How to manage this transition is the main issues and all elements of the society should be involved in this debate. I am convinced that the governement in the economy is inefficient and should be limited as much as possible. At the same time, without government support, the situation could be disruptive for millions of families while the process of adaptation develops.

Finally our competitors are not looking at us wihout doing anything. They are also moving quickly to acquire the technologies and move their production up the scale toward higher returns industries. They are working to put us out of the market and not be competitive.

Flexible and adaptable economies will be advantaged, but the process is going to be very painful. The transitory will be very long in any case because of unprecedented scale of what is happening. The challenges are huge and success is not ensured even for the most dynamic countries. The outcome, if we are not able to adapt, could be to see our economies and standard of living decline sharply in favor of others. We could simply see unemployment and poverty increase structurally.

Paolo Pezzutti is the author of Trading The U.S. Markets, Harriman House, 2008

Pitt T Maner III adds:

Touring around in Europe in the early 80s you couldn't help noticing the number of young Australians and New Zealanders. Many of them apparently just decided to do a "walkabout" and wait out the bad unemployment situations back home. If you are willing to rough it there are many cheap places to live outside the US. Hanging out for a couple of years in the right "socialist" country with good food, beer, healthcare, law-abiding citizens, low cost education, history and culture would seem to be an option–at least you would get an opportunity to see the pluses and minuses of other systems. No its not the American way. Are citizens of other countries more flexible with respect to moving around the globe to where there are opportunities?

Do today's youthful short-term free riders outside their native country that avoid permanent bumdom become tomorrow's long-term tourists and multilingual global investors?

Russ Sears writes:

While simply based on anecdotal evidence from those I know, I think you will find that "funemployment" is almost exclusively the domain of the youth, still riding on Mom and Dad's pocketbook. It seems to me to be the result of being taught: "you can be any thing you want","you are the star at everything" and most important parents never letting their kids fail– meeting the reality of this job market.



High-frequency finance can revolutionize economics and finance by turning accepted assumptions on their head and offering novel solutions to today’s issues. This comes from an interesting article on the topic:

In high-frequency finance:

The first step involves the collecting and scrubbing of data.

The second step is to analyze the data and identify its statistical properties. Due to the masses of data points available for analysis (for many financial instruments one can collect more than 100,000 data points per day), identification of structures is straightforward– either there is a regularity or there is none.

The third step is to formalise observations of specific patterns and seek tentative explanations/ theories to explain them. Fractal theory suggests that we can search for explanations of the big crisis by moving to another time scale — the short term.

On a short-term time scale, we study how regime shifts occur and how human beings react. The large number of occurrences allows for meaningful analysis. We study all facets of a crisis– how traders behave prior to the crisis, how they react to the first onslaught, how they panic, when the going gets hard and finally, how their frame of reference which previously was a kind of anchor and gave them a degree of security breaks down and how later, when the shock has passed, the excitement dies down, there is the aftershock depression and then eventually how gradual recovery to a new state of normality begins. It is possible to build maps of how market participants build up positions and how asset bubbles develop over time.

High-frequency finance opens the way to develop "economic weather maps".

Just as in meteorology where the large scale models rely on the most detailed information of precipitation, air pressure and wind, the same is true for the economic weather map. The development of such a global economic weather map has barely started. The "scale of market quake" is a free service. It is a very interesting experiment. You can read the paper "The scale of market quakes".

I believe these are really exciting developments. More than 15 years ago it was expensive to find end-of-day data and I would update together with my dad the files of the stocks I was interested in using data from the newspaper. Today we have huge online databases available to the average trader. The computer I had at the time and the SW I could afford would allow me to do some technical analysis building indicators and that's it. Today I use Tradestation.  I can program and automate my indicators, studies and strategies. It is a huge advance for average traders like me. High frequency finance is now the new frontier and if you want to be profitable, there you can still find the sort of inefficiencies you need. However, it cannot be accessible to everybody. Once again, you need the data, the computers and the math/statistical expertise. It is getting more and more complex. Moreover, to trade on such a short time frame you need to have very very very low commissions that the average trader cannot obtain. Would you expect something different?

The question I have is whether there are inefficiencies in longer time frames that the big guys do not even bother to consider: the leftovers of their meal. At the 60 minute level or even the daily time frame. I had the privilege to talk with one of the best traders of Wall Street (he trades mainly the emini) about this issue and he believes that this is the only way to stay on the market for the average guy. There is a way to profitable in these time frames. It worked for him. Inefficiencies at micro structure level must be so important that the few big players in the business that can afford that type of game are making a lot of money. In fact, policymakers have started to look into it, but it is very sensitive and interests are huge. With time, competition will increase also in that area and it will become more difficult even for them. But for now, they make billions. As far as I am concerned, I feel like a little fish that lives under the rocks and comes at night out after the sharks have made their dinner and left something back, which was not worth for them wasting time. The search continues.

Paolo Pezzutti is the author of Trading The U.S. Markets, Harriman House, 2008

Sushi Kedia writes:

In the spirit of Daily Speculations, where observations of small fish swimming up predict coming quakes in Japan, investing ideas that can be hypothesized before testing by observing characteristics of oaks etc. etc, one keeps wondering what would qualify from market data points as the proverbial rats, birds and smaller creatures that behave distinctively before coming changes in weather, terrain, storms and big winds. Even if jokingly, when a friend reminded me few days ago that Finance is the art of moving money from hand to hand until it disappears and while I know that fractals make the same ideas appear at every scale making the big and the small equal in their eventual outcomes, one simplifies the notion of fractal finance to the simplest possible that it is the art of moving money from hand to hand across any size, until it disappears. That brings one to a more easily imaginable notion of visualizing the food chains in the markets at action looking at distinctive behaviours of the smaller creatures.

Is retail behavior a richer source of predicting large moves or is the professionals' action a better gauge? Or is it that both used together produce some finer ideas?Does the behaviour of small caps and micro caps provide some extra insights into the markets? Distinct expansion or contraction of range is one obvious thought stemming from Chair's latest post.

So many have been talking about a potential crash coming by, suddenly in the last week or so, one wonders which minnows and sparrows are they watching to get such "feelings".

Are there any distinctive behaviours in volume and open interest too that forebode a coming change in the winds? Has some master of the universe quietly assembled in some corner of this world the mythical all encompassing indicator that captures time, price, volume, open interest? The equivalent of the General Theory of Everything in the markets? How far are the scientists in the markets from the equivalent of an 11-Dimensional M Theory?

Even if this set of simple(ton) queries generates from the specs a list of ideas they have felt over their long years in the marts as precursors to large moves, it would be highly useful to compile them and explore what testable theses can come up from them, for Einstein did say and believe that an ideas should be simplified as much as possible, but not more.

Russ Sears comments:

It would appear to me, that on the anniversary of the turn-around in the markets, it would be wise to review what the Derivative Expert / leading fractal proponent and his teacher/mentor were saying last year at this time.

As I recall, his predictions were that doom was inevitable and that it was just the beginning. The future was clearly going to be worse than the Great Depression. His only hope was, he prayed, every night, and in the morning when he woke up, "he was wrong"…

His teacher was not as sure as him, but thought it was more likely than not, going to be more terrible than imaginable, also.

Yet, I do believe there is considerable turbulence and potential for chaos theory, to occur whenever people allocate resources…However, the markets are the best mechanism for catching those grossly misallocated resources and shuting down those chaotic loops of turbulence that man has devised. While the derivative expert still could be proven right in the long run. One must consider that there are some strong forces of learning from your mistakes built-into the system also. Non-the-less no matter how certain our demise may be, the rebound shows that care must still be taken thinking one way, up or down, is the only direction.

While I will disagree with the Derivative Expert, that the markets are built on a time fractal, a quick look at the human situation shows that herds, large and small, are no protection from irrational thinking. Dr. Dorn and I have been working on a paper, that I will be presenting on April 13 in Chicago at the Enterprise Risk Management Symposium that will discuss this further. It is not directly related to chaos theory or fractals. But one sentence to ponder concerning fractals to whet your appetite: "Individuals, businesses, industries and even whole economies, all, can become victims of mania and panic".
And I will have more to say on how this does more closely tie into fractals and chaos theory in other works, time and receptive audience permitting.

Jeff Rollert comments:

The last 12 months remind me more of the eye of a hurricane.



EinsteinI came across this article on Bloomberg:

"End-of-Life Warning at $618,616 Makes Me Wonder Was It Worth It" by Amanda Bennett

It is the story of a wife who assisted her husband through a long story of pain, hope and money spent to prolong life as much as possible. It is interesting how time has a different value when you realize your life is coming to an end, and when you understand time has become a scarce resource.

Rocky Humbert comments:

Using 2005 data from the March of Dimes, the average pre-term birth costs $51,600 and the first-year medical costs are also about 10x greater for a premature birth versus a full-term birth. This is a lot of money because pre-term babies make up over 12% of American newborns. Amazingly a 2-pound baby now has a 95% probability to live a full and happy life. (Admittedly, some of these babies are permanently impaired and cost fortunes in lifetime medical costs.) Nonetheless, forty years ago, the probability of survival of a 2-pound infant was close to nil.

I bring this up because I like to focus on the positive, and truly amazing advancements in medicine have been achieved over the past decades. Polio, anyone? One of these "expensive" pre-term or in-vitro babies may be the next Einstein, and far be it from me to argue for "pulling the plug" on Einsten at age 0 or Einstein at age 100. Theoretical analysis ignores the infant mortality side of the spectrum. If one can theorize immortality, one should also theorize about the extraordinary efforts and money to reduce infant mortality and increase fertility. Why should one assume that an immortal man does not father hundreds of children? And why cannot elderly women have more children too? Hence rather than reaching the conclusion that the ratio of elderly/young would be unsustainable, one might reach the conclusion that the overall population would grow uncontrollably– perhaps with Malthusian consequences. Which of course argues that we need more Einsteins…

Nick White responds:

One needs only to consider that the march of mankind over the past 6,000 years has been generally forward. Hence if one extrapolates this trend, one is likely to conclude that as human population grows (ceteris paribis), there is more good than evil. A triumph of the optimists…I'm not so sure on this one.

Generally forward? Well, yes. But that neatly sweeps under the carpet vast swathes of humanity who may be net no better off (or possibly worse) than they might have been 6,000 years ago. Certainly, for everyone on this list, life is many orders of magnitude brighter than it was all those generations ago. Yet, overall, I would argue there's quite a bit of skew in the distribution of benefit; largely depends on what region of the world you're in and what ethnic group you hail from.

Is there more good than evil? I think this is another proximate vs. ultimate causes issue. I would argue that rational self interest (ie "greed") provides many collateral benefits– but is that intrinsically "good", and who decides? That depends, inter alia, on one's theology (or lack thereof). Generally speaking I'm short human motives, but long on some of the products of those motives!

Economically speaking, I think the progressive pattern you've identified is perhaps something approximating an unintentional Nash Equilibrium– society at wide has benefited as people have done what was best for themselves in the context of their group….but, on average, I think many people were out for their own end. (nb: of course, your example of Salk etc is duly noted, and there are numerous examples of truly beneficent altruism amongst the pantheon of social contributors) All said and done, I think Gekko sums up my position best, and I think it does capture the evolutionary spirit. It's just the side effects one must pay heed to and much of the colorful debate on this list goes back and forth on that very point; we all agree on capitalism– some of us disagree on appropriate social conscience. 



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.



 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.



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.



spring is nearI found this post on Trading The Odds.

He analyses 3 set-ups on S&P 500 with respect to a holiday: assumed one would’ve bought the S&P 500 on the close two sessions before the Holiday (setup 1), on the close of the session immediately preceding the holiday (setup 2), and on the close of the session immediately following the Holiday (setup 3).

His results:

1. New Year’s Day (celebrated on January 1)

The model will take a long position on close of the first session of a new year.

2. Martin Luther King Jr. Day

The model will not take into account the Martin Luther King Jr. Day exchange holiday.

3. Washington’s Birthday/Presidents’ Day

The model will not take a long position on close of the the session(s) immediately preceding Washington’s Birthday/Presidents’ Day

4. Good Friday

The model will take a long position on the close two sessions before the Good Friday exchange holiday.

5. Memorial Day

The model will not take into account the Memorial Day exchange holiday

6. Independence Day (celebrated on July 4)

The model will not take into account the Independence Day exchange holiday

7. Labor Day (celebrated on the 1st Monday in September)

The model will not take into account the Labor Day exchange holiday

8. Thanksgiving Day (celebrated on the 4th Thursday in November)

The model will take a long position on the close two sessions before and on the close of the session immediately preceding the Thanksgiving Day exchange holiday, and no long position the session immediately following the Thanksgiving Day exchange holiday, at least if not any other criteria are met.

9. Christmas Day (celebrated on December 25)

The model will always take a long position on the close, between two session before until two session after the Christmas Day exchange holiday.

In a previous post :

1. The (calendar) Day of the Month

The model will take a long position on calendar day 30 or day 31, depending on which one represents the last business day/session of a month

2. The Day of the Week

 The model will not take into account the day of the week.

3. FOMC Meetings (scheduled) and FOMC announcement sessions

 The model will take a long position on close of a pre-FOMC announcement session as well as on close of an FOMC announcement session if the index doesn’t close up greater than +0.50%.

4. Government’s Job Report Friday

The model will take a long position on close of a session immediately preceding the Government’s Job Report Friday in the event the index closed up.

5. Option Expiration

The model will not take into account the option expiration.

This is not complete and may not add much to what you do, however, I find it interesting that counting is done by many out there. The problem is: what is the right way to count?

Victor Niederhoffer comments:

There would seem to be many problem of multiple lookback, multiple comparison, Monday morning quarterbacking, selective retrospection, and consistencies with randomness with such an approach. Most important of all, they don't take into account the diference between likelihood (which is very high) and predictability. The seasonarian left our site because of "e" and is not here anymore, but his ghost lives on in this interesting post, designed presumably to elicit this comment.



 I was wondering if one could be taken off the street, with no experience, and taught to be a profitable trader. My father says no, with a few added conditions. He believes there's a genetic component combined with many early childhood predictors that indicate a propensity for success in trading. He cites games, sports, competition, and the willingness to accept risk as major predictors of success. He also believes that if one doesn't exhibit these characteristics by adolescence, it would be very improbable that one would become a successful trader later on in life. He also says that mentors are not enough if you don't have a "fire in your belly." My uncle, on the other hand, says he could take a monkey off the street and teach him how to trade successfully within a year. What do you think?

George Parkanyi responds:

I think the question becomes can you teach creative thinking, self-motivation, self-discipline, courage, patience, and self-confidence? If you believe that these can be taught (which I do, but it's not simple or easy), then I believe you could teach someone to successfully speculate. Good ideas and opportunities abound in speculation and are recognizable to many people, and the mechanics of trading are fairly straightforward. But actually implementing them and managing the risks are altogether something else.

Also I think that to be good at anything you just have to do it — warts and all, and make the necessary adjustments as you gain experience. You would never be able to teach the things I mentioned above without a heavy dose of hands-on application.

Paolo Pezzutti writes:

I agree that being good at sports and in particular at sports competitions is an indicator of predisposition to trading. Determination, ability to remain focused, to implement a game plan, to understand weaknesses and strengths, the self-confidence that allows to take reasonable risks with a winning attitude and so forth. However, that there is not only the "fire in your belly" component. I do not think that one can trade only by instinct or intuition. There are also analytical qualities that are more intellectual and less related to the guts. Can technology help somehow? However, if one is a great mind and finds certain market inefficiencies that a computer can exploit, does one need to have the great athlete's qualities? Those who develop successful algorithms need to to have the "fire in their belly"? I am not a trader so I cannot say for sure, but I tend to believe that mechanical trading can be successful. Besides that, if your father believes that he could teach a monkey how to trade in a year, I think I am better than a monkey and if he wants he can try with me!

Craig Mee replies:

No doubt a few of you have heard of Dennis and Eckhardt… these days different rules, different times, maybe if there had been tasty markets for it, before the rules of ever changing cycles kicked in. I believe Richard Dennis has struggled to replicate his results.

Dave Goodboy replies on behalf of Michael Covel: 

M Covel"Whether you agree or disagree with my book The Complete TurtleTrader it is one of the most unique "training" experiments ever conducted on Wall Street. It is the true story of literally taking novice traders off the street, injecting them with trading rules, and then watching millions be made. 25 years later it is also interesting to note which of the originally group thrived and which imploded. As far as the genetic component debate goes there are some great books out now about "talent" (see: "The Talent Code" and "Talent Is Overrated") making a very convincing case that success is far less genetics and much more about deliberate practice –which backs much of my research."

- Michael Covel



 T WTiger Woods apologized on his website regretting his "transgressions".

He claims his "right to some simple, human measure of privacy". He continues saying that "the virtue of privacy is one that must be protected in matters that are intimate and within one's own family. Personal sins should not require press releases and problems within a family shouldn't have to mean public confessions".

I have sympathy with his view although the public (often morbid) curiosity and the business generated by these kind of news makes them void statements. What I do not understand personally is why he and other public persons in similar situations have to blame themselves publicly for what they have done recognizing it was a mistake with statements such as: "I have not been true to my values and the behavior my family deserves." "I will strive to be a better person and the husband and father that my family deserves."

It is clear that they are saying this only because their affairs have become publicly known. It should have been probably better to be silent on the repentance issue.



 I read an interesting post at The Disciplined Investor on the Natural Gas ETF UNG.

If you bought the “natural gas” fund assuming that it would follow the commodity’s performance you would be wrong. Since last September, in fact, UNG underperformed significantly the spot price of the commodity. This is because it follows the percentage change in the price of the commodity’s front month contract. The problem is the market is in contango. In this situation longer-term contracts are priced higher than near-term contracts and the fund will underperform the underlying commodity. The result is quite impressive and disappointing (for some at least).

I have no idea why the divergence in behavior started in September and why there is such a wide contango in gas. The post proposes two scenarios. One where "UNG will come back in line with the natural gas pricing when (if) there is a the contango spread reduces to historic levels". The second where as the fund is "too big and because futures roll every month, there is no way that this can ever catch up".

Quite interesting example of product "inefficiency".

George Parkanyi writes:

I’ve been trading in Canada a similar ETF called Horizons BetaPro Natural Gas Bull+ ETF (TSX:HNU) – a double-long ETF. That’s also been in an abysmal bear market, having completely imploded after the commodities collapse in the second half of 2008. If you’re buying and holding a double long or short ETF (much worse for the short ones), a long one-way move against pretty-much wipes out the value and you will never recover if you bought at the higher end. However, for an active shorter-term trading strategy, you can still get very good moves out of these. HNU rallied from about $8 to $17 in September and October just recently. That’s a pretty good move if you can catch it. (Although its back down around $9 again now.)

You are right about the contango. As soon as they roll into the front month, it immediately goes down. Keep doing that every month… I have a large gas weighting in my portfolio and that’s my main concern as well.



In pure spirit of "contrarianism", I like this article about global cooling:

Statisticians Reject Global Cooling

In a blind test, the AP gave temperature data to four independent statisticians and asked them to look for trends, without telling them what the numbers represented.

….Global warming skeptics base their claims on an unusually hot year in 1998. Since then, they say, temperatures have dropped — thus, a cooling trend.

….if you analyze the trend during that 10 years, the trend is actually positive

….to find the cooling trend, the 30 years of satellite temperatures must be used.

….It's what happens within the past 10 years or so, not the overall average, that counts

….the 10-year average for the past 10 years is higher than the previous 10 years

….You're going to get a different line depending on which year you choose

….The trend disappears if the analysis starts in 1997. And it trends upward if you begin in 1999

….it's important to look at moving averages of about 10 years

….looking back 31 years, temperatures have gone up

Oceans, which take longer to heat up and longer to cool, greatly influence short-term weather…..the current El Nino is forecast to get stronger, probably pushing global temperatures even higher next year

The quote I liked when I studied statistics at the University (although it could be perceived as politically incorrect nowadays) looks appropriate to me in this case:

Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital. Aaron Levenstein

These discussions recall those about the stock market. Is it better a 50-days moving average or 13-days? Is the secular up drift over because of the recent downturn or what we are living is just another historical buy opportunity?

It looks like a discussion at a sports bar in Italy about the winner of the next soccer season.

In the meantime, let's take a look at El Niño and its effects on commodities and stock markets. In fact, the pattern of winds and ocean temperatures during an El Niño changes the jet streams steering storms over North and South America. It affects also monsoons carrying away moist air that would produce monsoon rains.

Provided that the forecast is statistically significant.

Paolo Pezzutti writes:

From Bloomberg Beijing's Heaviest Snow in 54 Years Strands Thousands

….the heaviest snowfall in the Chinese capital in at least 54 years blanketed the city for the third day this month. ….The government induced snowfall in the capital on Nov. 10 by seeding clouds with silver iodide, the China Daily newspaper reported yesterday, citing an unidentified official at the Beijing Weather Modification Office. Zhang Qiang, head of the office, said the agency induced snow on Nov. 1 by seeding clouds with 186 doses of silver iodide, according to a separate Xinhua report. The seeding brought an additional 16 million tons of snow, according to the report. Beijing takes every opportunity to induce precipitation as the city is suffering from drought, Xinhua cited Zhang as saying.

Maybe a global cooling could be induced artificially.

Anton Johnson comments:

Though theoretically possible, is induced global cooling really what we want? Looking at the Chinese snow example, what is happening? When seeding clouds, atmospheric super-cooled water completes nucleation and freezes, and then precipitates as snow. At liquid-solid phase change, latent heat is released. The converse occurs at the solid-liquid phase change, thus environmental heat energy nets out. That is, assuming the snow melts.

However, the higher albedo of snow compared to most of the earth’s surfaces causes increased solar energy to be reflected into space. So what happens when this cycle is taken to the extreme, that is, if we get the temperature balance wrong? A net increase in global snow cover will cause a net decrease in total solar energy absorbed globally, causing more precipitation to fall as snow, etc, etc; thus plunging the earth into an ice-age. Good-bye New York, Chicago and London. That is until the oceans cool sufficiently, reducing evaporation and precipitation to an inflection point that reverses the cycle – maybe after 10K-20K years.



In a recent post, The State of Short Term Mean-Reversion, Marketsci blog highlights how mean reversion strategies have not been working lately:

Do I think short-term MR will stage a comeback? Yes. I think the breakdown over the last few months is tied to the strong protracted rally, but that this slow grind up will come to an end and that short-term MR will again be the play du jour once we get to the other side.

I have experienced this deterioration in my systems (all contrarian of course).

Steve Ellison is more pessimistic:

I too lean toward the contrarian side, but am increasingly wondering whether that is just an irrational behavioral bias. If markets were efficient, there would be no mean reversion except by chance. Why should there be an advantage to mean reversion? Who is the dumb money that will buy high and sell low, now that the [daily rebalancing] ETFs are gone?



The type of price action we have seen makes me think of possible thoughts that the public could have had during the past months.

09 March - S&P 676. The typical private investor would say: "It's over. No way I will get my money back from this mess. I knew I had to sell… Moreover, I am losing so much that I do not want to risk anything more than I have already sunk into this black hole"

09 May - S&P 929. They would say: "Come on. It is only a rebound. It is going down again soon. I am not going to put money in here"

31 July - S&P 987. The public: "Unbelievable what I missed. May be this market has really turned around. The recession has a V shape and they will fix the economy… Well, I am even on some of the positions, I reduce my exposure and sell something"

5 October - S&P 1054. "Wow. Something is going on here! They have information we do not have. I am sure the market will continue like this until the Christmas rally. They will drive it higher. How stupid I was not to enter this market last March and to start selling during the summer. I should have known that things could not be so bad! It is true that the economy is recovering. I must buy now!".

Let's see a possible scenario after a few weeks:

Some time in November/December. S&P 900: "Oh no! I messed it up again…"

And by the way, the up gap of this morning [2009/10/05, S&P opened 1043 after closing 1036.40 last night] seems to urge investors and the public to jump on board a fast running train that will not give other opportunities. Do it now or you will have to pay much more to get in!

Good luck to the buyers.

Dr. Pezzutti is a quantitative analyst and speculator who blogs as Short-TermTrading.

Art Cooper comments:

In his book Mass Psychology, James Dines prints a graph annotated with the typical investor's changing thoughts as the price of his investment changes, very similar to those you gave.



 There is nothing as bad as losing the money you had and nothing as good as making it back after you lost. Thus, on Wednesday [2009/09/30], the market rose 2% from low and you made it back. The contentment, the joy! And the almanaktarian's favorite day coming up, with a beaten favorite play to boot! But the cronies knew. Disaster. One lost what one had on Thursday [2009/10/01]. You see, we're in crisis mode. Unless the health bill is passed, those jobs will not come back; what we need is to prosecute Secretary Mellon or his modern counterpart the way the magnetic radio person did in the 1930s. On Friday, bonds at a one-year high, and the cronies took profits on the number. Someone has to pay. Let us hope that the seasonalists, almanaktarians, and followers of all stripes will fare better in another world where we will not meet them.

Ronald Weber suggests:

What if markets slowly begin to realize "hey, we have come out of the worst crisis in a 100 year with many scars but we are still on our feet," couldn't it justify a much higher valuation level (lower risk premium) for equity markets?

Paolo Pezzutti analyzes:

Wednesday shows how desperate bulls were to let the market regain the opening level. Their failure and frustration is quite evident during Thursday's action. On Friday they tried to close the down gap of the open, but they were much less aggressive. Maybe they are realizing that the market needs to move to much lower levels before attracting new buyers who are also now concerned with negative news and W, U, square roots shape recession scenarios… If this is true we should sell any rebound next week.

Faisal Danka predicts:

Its not over till it's over. The retail traders who have seen the minor dips since March and have jumped on to the July bandwagon (even if a bit late) would be seeing this as an opportunity to buy on dips. All lagging indicators as well as price is showing break of resistance trendlines and key levels. On the heels of bad to worse news, we still have not seen a correction in above 10% range. This is why I think, a hint of good news and we break above 10k on the Dow. Just when none of the retailer traders will expect, the commercial loan situation will come to fruition coupled with lack of topline growth, and the long-awaited bear run will start.



What is the meaning of this long, long leg, low volatility but directional, with many up consecutive days? Maybe we have to see it as a sign of decreased strength to move to the upside. Maybe it is just a market where bears are still fearful to step in. The down gap of Monday was another lost opportunity for a correction. When will it come, what event will trigger it?

Steve Ellison laughs:

The correction will begin five minutes after you decide you can't stand it any more and buy at market…

George Parkanyi urges caution:

Well, if we muddle into the next earnings reporting quarter in October, the bar was so low last year that we'll probably see more "surprises" to the up-side. I'm not sure you want to be short that. I'm not sure I want to be short that.

Vince Fulco reports:

Sitting at a fancy bar/restaurant I rarely frequent here in the Midwest, have had the chance to listen to ancillary conversations at other tables. Helps to have been on a trading desk with two phones to ears while talking to a third person besides. All the talk is about the dreck stocks– AIG, FNM, BSX, et al. I feel like I am back in 1998 when the 'concept' stocks went gangbusters while liquidity remained too loose. I hate concept stocks like the plague but you know you are getting old(er) when the cycles keep repeating.



What is the explanation (either your own or the "conventional wisdom") for why bonds have been rallying concurrent with a strong stock market and all the talk about recovery?

Bloomberg news reports:

The $12 billion of [long term govt bonds] offered yesterday drew the strongest demand in more than two years. The U.S. Treasury auctioned [a total of] $70 billion of notes and bonds in three sales this week to help finance a record budget deficit. “It was a stellar auction at much lower rates,” said Thomas Tucci, head of U.S. government bond trading at RBC.

Paolo Pezzutti adds:

It seems that all assets are going in the same direction (commodities, bonds, stocks). Is there anything negatively correlated that one could consider to diversify?

Alston Mabry has a one word answer:


Phil McDonnell also replied:

Same day correlations for various assets with respect to stocks (SPY) for the last 105 days:

FXY yen -44%
TLT 20yr -32%

So there are still some things that are negatively correlated with stocks. Same day correlations are not useful for Granger-style prediction [of one time series from another], but they are useful for reducing the risk of a portfolio constructed using the various assets.

It should also be noted that just because price levels have gone up over a certain period of time [i.e. an upward drift in both series] does not mean that the price changes are positively correlated. The preceding correlations were calculated based on daily net changes in order to avoid the spurious correlation problem caused by using price levels.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Vincent Andres answers:

Why have bonds been rallying? In the past, government(s) were putting their hands in the machine only under exceptional/rare occasions. Now they are doing that on a regular basis. Markets (as we used to know them) have never been so oligopolistic and manipulated. The fact that old rules like stocks up/bonds down (and many others) now no longer works is simply one of the signature of all those oligopolistic interventions.

A possible scenario : The stock rally being a completely constructed one, concerning in fact only a restricted number of actors. Those actors aside, the stock markets were not rallying, that is what bond buyers believe and why they buy bonds.

For our stock "markets" (and some others), just a facade subsists.



 [The race between Atalanta (l) and Ippomene (r) by Guido Reni, 1618, Museo del Prado de Madrid. She loses the race and wins the boyfriend by picking up the gold "pomo" tossed to her by the Fed.]

After a sagacious relative's Email about POMO, I have been reading as much as I can about it. I found a recent article (August 10, 2009) by CXO Advisory Group particularly interesting.



CycleI may well be wrong, but my belief is that we are at the end of a big cycle. The end of the "easy debt" cycle?

1/ 2008-2009 shows clearly that nothing will be done by borrowers to stop their dependence. Nothing will be even tried. On the contrary. Because of our debt levels, this triggers the question of solvency. At least, this makes the question of solvency exceed a significant psychological level for the lenders. Confidence lenders/borrowers is definitely affected (gone). (Even if little is publicly said about that).

2/ This situation of confidence loss is new. The exhibition of our attitude at such a level is new. The awareness/knowledge/understanding of this situation is new. Presently, neither the lenders, nor the borrowers, have exact plans to deal with this novelty.

3/ … but, under the calm and apparent status quo, they are of course actively searching. At least the lenders. With the intent to do something. (Something will be done, even due to randomness. At least some small domino pieces will fall.)

4/ so my belief is we arrive at a delicate/complex crossroads/nexus/crux/bifurcation point (à la Prigogine). We're now inside a huge, real-life, game theory exercise. Many many things can happen. (But I believe many probable scenarios will share common steps). (I believe even dramatic events are now made possible.) But the status quo seems me rather improbable (even if it would be the case, this would just postpone things).

The above sequence lacks numbers (and may look abstract), incomplete, too coarse and biased with a sort of "pessimism", (but it's not how I feel about it). I'll thank you for any help to remove the flaws/omissions/clumsiness of this reasoning.

Phil McDonnell replies:

Debt is an important part of the big picture.  But I believe that a better perspective on current economics is that private consumer debt will no longer be easy.  In fact current figures show that consumers are 'saving' in greater amounts.  To be sure this savings does not show up in savings accounts or other tangible assets.  Rather it shows up as consumers pay down credit cards and mortgages.

The key thing to understand is that the powers that be do not want a reduction in total debt.  The size of the world economy is directly related to the size of the world money supply and all of its assets.  Given the destruction of wealth in mortgages, real estate, stocks and commodities the only source of money creation to reflate the world balloon is government borrowing.  So in effect the consumer debt is being replaced by increased government debt and conscious efforts to print money out of thin air.

J. Rollert predicts:

The present environment will make people treat debt like our grandparents did… and not trust financial types in particular. This is a social change beyond the cycle.

Paolo Pezzutti recalls:

People will not change behavior and attitude unless they are forced to do it.  When I arrived in the US from Europe two years ago I went to a dealer to buy a car.  There were signs on the cars on sale indicating $400, $350 and so forth that I could not understand at first.  When I started to talk with the guy it became clear to me that the signs were the monthly payments you had to make.  When I buy a car I want to know first how much it costs, not how much I have to pay each month.  But in the US people are apparently either encouraged to buy on debt, or they like to buy on debt, or they must buy on debt because that is the only way they can afford a car.  Only if the behavior of the lenders changes, we will see a different attitude of consumers.  And this is what could happen. Even with 0% interest rates.  Unless lenders find "new" ways to lend "easy" money.

Russ Humbert writes:

It is not just Govt. debt in the traditional sense, that the Govt. is increasing, it is putting more risk on the Govt. balance sheet on the asset side as well.

The Bernanke plan is to keep it coming, from what I can tell, to those that are willing to beg from the government.  Securitization is not dead, for the government quasi guaranteed it… This includes education and housing loans for most people, up to the point of being "rich".  It would seem that those that have no real prospects of paying off the principal, those that won't better themselves will be frozen out. At the other extreme those that better themselves to the point that it's clear Government is impeding personal progress, will not get this "risk free" money.  There won't be another AIG to scoop up all the risks, without any real capital backing it, for a long time.

This may seem momentarily like we are headed back to the sixties, before even credit cards, because of the sharpness of the down turn.  But this still leaves the US with much more debt capability than existed 10 years ago, before things got out of hand.  And money will flow down to consumption, it just won't be direct and if direct not as cheap.

Legacy Daily is skeptical about big changes:

I perceive debt to be the current fuel in the engine of growth. Unless an "alternative energy" is discovered, I believe debt is here to stay. The donut maker got it wrong, "America runs on debt." One reason for the efforts to improve the geopolitical landscapes in emerging economies is to also help raise their asset bases against which further debt can be created to satisfy the unending need for growth that our markets, our 401(k), and our lifestyles require. Since there's nothing new under the sun, just as soon as this cycle of diet and slightly better behavior has run its course, the patient will be right back to the liquor store for more of the same and a new cycle will be born. When and in what shape? That's the really difficult question.

We received a contribution from thin air (or is it Thin Air?):

Let me introduce myself: my name is Thin Air. Yes, THE Thin Air. I've been around for eons upon eons and have enjoyed a fairly tranquil existence. Who or what am I? A Princeton web site defines me thusly: "thin air (nowhere to be found in a giant void) "it vanished into thin air." That's OK with me, I can even live with the example which characterizes me as the passive element in an inexplicable event. Over the centuries millions of people, things, explanations, excuses, villains, heroes, and life savings have "vanished" or "disappeared" into me.

No problem. If you humans lack the will or imagination to discover just whatever it was that was lost, misplaced, filched, or embezzled, that's fine with me. But trust me on this, I don't have any of those people or things….never even was aware they were gone until I looked me up on Google - imagine, almost 3 million references. Rosie O'Donnell's number is just slightly higher, Bill Clinton's is 7 times greater, Barack Obama's 25 times greater, and Michael Jackson's 70 times greater- a telling measure of your society's priorities.

Those individuals weren't chosen capriciously; as a member of the "thin" contingent I chose two thin representatives and, by contrast, two fat ones - although it appears I'm being dissed in relation to other "thins", I love it and want to keep it that way. But Philip McDonnell served as the straw that broke the camel's back when he penned: "So in effect the loss of consumer debt is being replaced by increased government debt and conscious efforts to print money out of thin air."

I'm getting so, so tired of hearing that. You can't get through an hour of CNBC or Bloomberg without hearing that phrase or a riff on it. But those people are pretty lame and I expected Dailyspec contributors to provide a creative twist to a tired theme. Additionally, when phrased as shown above, it appears that I had an active part in the event; that I somehow swooped down and dumped billions and billions of dollars upon a group of bankers. First off, I'm broke; I neither have nor need money (gasp). Secondly, if I did have money, do you really suppose I'd drop it on that group of dummies? Not a chance.

Being a disembodied element and not a human, I can still make value judgments, tell the truth, discriminate, and speak out without fear of being condemned, jailed, boycotted, or shunned. Among those things that are unquestionably bad is excessive debt. It would seem this is self-evident, and Mr. Andres ought to be commended for bringing it to the fore. Similarly, Mr. Conrad (on another thread) reveals that the WEEKLY treasury begging bowl calls for low-interest-loving optimists to pony up almost one quarter of a trillion dollars. If this occurred every week, Treasury's annual issuance would approach the nation's annual GDP.

One can hardly blame debt buyers, though, as it's a given that the system will get better (or as the Sage, a student of Pangloss, stated this a.m. "better than ever") and that American Exceptionalism will prevail where, in similar circumstances, similar efforts failed. On the contrary, we witnessed major adjustments following the Tulip Bulb mania, the South Sea Bubble, Teapot Dome, the Great Depression, the Salad Oil scandal, the S&L fiasco, Russia's Default, LTCM, Y2K and Tech Mania, Enron, and the Real Estate Bubble.

History has demonstrated that none of these came out of Thin Air, nor did their eventual solutions. You can check it.

Thanks for your consideration and

Please leave me alone,

Thin Air



V NSometimes masters can be recognized by how little motion they make in beating you or relieving you of your funds. On this score, note the S&P in a three point range on five consecutive days, and eight of last 10 closing prices have been between 839 and 843. I find that the old mistress has not done this once in the last 15 years with the closest virtuous performance being on October 11, 2006 with the ranges widened to three. Hats off. What does it all mean? What's the sports analogy?

Paolo Pezzutti answers:

I see two boxers studying each other during the first rounds of a fight to find out weaknesses and strengths of their opponent. They test and experiment, trying some punches and techniques, moving around the ring to gauge capacity and time of reaction. They get ready and prepare the assault. When the moment comes, the fight develops furiously and fast with opponents using all their ammunition to try to knock the other out. When this type of match occurs, it is hard to figure out during the first phases who is going to be the winner. Deception to cover one's own weaknesses and strengths makes it quite impossible to bet on the outcome, unless you know values at play. Today's afternoon move could be one of these deceptive moves to be faded.

Thomas Miller adds:

In a most martial arts matches, the superior fighter expends as little energy as possible while letting his opponent expend his energy, become frustrated, lose concentration, and eventually lose the match. A wise fighter who is outclassed and knows it avoids the fight to begin with, waiting for a another day and a better opportunity. A wise trader would do well to avoid tight range markets waiting for another day and better opportunity.

There is tension in this market like a spring winding tighter, waiting to be released.

Henry Gifford comments:

A tiring bicycle rider can be seen many ways, with the most obvious being movement of the shoulders as if there were a second set of pedals connected up there, which of course is not the case, meaning all that movement is wasted.



 Was the Vasa was the greatest warship of her time? By the time Samuel Pepys (great gossip, even greater Gilbert & Sullivan head of the Queen's Navy) became Secretary, the Stuart Navy was successfully challenging the Dutch and the French and offering its protection the Swedish merchant marine ships in their trade in the West Indies.

In his Miscellany Pepys lists the following classes of ship:

Rate          Name        Length     Beam     Draft    Tons  Men  Guns
First          Sovereign      127         46         19     1141  600  100
Second      Fairfax          116         34         17     745    260  52
Third         Worcester      112         32         16     661   180  46
Fourth       Ruby             105         31         15     556   150  40
Fifth          Nightingale      88         25         12     300   90   24
Sixth         Greyhound       60         20        10     120    80  18

A comparison of the Sovereign with the Vasa is dispiriting. The Vasa was roughly the same size - 1200 tons; but it was nearly twice as long - 230 ft. - and its beam was 8 ft narrower (38 ft.). That is a length to beam ratio of 6 to 1.

That was asking for trouble. The rough rule of thumb since people first started sailing and capsizing boats is that a monohull should be three times as long as she is broad. This should not have been news to the Vasa's architects. The Mary Rose (built 90 years before the Vasa) had a ratio of 3 to 1.

There is a reason for the Vasa's builders to have wanted it to be so long. There is even an explanation of why they thought they could build to such an extreme ratio. The longer a boat is, the less beam she needs proportionately. A boat's resistance to being overturned varies as the fourth power of her waterline length, the heeling moment of the wind pressure on the sails or the waves and swells against the hull in an engine powered ship varies as a cube of her length. Length is desirable in itself because the maximum speed of a vessel is - roughly - 1.2 times the square root of its length at the water level.

The Vasa's builders were trying to achieve the same results that American naval architects produced with the Iowa class battleships — the last ones ever built by the U.S. and the last battleships to operate on the high seas. The Iowas had to fit through the Panama canal and be able to keep up with the carriers (which were much lighter and, therefore, faster for the same propulsive power). As a result, they had an extreme beam to length ratio (8 to 1).

Then, why did Iowas survive typhoons while the Vasa sank literally in port? The answer is that the added stability of length can be horribly offset by increases in height. The Vasa had a height of 172 ft. - 75% of its length. For the Iowas to have had the same proportion, their hulls would have had to be 500 ft. high! Adding another 3+ ft. and a great deal more ballast kept the Vasa's sister ship from sinking in the Baltic, but it could never have survived the North Sea. Even using the 3.5 to 1 length-to-beam ratio that the smaller rated ships in Pepys' fleet (the Worcester, for example) would have required the Vasa and its sister to have beams of at least 65 ft; and, in the age of sail, there was no way for them to reduce its height to the dimensions of the Iowas.

The analogy with financial engineering is certainly appropriate. Somewhere in Stockholm in 1630 there must have been some bright young men who looked at the extraordinary success of the ancient Viking long ship designs thought "leverage can only lead to greater glory." But, the little matter of the Viking long boat's limited sail height seems to have be ignored. There are no surviving rigs for the long ships, but the best estimate for a 30 meter boat is that it had a mast height of 12 meters or roughly 40% of its length.

Phil McDonnell writes:

 I visited the Vasa Museum. It is a fascinating story of the greatest warship of her time that heeled over and sank within minutes of first setting sail in moderate conditions. In many ways it is the story of man's attempts to master engineering, be it naval or financial. The ship was only raised in the last century with modern engineering and is over 90% preserved due to salinity conditions in the Baltic. The interesting sequel to the Vasa disaster is that her sister ship which was completed two years later was only one meter wider but had significantly improved ballast engineering. The redesigned ship actively served Sweden in the war against the King's cousin, the King of Poland. Highly recommended tour.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Paolo Pezzutti comments:

 Maybe the ship was top-heavy.  If the ballast, for example, is not enough, the metacentric height (distance between the center of gravity and the metacenter) is too low, the ship would be unstable.  
From the thesaurus:

"metacenter - (shipbuilding) the point of intersection between two vertical lines, one line through the center of buoyancy of the hull of a ship in equilibrium and the other line through the center of buoyancy of the hull when the ship is inclined to one side; the distance of this intersection above the center of gravity is an indication of the stability of the ship".
(The center of buoyancy is the line of action of the resultant of all buoyant forces of the immersed portion of the ship).
(The center of gravity is a function of the distribution of the weights on board the ship and the ships itself).

There could have been different problems. An initial instability because of low metacentric height. Shifting of weights on board the ship may have altered the center of gravity. Or both.

Is how to calculate the metacentric height of a market a silly question?



 The 19th century expansion of trade with America and India (thanks to the British Navy dominance and the imperialist policies of that century) caused the growth of population in cities, the increase of demand of labor and, therefore, wages. High wages associated to the availability of low cost energy (coal) were the main driver of the industrial revolution in Great Britain according to some studies. Basically, the demand for technology was meant to substitute capital and energy for labor. High wages contributed also to increase skills and education. In other parts of Europe and of the world energy costs were higher and labor cheaper making the use of new technology not economical when in Great Britain it already was.

The move from the Industrial Age to the Information Age changed relative values of labor and capital. The value of labor has remained high, but the value of intellectual labor has greatly increased. Western nations (and especially the US) have experienced initially an advantage in exploiting the transition to this age because of the higher level of education relative to other countries. An important characteristic is that less capital is necessary to enter markets in order to develop information related products and distribute them. The Information Age has lowered previously high cost barriers to entry. Geographic barriers as well have been lowered. One can now participate in this sector of the economy from anywhere.

The Information Age has affected the sources of wealth, but it has also altered the balance of economic power. As emerging nations improve their education and skills level, they are able to better compete with traditionally advanced and mature nations because entry barriers to markets are lower. Moreover, these countries have the advantage of low wages. This combination is explosive in the long term.

Not only western countries are moving to emerging countries ever more important parts of the manufacturing sector, but they are moving the higher value added activities typical of the Information Age. Emerging (are they really still "emerging"?) countries are entering these markets with their own companies. At the same time, we see the big innovators and winners of the nineties become gradually mature and slow down their rate of growth (MSFT, YHOO and so forth).

Many believe that renewable energy is the answer. I personally believe this is very important, but it will not provide the solution: solar panels will be made in China! As we will live in the Information Age for some time in the future, we may not see any actually disruptive innovation that will give back to the US the huge technological competitive advantage the country had in the past decades. And it is not a given that the US or Europe will be the leaders in the next innovation era. What will be the drivers? Education and skills again, I think, because, with time, the cost advantage of emerging countries will decrease. The proposed US budget includes $147.6 billion for research and development. After four years of decline in spending on basic and applied research the 2009 spending and the 2010 budget proposal represent a turnaround in federal research investments. This is big money, but I am not sure it is a panacea. May be we should also let the free entrepreneurial spirits at work providing only a sound market and property rights framework as incentives.



 1. My 18 year old Lab regularly wakes up and barks at 5 am, and the coyotes are waiting right outside the door and howl in unison. One wonders if they are waiting for a meal or believing a friend is close. The market often is near death at 5 am and lurches in a spiral, with the Dax plummeting below the round.

2. The last hour on Friday often reminds me of the last two minutes of many basketball playoff games, especially those of the Celtics. The lead changes five times. There are violent moves with three-point shots and running of stops on both sides, and a complete recap of what has happened up to that time. Slow but steady wins the race.

3. The Dollar/Yen and the S&P do a very nice dance together and when you trade one you are really making a forecast of the other. Many times all the people who use the program I invented are waiting for a move to happen predicted by this or that market on this or that day or time, and out of the clear blue sky, someone like Dr. Greenspan will be speaking at a lunch, and will say something that makes the prediction come true. How did it know? And how if it didn't could you keep up with those who don't pay commissions and are always ahead of you on the bid or offer no matter how fast you are?

4. The many and increasing 100 million trading days that the "banks" are realizing these days presumably will help their kids get into certain Ivy League schools or at least get them a good letter of recommendation from former "bigs" there.

5. After a 35% rise, when the market drops 5%, the bearish commentators and the newspapers are not as hopeful of the big decline as they are after declines that follow terrible moves.

6. The Laffer Curve should be generalized to encompass the incentives that people have to buy and pay whenever any purveyor tries to siphon away their margin of benefit.

7. I can never read a Patrick O'Brian book without finding in every chapter insights into how by following the wisdom of Jack or Stephen, I could trade better.

8. I wrote a letter to a little boy telling him that having a strong and long base of operations is a key to success in life and I would be pleased to share it with those who might find it of interest in life or markets.

Alston Mabry writes:

My dogs and I have made a casual but first-hand study of coyote behavior (less casual, perhaps, for my dogs, especially Trevor who lost a dollar-sized chunk of fur and flesh to a coyote bite when he was about three). We call it a "hoot-up" when they howl as a group. In my experience, a hoot-up is a claim on territory. Coyotes coming back into the mountain park here just before dawn, after having spent the night scavenging and hunting cats and ducks in the suburbs, will stop at a familiar waypoint and do a hoot-up: "We're back. This is our territory." Several times, too, when I have been out with the dogs at 3am, and they have found and noisily chased a rabbit through the cactus, the coyotes came along twenty minutes later and did a hoot-up on the spot where we barked and whined, to claim it and try to scare us off. When you have a group of coyotes like that, they are a family, not a pack, with the parents and usually one or two cohorts of siblings not yet struck out on their own.

The end-of-day action reminds me sometimes of a football game, when there are six or eight minutes left in the 4th quarter, and the team that is behind starts throwing long passes and marching down the field. And I wonder, "Why didn't they play like this all game?" But similar to markets, they didn't play like that all game because of risk. When they get to the point where the game is on the line, then everything must be risked or else all is lost.

It's also interesting to throw the Nikkei-S&P correlation into the analysis. Is it time to go long the AUD again?

Is it that we watch the market turn and then interpret contemporaneous news as the cause? And when nothing much is happening, we ignore the news– if the market isn't reacting, then it can't be important. It's good that with both news and market data, there is an uninterrupted supply.

Paolo Pezzutti writes:

Two good friends interact and follow the same path in life. Some time one is leading, some time some the other takes the initiative. Overall they share the same values and enjoy spending time together. Suddenly, for some reason difficult to explain they part and go to different directions and not without pain. Similarly markets correlations emerge and increase to a point where you think there must be really very good reasons for them to work. Then you find out that it was all ephemeral and they were may be brought together inexplicably and randomly. With sadness you look at your friend and do not understand any more, it is simply a different person. And you hope things could go back to the good old days. Sometimes they do, but most of the times they don't.



 There was a time when in my country the barber was quite a personality in villages. The social opportunities and contacts at the barber's or at the bar in the piazza were unique. The barber was a very precious source of information. There you would do your business, get useful information and news about people and things happened, find friendships and establish connections. Much of the talk was about people I must say, and I am afraid that they would not talk about stocks tips and hints because the financial market was not developed at the time. Moreover, it was a place where you could spend some time and relax reading a newspaper with someone taking care of you; it was a weekly routine to be shaved the way only a barber can do. Provided that it was sometimes dangerous… Remember those scenes in old movies where a gangster is shot dead in a barber's chair? By the way, Al Capone's father was a barber. It seems that much has changed today when we consider going to have a haircut a waste of time and money.



 In meteorology, with nowcasting you want to perform short term estimates and prediction of thunderstorms or other events. Typical questions you want to answer are: where is the storm now? Where will the storm be in 60 minutes? What is its path? Is it weakening or strengthening? Are there hazards associated to it (lightnings, flooding, etc)? The problem you want to solve is about spatial location and intensity. It is similar to what we want to know about price: will it be up or down in X hours? How many points? Predictions are performed using algorithms and extrapolating radar echos (based on movement) assuming no growth/decay, which is normally acceptable for 60 minutes forecasts. There are several methods to track objects and estimate motion in real time using filters (e.g. Kalman) and calculate trends. The longer the time considered for the prediction, the higher the uncertainty. Accuracy is strongly depending on the type of model you use. In the stock market, when you try to predict the price of an asset at a certain time in the future you take into account the information you have at the moment you do the forecast. This involves uncertainty, which is also function of the time horizon of your forecast. As time progresses, you are able to include new data and more information in your model to update and refine your forecast. With time, you have more data available and your forecast horizon decreases. As uncertainty decreases, you have a more accurate forecast, but also have lower margin profits. For example, at the close today you forecast the next day's close taking into account the data available up to that moment. As time progresses, you include in your model the overnight action, then the open, the morning action and so forth getting closer to the end of the trading session. Accuracy will depend on how your model smooths data and extrapolates movement.

How can we use this methodology? When you open your trade you expect a certain behavior as time progresses. Nowcasting can be used to check if the path (price) of your asset follows the expected pattern. You have a number of "what if", such as: what happens if it opens higher, what happens if it prints a spike to the upside and so forth. Each time you update your expectations and when the expected path deviates too much from your original forecast it is time to close your trade. Conversely, if, with more data, expectations are reinforced you keep your trade going. It is a matter of thresholds of course and accuracy of your model, that depends much also on the frequency of observations and amount of data available.



The femme fatale seduces her lovers with her beauty and charm, but the sexual allure I think is the characteristic that bonds her victims the most in a deadly and compromising relationship. For some reason, she hypnotizes her victims, sometimes more than one at the same time, attracting them gradually, but inexorably, in a situation they can escape only with extreme actions and outcomes. She builds slowly and scientifically, an asymmetrical relationship where signals of confirmation of her affection alternate with denials. She has a sort of network where victims are monitored and managed to make sure they do not escape. She does all she can not to let them free, including lying. Her lovers enter finally a state of dependence and obsession that she enjoys and of which she drives the dynamics that with time become more and more extreme. The desperation, exhaustion, anxious and obsessive phase of lovers is characterised by an unhealthy and overwhelming attachment that can cause irrational decisions. The final destructive phase involves feelings of self-blame and often anger. The deadly femme fatale has a complex personality, hard to recognize at first. When victims realize the situation, it may be too late. Similarly, the market seduces lovers with charm, beauty and the art of deception. The deadly outcome leaves victims with huge losses.

Marion Dreyfus writes:

Just because the vast preponderance of readers here is male is no reason to excoriate females — the description of f.f. goes way overboard. Most women are aware of their allure (it does not take much to excite randy males, which describes, given the chance, 95% of all the gender), but we do not spin these nets and traps — it is an anachronistic model, based upon the impotence of former females in insurance securities, investments and her own nested income. Absent the need to survive and ensure for her needs, these females melt into the tough, hard-working, capable, no-nonsense female of today. To the extent that women are again (arguable if so) 'femmes fatales,' it is because of the insecurity of the times. That is why skirts rise in lean times: Females are wont to finding and bonding with a future of plenty, not want, and the sexual signal is the come-hither to desirable males.

Indeed, if a woman does behave in this alluring, seductive pattern when a male is about, it compliments his status-quotient. Were he to be adjudged low in value, her interest would not be piqued, and her sexuality would be aimed elsewhere.

We all try to to survive. The devices and tools women have are mimicked in the insect and animal world models–these are meant to procure food and necessities–stop spinning the paradigm as if it were *sui generis* for no reason other than the gratification of the destroyed male.

Scott Brooks replies:

Just like women are often attracted to the rebels… know the old saying….good girls are attracted to the bad boys….men are often attracted to femme fatales. I dated a FF for a short time in college. I found myself attracted to her as she was obviously a "bad girl". The attraction didn't last long as I found I was not quite as "adventurous" as she wanted to be.But of course, today, the Mistress has her hooks in me and she's driving me crazy. But I live a well balanced life. My wife is a balance wheel, very well grounded and keeps me on the straight and narrow!

Now our very beautiful, very femine Dr. Dreyfus bemoans the use of the FF phrase…..sweet innocent Marion…..who, I'll bet, has gone hunting, fishing and shot more guns than most of guys on this list…..who did her stint in the IDF. Who has roamed the hostile streets of the middle east and who manages to navigate the often moody straits of the Type A middle aged successful men who inhabit this list……and yet…… does so with flair, feminity and grace.

Fair Marion has probably been in more dangerous situations than many on this list will ever be…..I like to think of her as our groups own private FF……a living character in an adventure novel… we get to have all the adventure (but only in our minds) with none of the danger!



 When you maneuver a ship, there are controllable forces, such as propeller and rudder effects. There are also uncontrollable forces, such as wind, current, sea conditions. Moreover, each vessel has different characteristics and reacts differently. You have also to take into account the characteristics of your ship that may not be constant and given, such as ship loading and hull conditions. As a result, a captain works in an environment where a ship's behavior is not observed in exactly the same way and each situation is different from another. A maneuver is a dynamic process. You have your plan and when you execute it, you want to have a continuous update to understand the effect that your order has achieved and the next course of action in order to be able to follow your plan. Each time you find yourself in situations where your ship reacts differently due to everchanging combinations of speed, rudder, wind, current, sea state.

You need to be adaptable to the environment. Often, a too frequent assessment of your orders is not good because you need some time to let the ship react to your order because of its inertia. At the same time, if your feedback cycle is too slow, you might not have enough time to correct your action. You might end up not being able to follow your plan any more. In that case, the wisest thing you can do is give up and start again the maneuver from scratch instead of trying improbable corrections.

In markets, you do not have controllable forces, but you have expected crowd behaviors. In this context also each situation is different. A trader establishes a plan and during the trade execution, as new data come in, he/she assesses the market's behavior. The frequency at which this feedback process is done is critical. Traders may overreact and be deceived by the short term noise (you need time for the trade to develop), or they may be too slow to realize that the trade is not going as expected. How much data do you need, how often? How is the behavior different from what is expected is an interesting parameter. What is the threshold that makes you realize the trade went wrong? A ship maneuvering characteristics can be modeled mathematically, but in real life captains have to apply their experience and judgment to work in an observe-evaluate-decide-act cycle, which is very similar to what a trader does in a real time environment. Similarly, the market can be modeled, but most of the times expected outcomes require judgment and interpretation. It is all about the human dimension, where the action-effect cycle is matched against broad assessments of a generic "system" behavior.

Jeremy Smith comments:

“Consider how often a vessel must change its course in leaving a harbor, yet once on the high seas a single heading may bear it to its destination. Only
a major navigational hazard could change it.”

 – Louis Auchincloss, The Embezzler [1966]

J.T. Holley adds:

In the spirit of Patrick O'Brian I would have to disagree or at least add to this quote. Pirates, Enemies and Gov't can cause navigational changes in both the ships directions and destinations as well as in the markets. Seamanship by David Dodge is a excellent book that discusses the navigational patterns as well that the U.S. Navy utilizes. Having served onboard the U.S.S. Stark I can assure you that rarely is "a single heading" utilized to reach a destination. Sure it is the broad direction, but there are other directions that are in between when going from point A to point B.

Pitt T. Maner III writes:

Let me add a nice quote from The New Dictionary of Thoughts (1963). I wish I knew who "Anon" was:

A smooth sea never made a skilful mariner, neither do uninterrupted prosperity and success qualify for usefulness and happiness. The storms of adversity, like those of the ocean, rouse the faculties, and excite the invention, prudence, skill, and fortitude of the voyager. The martyrs of ancient times, in bracing their minds to outward calamities, acquired a loftiness of purpose and a moral heroism worth a lifetime of softness and security. Anon.

The pdf of the book is searchable and many a fine old quote can be found there. 

Jim Sogi adds:

Jeff is right. A sailing ship in particular will sail the best course made good, rather than rhumb line. For example, it will take the best angle to the wind, for the ship best speed, even though off rhumb line, for best course made good. A catamaran, for example, will go faster tacking down wind, zig zagging rather than shortest distance. I think day traders know this instinctively. It's quantified in markets in the absolute volatility numbers, or in Sharpe result numbers.

Another curious effect is when there is a strong current setting the vessel down. The vessel aims at a different point than where it intends to go, and 'crabs' along its course. This is hard for people to understand, as they can't really see the current, but one has to be aware of the motion of the ship in relation to the course, which is a derivative function. I suppose this might be thought of as Sharpe as opposed to gross dollars in trading or percent.

Another odd effect I experienced last weekend up in Alaska skiing was during a white out, a sense of vertigo. There is no visual reference point to balance, and its easy to lose balance in total white out conditions. While standing still, a small avalanche passed by, and though I was standing still, seeing the snow pass by gave the impression of motion, and threw me off balance. Or there is the feeling of standing still, then all of a sudden hit a bump and realize the skier was moving, but couldn't see it. The idea is that sometimes the perception is not correct and some other reference is needed. Pilots know this. This was one of the main points in survival. Loss of a reference point often lead to panic and death. In the markets, it's easy to lose reference. Chair's international numbers, I believe, are an attempt to get some sort of reference point. I had guides skiing up in the wilderness, who have a lifetime of experience and reference. Like markets, if you lose your reference point, you'll be dead in short order. 



 Redundancy is one of the keys to digital cell phone transmissions, and packet transmissions for the internet, human speech, credit card numbers, music composition. The list goes on and on, but should include the market. In speech, typically people say the same thing over and over, to guaranty the message gets through. Digital cell phone technology uses some sort of redundant error correction to insure the correct message. Musical composition often has three verses, and repeats the theme to get the message through.

The market does the same. The mechanism is the result of trial and error, to some degree, but also of communication, error correction. A minimum of three is needed to provide some sort of error correction, and to insure transmission of the message. This is why we often see things in threes. It is good to know or expect repetition or redundancy as it gives an edge. For some reason the news and commentators seems to think rather of endless continuation as the normal mode.

Paolo Pezzutti adds:

Redundancy increases reliability of systems, usually in the case of a backup. You can find in many critical-performance systems and applications that some components or modules can be at least doubled. When you have a federated system, for example, you can choose to have a central "intelligent' core and a number of "non-intelligent" sub-systems, or you can have "intelligent" subsystems providing a higher degree of resilience to failures. This is typical of some combat systems on board ships for example. The point is that not only redundancy adds reliability, but it increases also the performance, because intelligence is distributed throughout the system of systems and decentralization is a more efficient and effective solution (there are less bottlenecks and so on).

Redundancy and reliability, however, have a cost. When designing a system you have to weigh costs and benefits to find a balance that meets the user requirements. Markets find dynamically a balance between costs and benefits through the price discovery process. Also in this case, network-enabled players that apply a decentralized approach have an advantage in situational awareness, speed of evaluating the situation and making decisions, and speed of execution have an advantage over bureaucratic, centralized and slow players.

Phil McDonnell comments:

Redundancy can be very good but there are some occasions when it accomplishes less than one might think. For example, most data centers have more than one server. But if they are running on the same electrical power system they are still vulnerable to the loss of that common critical resource.

Another example might be when the sources of failure are not independent. One example using two servers might be if both are plugged into the same wall plug. They are susceptible to common power surges and lightning strikes transmitted over the power lines. Even several computers connected via long network cables can be simultaneously damaged by the EM pulse from a nearby lightning bolt.



 What a difference in the complexion of the world markets from last year where at the end almost every market was down 50% with no exceptions. This year as of March month-end the world markets are down a mere 10% and there are exceptions galore, notably Israel up 15% and Russia up 31%. All over, anomalies exist. Norway up 10%. Pakistan and Taiwan up 17%. Indonesia up 10%. All over South America markets up from 10 to 30 % in Peru and Venezuela. Venezuela up 40% from 1999. Recapping the wisdom of Maturin during the French Revolution advising Sophie to buy stocks, a stridency relevant to today shortly.

George Parkanyi writes:

Many a financial network talking head these days pronounces that "buy-and-hold" is dead. Here, or somewhere around here, is the perfect time to initiate a buy-and-hold strategy. This is from where the $3 AMDs and Motorolas of the world go back to $30 or $40 in the next bull market. And what of it if it takes 10 years, not that it's likely to take that long. That's still 100% per year non-compounded. My ex-high-school teacher and stock market mentor Omar Sheriffe Vernon-el-Halawani in the last two decades of his life (he passed away in 2005) did just that for most of his portfolio — buy good companies on the incredible cheap when the opportunities arose, and just put them away. He introduced me to "Reminiscences of a Stock Operator" long long ago, and in his last few years kept admonishing "George, why bother to sell?" (Though he wasn't inflexible either — he did sell Sun Microsystems once it got to $200. A couple of his closer friends rode Nortel back down to nothing.)

Paolo Pezzutti replies:

What if in ten years from now Motorola and AMD do not exist any more because a Chinese or Taiwanese corporation has wiped out these companies in an already mature market of telecoms and semiconductors? Sort of a General Motors and auto industry fate in 2015? In the meantime we have to see if the Western countries will manage to lead the next wave of innovation. It is not a given.

Stefan Jovanovich adds:

Motorola may survive as a defense/government contractor like Studebaker did; but its days as a competitor in the mobile dial-tone device market are long over. It has a legacy business in walkie-talkies, but those devices are now commercial products for — oh, happy day! — the construction and events trades. The "next bull market" will be in businesses that do not need the help or money of the academic/finance/regulatory complex. Some pissed off genius who is dropping out of graduate school right now because he can't stand another day listening to a discussion about hockey sticks will be the guy who creates a viable alternative to the internal combustion engine. The fact that the next Henry Ford did it because his uncle died and left him enough money to allow him to pursue his dream of racing an electric motorcycle will definitely NOT make the history books. Instead, some not-so-bright but perfect resume student of "economic trend analysis" at Berkeley will write a seminal paper explaining how it was all due to the "convexity of the forces of ecological history" (assuming, of course, that CalPERS has not blown all the money and put the University of California into receivership — which may the wildest of all my surmises). On a happier note, the Cal Men won the national swimming championships this week. Go Bears!

Pitt T. Maner III writes:

"Hardened silo" companies, with strong management, that have survived through and handled multiple, steep cycles over the past decades by mothballing equipment as needed, sending seasoned hands "back to the house" when necessary, and which have high barriers to entry (and negative government support) into the particular business would appear value candidates now. High quality drilling and drilling service companies, over the longer term, are appealing at present prices unless solar, windmill, nuclear, and alternate energy supplant the need for hydrocarbons. There are many other groups and companies that probably fit this undervalued, "tough-times survivor" model that odds would favor moving forward.

Jim Sogi adds:

After such a rally, and now when more and more people and pundits are calling a bottom, and I hear news proclaiming a thaw, and I hear talk of people starting to buy, these are the type of things that put my radar up. It's funny that the news media is somewhat stultified in that despite their steady barrage of bad news, the markets are all up. They actually have to change their copy of bit as it's hard to proclaim, markets up 15% on steady barrage of bad news. Obama did make a good call to buy, the day before the low and gave everyone a chance to buy. He knew what was in the govvy cards of course. That was the time to make the big commitment, not now. There should be more chances before they proclaim the next bull market as the market tops.

Legacy Daily writes:

Given things stay roughly the same, I cannot disagree with any of these comments. The challenge right now is that nothing is given.

For people who trade via systems, I have a question.

At which point does one decide to a) modify the system (and to what degree and based on what), b) discard the system (and why), c) continue relying on the system (and for how long); if such a system is producing losing trades more recently but has worked fine for a long time (definition of time scales not relevant)?

Perhaps the answer contains clues regarding our recent government actions (and market reactions) where the scale of the system and the magnitude of its impact is great. The problem is further complicated by control over one's actions but lack of control over [negative] consequences of those actions in a human system.

The second question that does not leave me alone is whether a game of chess (or any other game) can be won if every few moves, the game rules are modified. Does the player quickly adjust and remain focused on winning the game according to the new rules ("queen can only move three squares at a time" for example) or does the focus shift on guessing what the next set of rule changes may be? After a few set of changes and corresponding adjustments, does the player begin to suspect the rule maker in taking one side or the other?



 I wonder if snow, for example the deluge on Feb 1, 2009, in New York has a negative impact on stocks. It had a positive influence on the ability of youngsters in the 1950s to buy stamps, as school was out and Nassau Street was accessible by train. Now you can't even find kids having snowball fights as they are all inside with Nintendo or Twitter or IM.

Paolo Pezzutti comments:

Last evening I left my girls to spend a few hours at some friends' place. I left them playing with a "Chinese" toy pen with very basic videogames such as bowling or skying in it. When I came back they were still playing with that silly toy. They were hypnotized, although sleepy, but they would not give up. What is the power of these applications — even as simple as this? We can track a parallel with a trading screen and its ability to hypnotize wanna-be traders (and not only them) creating a compulsive attraction and dark force to trade even when it is not the best setup.

I was somewhat nervous about my daughters because they were not stimulated to do something different. It seems that if they are not "educated" and addressed to healthier and outdoor activities kids (and adults too) in most cases prefer spending their time following action on a screen. This is what game companies and stock brokers exploit.

Michele Pezzutti adds:

 That's true. This is something I always think about when I reflect on the way kids are growing. I often wonder if the way the kids play today is healthy. I do not want to sound old-fashioned. I do not come from the 18th century. But are fantasy and creativity stimulated the same way by a computer game as they are by Legos, for example? I think that the problem is not in the technology itself but in the use we make of it as in everything else. Too much is poisonous. And I feel relieved when I see that my kids, when they feel like, can still play as only kids can do. From nothing they are still able to create their world and stories. They have plenty of imagination. Then my worries fade away as I can see in them the same kids we used to be. In the end, every new generation must have asked the same question.

Jim Sogi replies:

J SogiWhen my son was younger, we also worried that he also loved computer games and stayed up all night playing. I reasoned, better playing at home than out on the street. He was also an athlete who surfed, snowboarded, skate boarded. But the training he got playing games serves him well now in his new career in the financial markets. Is what we do 24 hours a day glued to a screen any healthier? I say no. It's really the future of work and communication and social structure.

Speaking with my daughter, we compared our contacts with old high school friends and family. She right pointed out that it is easier for her with IM, Twitter, email, sms, and use cell phones to keep in touch. Don't be old fashioned. It's a new world.

Alan Millhone writes:

 On the news tonight it was reported on a program in El Paso, Texas schools that has a regular exercise program in the schools that shows that regular exercise in youth produces better test scores, etc.

When I was a youth the neighborhood kids played outside till dark and our parents had to call us in for supper. In the Winter we built snow forts that we defended with snow balls against attackers. In the Summer if a new basement for a house was being excavated when the workers left we had dirt clod battles!

I began collecting stamps at age seven when that Christmas my parents gave me a Coronet stamp album and some stamps from H. E. Harris and Co. of Boston. In my early years they gave me sets of Lionel Trains (still have both sets in the original boxes ). We had no computers, cells, Ataris, etc. to fritter away our time and no TV for several years. We played board games, rode our Huffy bikes with a baseball card held in the rear spoke with a wooden clothespin. Modern technology is good to a point for youngsters. Much though that was good and wholesome has been forever lost. Just like the Checker players that at one time could be found on a daily basis in Central Park under the wooden canopied shelters. Tom Wiswell would not believe the changes there.

Jeff Watson comments:

I just got through watching the excellent movie Surfing For Life. Written and produced by David Brown and narrated by Beau Bridges, it chronicles the lives of people who are still surfing in the twilight of their lives. The movie took a sampling of notable surfers from the ages of 60-93, gave brief bios, and showed them surfing well as seniors. Surfing for Life is much more than a surfing documentary, it's a celebration of man's optimism and the results of living a life of optimism. It showed one particular surfer who visits senior facilities on a volunteer basis, and most of his charges are younger than him. It then cut away to him surfing a nice 6' wave. The central theme of this movie is that living a life with an optimistic bias will ensure personal happiness. My favorite scene is the closing where they show Doc Ball, 93 years old, riding a skateboard. Not only was he riding a skateboard, it was obvious that he was clearly enjoying it like a little kid. I've been told by many that I'm just like a little kid, and take that as a compliment whether they meant it as such or not. Little kids enjoy playing games, are optimistic by nature, and receptive to new experiences and knowledge. I'm of the view that trading is a game, an extension of the games we played as children. It can't be mere coincidence that a plurality of traders I know usually excel at one form of game or sport. Whether it's checkers, chess, poker, the racket sports, or surfing, these games played for a lifetime keep one's mind sharp, and mentally nimble. Game playing also keeps our competitive edge well honed, which serves us well in the markets. Surfing for Life is such a positive, uplifting movie that it should be seen by all, as it exudes optimism. It would be an interesting study to analyze the optimism/pessimism ratio for all market players. I have a hunch that the successful players would fall into the optimistic category. Optimism breeds self confidence.

Russ Sears says:

 When I hear tales of the freedom of youth my thoughts often turn me back to my 7th grade year, in Pauls Valley OK, where I delivered the Pauls Valley Daily Democrat door to door on a rusted out Schwinn bike I had spray painted baby blue.

I recently went back and visited the town 33 years later. The drugstore where my brother and I spent our share of the subscription price on comic books, baseball cards and soda fountains chocolate shakes had moved from across the street from the newspaper to the new Wallmart. Parts where still the same, with only a fresh coat of paint, others totally gone.

We had a great time "owning" our part of town. However, I think we were one of the last two kids to deliver papers this way. The only reason they gave me the job, since the Sunday papers weight more than me, was cause they were desperate. Few parents would let their kids do something like this even in small town mid late 70s. And thinking back, there were several times where I think "what were my parents thinking"… As I had a machete to my neck from a high druggie, learned where to drop my collection money off before I went to certain areas, and narrowly escaped a pedophile.

Bottom line is it's not all the kids' fault.

Anton Johnson writes in:

In addition to dirt clod fights, we would play king-of-the-hill on construction excavation mounds, resulting in the occasional emergency room visit. During spring-time we played Monkey-in–the–Middle and 500, honing our baseball skills, all the while dodging vehicles and swatting mosquitoes. On moonless sultry summer nights, we played neighborhood wide team hide-in-seek, some of us subtly maneuvering to get close to the object of our affection. Not even brutal winter weather could keep us inside. Often a dozen would-be Bobby Hulls would play ice hockey, taking brutal hits without pads (some of us even wearing figure skates). We shoveled our own rink on the lake, and hauled seemingly endless buckets of water to fill in ice cracks. Almost nothing could deter us, we played whether +40F or -15F degrees, sometimes coming home soaked after falling through the ice or occasionally with a frostbitten appendage. I wonder whether the electronic generation will reflect on their childhood with a similar nostalgia.



 Summary From Wikipedia: Haemophagic leeches attach to their hosts and remain there until they become full, at which point they fall off to digest. They all have an anterior (oral) sucker, which releases an anesthetic to prevent the host from feeling the leech. Some species of leech will nurture their young, while providing food, transport, and protection. Not all species can bite; 90% of them solely feed off decomposing bodies and open wounds. Leeches normally carry parasites. However, bacteria, viruses, and parasites from previous blood sources can survive within a leech for months, and may be retransmitted to humans. Bloodletting is the withdrawal of often considerable quantities of blood from a patient in the belief that this would cure or prevent a great many illnesses and disease. It was a popular medical practice from antiquity up to the late 19th century.

Leeches are part of the ecosystem. They have interesting characteristics:

There is only one huge difference:



 One evening an old Cherokee told his grandson about a battle that goes on inside all people.

He said, "My son, the battle is between two wolves inside us all.

One is Evil. It is anger, envy, jealousy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, and ego.

The other is Good. It is joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, generosity, compassion and faith."

The grandson thought about it for a minute and then asked his grandfather, "Which wolf wins?"

The old Cherokee simply replied, "The one you feed."

Michele Pezzutti responds:

 This reminds me of The Strange Case of Dr Jekyll and Mr Hyde: I would like to share my experience on how this thinking can make me a better trader.

If I should apply this to my (very, very poor and limited) personal trading experience, I can find Evil everywhere:

 -arrogance, when I trade based on pure instinct and with little/no evidence of trends or data supporting a decision.

- false pride and superiority, for being able 'to beat the market', when I make some profit.

- anger, when I lose too much not being able to put a stop loss.

- lies, when I do not want to admit to yourself that I have acted irrationally.

- regret, when I think 'why did I do that?' And I could go on and on…

Much more difficult is to find examples of the Good wolf. That is, long way to go to become a 'Good' trader.

Paolo Pezzutti writes:

I want to propose a slightly different perspective of the two wolves, the "bad" and the "good" one.

Trading wolves move in packs. They are territorial and wait for their preys to graze standing ready to attack when they are distracted. Wolves can also establish some type of coordination during the hunt. They conceal themselves as they approach the prey, targeting the easiest options available, the weakest animals of the herd. Sick or young animals, even pregnant females. They look for preys they have seen already. They do not take much risk, do not even engage in long chases, and rather wait for their prey to die because of the wounds. Sometimes wolves have to yield to their prey and their killing success rate may be low. But they know that their prey will be there in the same place at the same time the next day. It is only a matter of time, sooner or later the wolves will get it. These traders are deadly, but the current downturn might have killed many of them. They have taken too much risk, too much confidence in their strength. These wolves have become preys themselves in this phase of the market. Those who will survive, however, may become even stronger and be able to adapt their techniques to the new environment.

Single trading wolves can also be found, but less frequently. Lone traders can be old specimens expelled from the pack or young animals in search of new territory. Solitary wolves target smaller animals and many deaths are due to other wolves' attacks. Being alone in the wild can be very dangerous. These traders have to find niches, small inefficiencies left over and disregarded by the wolves packs. They have to be adaptive. They have to learn how to survive. I feel one of the lone wolves. Hopefully I will survive and learn how to be a "good" wolf.

Who knows if any of the wolves will survive this market? After all, species can also disappear.



 On February 10th, Treasury Secretary Timothy Geithner presented the details of the Administration's bank rescue plan. The new program includes government spending and private-sector involvement. It provides for buying toxic assets from banks and supporting consumer and small business lending. The aim is to get private investors to buy up the toxic mortgage related assets. Everything looks fine except that the markets plunged almost 5% after the speech in heavy selling. Bank shares lost more than 10%. We know that markets over-react, that the crowd sometimes is not able to make rational decisions, but what we saw today was a real fiasco after the world wide expectations of the first Administration's steps. Hopefully they will be more successful in the next weeks, but today's market reaction was nasty. The plan was deemed by analysts to have lack of transparency and lack of detail. How the plan is going to be implemented was not said and may be investors fear the nationalization of the banks that would wipe out shareholders (shouldn't have it happened already?).

As an agent of change, the new Administration has not offered a striking debut. This is for sure. I think it's important to understand why the strategy was so poor. Was there a lack of details on purpose? If yes, there had to be a good reason and this might be reassuring somehow. One could say they have a good plan and clear ideas, but they have decided not to describe them in detail now. Might this be related to the approval process of the stimulus package? In this case, it was a great buying opportunity. But if the lack of details was there because there are no details yet, well, I think the markets have a good reason to be scared. Everybody now is thinking of what the President said: "The time for talk is over, the time for action is now." And critics are already saying that he won the campaign and now it's time to lead. In this context, the speech given by Geithner today is a false note in the concert of statements received in the past weeks. I do have trust that the Administration will manage to restore trust and confidence, and revive the conomy. The world is looking at the US with great hope (too much?). Hopefully today it was only an episode of failed communication strategy and not the lack of the financial stability strategy.

Victor Niederhoffer comments:

One must always remember the beaten favorite routine with the next time out winning at much more favorable odds by indirection. "Boy, dont work him so hard at 4 to 5 unless he's a clear winner," and also, the bond and stock vigilantes who like to force the forces to do the right thing through going down when they might waver.



 During my chess career I learned a lot about the dark side of psychology. One thing that I didn't put into 'Chess for Scoundrels' was how to talk a tournament leader into self destruction.

It goes like this. Let's say that a particular player is leading a tournament and is really 'in the zone'. The way to ruin him is to congratulate him on his magnificent play and then innocently ask what exactly is he doing right? This works in 2 ways, the first part (the flattery) being to cultivate vanity (more preening, less vigilance) and the second (requesting the explanation) fosters the kind of self-consciousness which takes them well and truly out of the zone.

Now I don't use this myself, but I've seen it done many times by, let's say, 'well meaning' fans. They flatter and beg advice, thus unknowingly sowing the seeds of self-destruction in their hero. And of course they promptly move onto a new hero when that one happens to fall.

This is why it's better to only flatter your enemies. And run like the wind when you're the lucky recipient.

Pitt T. Maner III adds:

Gamesmenship is practiced in many sports. And Stephen Potter was one of the masters in a good-hearted way:

All this failure is important, for it never would have occurred to a successful man to devise the four strange books that were the making of Potter's reputation as a comic artist. The idea for these books first arose while Potter was playing tennis with the philosopher C.E.M. Joad as his partner, against two younger and better players. After hitting a ball that was obviously well out of court, Joad called, "Kindly say clearly, please, whether the ball was in or out." By suggesting a slight lapse in etiquette on the part of the younger players, good sportsmen both, it threw them off stride, a stride they never regained, and Potter and Joad went on to win the match. "For me," writes Potter, "it was the birth of gamesmanship." "Gamesmanship" is devoted to "the art of winning games without actually cheating." Actually is the key word here. In tennis, golf, chess, poker, cricket, bridge, hunting and other games, Potter suggests delicate ways of breaking the flow of concentration in your opponent so that he stumbles and falls off his game. A gamesman does what he can to make sure that the best man does not win.


George Parkanyi comments:

This would suggest a corollary that insults and criticism would only just strengthen the already confident, i.e. the rise to the challenge gets the creative/competitive juices flowing.

It reminds of a recent football game — I think it was the Super Bowl. For some unknown reason, this huge Pittsburgh player went after this much smaller Cardinal player tossing him around like a rag after the whistle had blown. I remember commenting at the time — "What did he say to that guy?" It certainly was something.

Paolo Pezzutti writes in:

It happened to me after a long streak of winning games during a tennis match. For some reason I was in the game, focused and ready to exploit any weakness of my opponent. But when I would start to rationalize what was happening and why it was happening and building scenarios for the final victory I was finished, and eventually I would lose at least the set. Maybe it's because you take bigger risks: you think you can do even better and change something in your tactics. This makes you out of sync with your physical and mental condition which builds an advantage to your adversary. Similarly in the markets, after a long winning streak, when I try to analyze the what and whys, I end up changing the way I have been trading up to that moment and things get worse.

Nigel Davies adds:

Empty sycophants can be bad news for any teacher, especially teachers who are active participants in their activity and need to maintain great focus and self discipline. I've found in my own mentoring work that the best students can be very difficult, but they can actually help you raise your own game.



 The financial crisis has a number of causes including weaknesses and gaps in regulation and supervision. However, the idea of a growing government as a solution to problems created by greedy capitalists and bankers around the world looks too simplistic and has a bit of populism in it. There may be results in the short term, but in the longer term the issues will likely be more than the benefits with an expensive bill for the next generation of taxpayers and citizens. I am not referring specifically to the US, but also to Europe to some extent.

Real change would be first to understand weaknesses and challenges of our industrial, financial and social systems. The world is changing. There are new players in the game. And the relative importance and power of countries is changing with time, and accelerating. We should recognize this fact. This has consequences on our present and future ability to be innovative and competitive, on the possibility to maintain the same lifestyle in the future, the same welfare. This crisis has shown that the US is still vital and fundamental for the good of the world's economy, but it has also dramatically shown the increasing difficulties of the US in maintaining this leadership, which is not only economic, but also intellectual and political. After this crisis we cannot go back to business as usual and our countries will end up with more debt on their shoulders. We cannot solve the crisis just pumping government money in a model that is not working without doing anything to change it. We will only have crisis after crisis if we do not eliminate the roots of the problem. And the problem is that new players in the global economy produce goods cheaper than we do, that they are learning fast how to make high tech products and services, that they sell more than they buy. This is causing a fundamental imbalance in the global system that market forces should solve within a proper framework and set of rules provided by governments. Also we should probably all realize that may be we are living a standard that we cannot afford any more.

From a WSJ article:

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today: Galt: "You want me to be Economic Dictator?" Mr. Thompson: "Yes!" "And you'll obey any order I give?" "Implicitly!" "Then start by abolishing all income taxes." "Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?" "Fire your government employees." "Oh, no!" Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

Riz Din writes:

Not so long ago, I heard a pundit commenting on recent economic policy responses saying something along the lines of when the fires are raging, the first priority is to put them out, and to deal with the longer term implications later. Personally, I think it is better to sometimes let things burn and let nature take its course.

I agree that we are living a standard we cannot afford any more, but only in the sense that we may have 'brought forward' living standards by a few years and that we may have to contend with tougher times before the wheels of progress start spinning again. Indeed, while a part of me worries that all this policy meddling risks damaging the natural checks and balances of a free system, I am reminded of the old adage 'necessity is the mother of invention', and look forward to new discoveries being born from a period of relative hardship.

Duncan Coker adds:

Looking to history, in the 1930s all the programs rolled out by FDR did little to solve the Depression. There was even a mini Roosevelt depression within a Depression in 1937-38, four years after all the government action. What did get people back to work was arming for potential conflict, which added three million jobs in 1939-40 and continued through the horrible conflict to follow. All the FDR structural reforms played a bigger role a decade later, after the war, when security and arguably a more transparent system allowed for exponential growth for middle class incomes, housing and standards of living. I believe it will be the small businessman and entrepreneur that paves the way this time, really the only ones that can "create" jobs.



 The biggest love delusion is illusion. When you feel the irresistible attraction of the first dates, you think she has something special, unique that you cannot miss even for a minute. But with time inevitably daydreams vanish. And you discover a different person. That you don't understand. That you don't know. That you don't like anymore. You remain with the bitter feeling of failure. Once again.

It is similar when you apply a market model that works for some time. All parameters perfectly synchronized with the price action, you are mesmerized by such perfection and beauty. Price swings follow the rhythm that you have perceived and coded. Invariably cycles change and the same parameters and logic applied appear so inadequate and awkward you feel almost ashamed to have considered them in the first place. You remain with the bitter feeling of failure. But for some time, the illusion to have found your meal for a life time remains. The illusion to have found the woman of your life.

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