Dec

24

 We've had some talk (some might argue too much talk) about bitcoin this year on the site. I've come across a sentinel—about as good as one can get, I think—that the currency's demise is close at hand. "Bill Gross: The Bitcoin Age". This is one of those "End of Equities?" tells. The next few months should provide some insights into its accuracy.

Dylan Distasio writes: 

The Upside Down Man always has his own book to talk, so I take his comments with that always in mind.

Gross: Part 1of 2: We live not in a new gilded age but a bitcoin age where artificial money (from central banks) creates temporary prosperity

Unless I missed another tweet that speaks more directly to bitcoin, I interpret his comment as referencing the fact that central banks magically create money out of thin air. I'm not sure how this ties into the end of bitcoin just because he is aware of it, and using it as an analogy to central bank printing.

Bitcoin has a lot of issues, including the fact, as Stefan points out, that it's not legal tender. It also has a lot of digital competitors waiting in the wings. Maybe one of those like LiteCoin or dare I say DogeCoin ultimately wins out, or maybe they all fail and expire worthlessly. It's an interesting experiment either way.

Jeff Sasmor writes: 

The NYT reported about Overstock.com accepting Bitcoin.

Stefan Jovanovich writes: 

 Details, details. Here is the link on Overstock's web site for the search results for "Bitcoin".

A guide to using Bitcoin.

What is amusing is that the price for the book is itself in dollars.

When the printing press was developed by Gutenberg, its first popular use was for the printing of indulgences. The Papal State needed the money for its military budget and the minor detail of paying for the beginning work on the new St. Peter's Basilica. Luther gets all the press for the Reformation; what is not mentioned are the effects of the invention of printing by typesetting having reduced the cost of producing an indulgence 1000-fold. For an indulgence to be real - something that you could literally take with you when you died - there had to be a document. The printing press was able to do in a morning what usually took a scribe a month. The boom in the buying and selling of indulgences that followed was spectacular. What came next was the bust; entrepreneurs (mostly minor nobles who were themselves members of the clergy or had relatives who were) started producing indulgences that had not been approved by Tetzel. When buyers questioned those documents, they were told that these indulgences were the "real" ones, not the ones produced by that fraud Tetzel. A great deal of the violence of the earlier rounds of the religious wars came from the mobs of the people who felt they had been defrauded or feared they would be.

Aug

19

 There have been 5 occasions when stocks fell by more than 200 Dow points in a day and bonds the same time fell by more than 1/2 a big point 3 of them occurred in last two months including last Thursday. This has many market implications including the changing the guard of the relation between bonds and stocks, and the importance of liquidity preference.

Rocky Humbert writes: 

Agree 100% with Vic's astute observation and hypothesis. Mr. Market is seemingly at the point in the economic cycle when good news is bad news for financial assets. What's difficult to believe is that in the current cycle, this inflection point is occurring with lackluster GDP growth (i.e. substantial output gap in domestic and global economies) and high unemployment. These facts help explain why the 2 year Treasury is not backing up.

One surmises therefore that Mr. Market is trying to find an equilibrium yield in the long end of the curve with no prospect of further aggressive manipulative Fed interventions. Since the current easing cycle began (and before the Fed started buying long-dated securities), the extreme of the 2/10 spread has been +288 bp. We are currently at +248 — which gives a price anchored sense of magnitudes to where we may be headed. If the curve steepens another 40bp, that will coincidentally also put the 10 year TIP at about +100 real yield — all of which is sensible, consistent and not a panic overshoot. This will also put the 10 Year Treasury at about 3.2%ish.

I'm not making any predictions about the effects of this on stock prices. Except that I would expect stocks to get into some potentially serious problems should the 2/10 spread quickly widen past 300bp as that will represent a new regime (as Vic says, "changing of the guard"). There are too many other variables to be more precise. Including the relationship between nominal yields, yield ratios, etc. I will note that bank CD rates have not been increasing with market interest rates. This can be interpreted numerous ways but it's an important fact for investors.

Gary Rogan writes:

Perhaps this is as simple as the market is taking seriously Ben's statements that he will keep the short end of the rates low, but is determined to use any good news, fake or real to taper/stop the QE. There is just going to be less money for any kind of financial assets so that any rates not controlled directly by the traditional Fed manipulations so that their prices all have to go down, stock, bonds, and everything. The market must believe that the Fed sees real danger in continuing QE and it thus must come to an end almost for sure. This has puzzled me for a while since I can't see how any kind of housing recovery can be sustained with higher mortgage rates nor how the US treasury can afford the higher rates, because I expect the deficits to start increasing again. But Ben's term is coming to an end and he probably wants to leave on a certain not that only he can judge to be the most optimal for his post-Fed future. In a couple of years it could be deluge as far as Ben is concerned but not in a couple of months. Perhaps he just doesn't want the QE in place when he leaves.

Anatoly Veltman writes: 

This is an unusual Ponzi, in the most important respect: that there is no official to call it. Alas, where market is bound to err, the market will focus on public sector Ponzi alone. The more important is the derivatives Ponzi, and that's what is liable to cause 90% market contraction off of whatever pinnacle.

Happened twice already in new millenium: with .com stocks, and then with bank stocks. Yet, most participants' philosophy is that it can't happen. Or has no right to happen? What right is there to take a billion-dollar underlying, re-hypothicate it without an end in sight, and pass it for a trillion-dollar book? Mr. Market is bipolar; trying to fit it onto historical precedent will work, for most of the trading days — but not for the most important trading days.

Jeff Sasmor writes: 

It's also possible that this is a trial balloon and that there will be feedback from the market reaction into what the fed does.

If interest rates rise and choke off the housing market wouldn't they act to reverse that?

"Plans within plans," as the Guild Navigator said.

Rocky Humbert writes: 

Anatoly is of course correct that markets go further and trends persist longer than reasonably sane people expect. The most recent examples of this are the Platinum/Gold spread; the WTI/Brent oil spread; and the 2008/2009 period. But his conclusions about "most important trading DAYS" are not only disproved by the duration of these episodes, they are also suspect in the context of investment and wealth accumulation — as the power of compounding requires time.

There remains no evidence that ANYONE can consistency anticipate or profit from the "most important" trading days. Those "important" days pale in the fullness of time as we see over and over and over again. Furthermore, he can (as I do) lament the Fed's mechinations. But they in no way resemble a Ponzi scheme. A Ponzi scheme requires new money to pay off old money, and can persist in perpetuity so long as there is sufficient new money to pay off old money. So long as the Fed has a printing press and the ability/willingness to expand its balance sheet AND THE US DOLLAR IS STABLE, the status quo can and will persist. Social Security (as a standalone entity) is a better example of a societal Ponzi scheme.

Further to the "status quo," among the things that I find most remarkable about the past few years is the relative stability of the major currency markets. Sure there have been some violent moves. But the Dollar, Yen and Euro are all within a couple of percent of where they were exactly 20 years ago! . Even the Chinese Yuan was trading at about the same price twenty years ago. (They devalued it to about 8 in 1994, and then gradually moved it back towards 6ish.) Lastly, does anyone remember Bill Ackman's breathless announcement from a couple of years ago that he had a massive call position on the Hong Kong dollar … and that they were going to be forced to imminently re-value their currency. With his problems in JCPenny, Herbal Life etc, he should consider unplugging his Bloomberg and read "All Quiet on the Western (sic) Front."

Gary Rogan adds:

I expect that they can't live with the effect of the rising 10 yr and mortgage rates even as they stand today. My initial supposition when Ben first started the tapering talk was that he wanted to puncture the stock bubble, but can't afford to puncture the bond bubble. He seems to have punctured both. The genie is out of the bottle and with all the loose talk emanating from the various Fed associates it will now take a pretty dramatic action to reverse what looks like a looming crash for most asset classes.

Dec

30

 Driving a motor car or motor bike is probably the best analogy I can think of for trading.

Start, Stop, traffic lights, dogs and cats on the road, cows, give way signs, t intersections, signs saying "kangaroos for next 50 kilometres ahead–and that is just in the first few 100 metres of leaving home– and then when you hit the express way, and consider yourself in the clear, there may be road works, or fog, and unsighted hazards ahead.

It's very rare you can enter an express way…of start to finish, or finish a journey uninterrupted.

It is our jobs as traders to close down all risks as they appear, in whatever form, to cause minimal bumps and bruises to ourselves. Problematic situations will appear when you expect OR when you least expect them, and when you do get uninterrupted runs, you appreciate them, since it is what you have planned for, but see less often than one may hope for.

Be flexible, bend like the tree, always give way when on the road, and when you hear the sirens move top the left and beware of trouble ahead.

Peter Tep writes: 

"Be like water" - Bruce Lee

Nice post Craig. I liken trading to Bruce's Jeet June Do methodology– using all the skills we have to move forward and strike the opponent down.

What worked yesterday may not work tomorrow. Especially with the presence of HFT, SMSF, central bank presence.

Chris Tucker adds: 

If one were to "always give way when on the road" in NYC, one would never get anywhere. Cabbies will eat you alive if you let them, they will try to force their way in front of you and then look at you as if you are a criminal when you fail to yield.

Yes, always giving way is a much less stressful way to navigate, but there is no victory in it!

Jeff Sasmor writes: 

Depends on how aggressive you want to be and what sort of car you are driving. If you are driving a beat up car and honk and go, they give way. I speak from personal experience on both sides of that transaction.

Jim Lackey adds:

Look where you want to go. Do not look where you don't want to end up. In a slide, if you look at the wall, you'll run right into it. If you look ahead down the race track it's amazing, you'll auto steer and correct your way out of the spin. In a crash, hold on, and do your best not to get hurt and head for the pits for repairs.

Last night during the 200 MI trip from the hill outside of Birmingham, AL, the transmission cooler lines on my BMX van broke. It must have been a sight as trans fluid was all over the engine trans and back of van in a cloud of smoke. Good thing we didn't have a fire. You know what I did? I eased it back to the pits. I exited, dumped some fluid into the trans and made it home. This AM all fixed.

I froze my tail off shooting weapons for 12 hours in the Bama country with my Sisters family. They have more weapons than anyone I know. My son did the walk balk with the AK-47 and I burst out laughing as another teenager was taking some hot brass as they ejected from the chamber. I told the kid to move. Good fun safe day. I can still hit a 300 meter tager with a .22 rifle 2nd shot after 20 years of no practice. Okay, it wasn't 300, but simulated as a 4" target X meters away…bing…

My nephew made the comment, all these weapons are so easy to use it's ridiculous. Yeah, that is how and why there are 10 year olds in the militia in Africa. The only reason I shot at all was the current news flow. I really have no interest in firearms. After shooting the 150MM main gun and killing tanks at 4,000 meters on the move, with F-15's as cover and the Apache on my 6 and MLRS destroying 1k by 1k boxes at a time… real war is reprehensible. All the arm chair warriors really need to tone it down a bit. The only comment I agree in the past 4 weeks of talk was Professor Stefan with his Bellini. If you want to put on the show of defense, that is the smartest idea I have ever read. Those shot guns are world class and perhaps I'd buy it from him. I own no weapons.

I am still thawing out after 13 hours outdoors then the 3 hour drive home then the work this am. My water heaters theromcouple died.. Lowes and HD are useless! Ugh, Ace hardware has all the parts they are amazing, but after inspection my buy American just bit me… Standard brands, made here in TN, has a special thermocouple. I asked the local heater man if he'd be kind enough to drop one off in my mailbox. He said sure, but the clerks said they have to charge me 69 bucks for the Sunday trip. I can wait a day. The part is 14.99. I can do it myself. It's already apart.

I am a man. The ladies must have hot water now. Ill sacrifice my McDonalds budget for Jan and have my man stop by. Perhaps he will find another problem as well.

Back to Carz racing and trading… it's not the one big edge that makes a champion…it's the 10,000 little things all done perfect that adds up to a big edge. The biggest edge of all is the drift over 100 years. After two crashes and a dozen panics the past 12 years, I find it hard to believe that buying every panic with prudence over the next decade will not produce a fine profit. 

Aug

6

 Digital music uses different algorithms that reduces the spectrum of pure sound to a small sampling. As a result the sound is always "hollow" and lacks the fidelity of live or even analog vinyl. Turning up the volume or boosting the bass doesn't cure the problem. I remember when we would spin the vinyl in the old days, everyone would get up and dance. There was more feeling. Some of the algos boost the prominent parts of the track and hide the back tracks. Things are lost.

In a similar way, IB uses some sort of algo to reduce the bandwidth of the order flow in order to keep prices current for execution. Investigation to determine if it is a proportionate reduction of the bid/ask order flow, showed it is not. Use of the IB data flow will screw up order flow calculations. Russ wrote about this some years ago. A lot is lost, but even in fast markets IB's price seem to keep pace pretty well. Its hard to tell when your broker quotes lag behind your data feed what is going and results in fills outside the apparent inside market.

Jeff Sasmor writes: 

A lot of what you hear has less to do with the digital process that's used to compress the audio but with preprocessing to make things sound better on ipods and such. Hard to believe? In the past I worked at a major NYC recording studio and we used to have tiny speakers so people could see what a recording would sound like on a junky transistor radio or an AM radio.

It's the compression and other processing that makes most of what you're complaining about. It's also dynamic range. On a standard CD you have 16-bit audio which isn't mpeg encoded or anything like that. But 16 bits is only 96 dB dynamic range which isn't enough for you to hear quiet sounds adequately without having loud sounds be distorted. So sound was routinely "compressed"; not in the sense of mpeg and aac (which are perceptual encoders) but rather dynamic range compressed to make quiet sounds louder and loud ones quieter. That's most of what people found objectionable when CDs were first introduced (and even now since the tech is more or less the same).

Perceptual encoders are not worth explaining in detail, but they throw out sounds you probably wouldn't hear as part of the process. It's actually sort of obnoxious…

Modern uncompressed audio at 24-bits, if encoded that way originally and not messed up by mpeg or aac or other processing is much better than vinyl with no clicks and pops.

But with all the emphasis on downloads and the fact that most people are listening on systems that can't reproduce much, and the other fact that most people don't care, 24-bit just isn't viable as a product.

May

30

 One has to wonder why this whole "college is a waste of time" meme has suddenly become so prevalent. Is it because so many people have trouble with college loans? Too many writers who have nothing more to say about O's birth certificate?

Thinking one can predict the future based on what one does in the present is a persistent human foible. For sure a lot of kids go to college who don't need to. But is this truly something new? Would anyone sensible make a decision based on what they read about this subject? Unfortunately some probably will.

It remains to be seen how employers of the future will react to resumes that state "I am really smart but I didn't go to college because I read online that it was BS; but I really am smart."

One of my kids is 1/2 way through college and the other is just entering this fall– and I don't spend any time at all thinking it's a waste of time or money; it's been a path to prosperity in my family where none of the previous generation had any education past high-school (if indeed they finished that at all).

On the other hand my wife and I went to CUNY at a time where the cost was $35/semester. That's not a typo.

But I still wonder what's behind the impetus to discredit higher education?

Ken Drees writes:

I get the vibe that the intent is more of a cost justification issue. You don't send a kid to college who gets middle of the road grades and majors in marketing anymore. The job market out of college is poor and will continue to be poor. College now will set you back serious money as a percentage of household income and there will be serious debt burdens on the student and parents upon graduation. You can't put the college payments on the credit card or the home equity loan anymore.

I believe that a college bound child needs serious career planning up front, which is tough to do since kids sometimes do not know what they want to do prior to going off to the higher education arena. Like the union bubble which is feeling the backlash from the debt riddled state pockets empty reality, colleges need to step back, cut back, stop the pay raises–else enrollment is going to crater and the pie shrinks.

Victor Niederhoffer comments:

 A college education will always serve as a signaling device to employers and partners and parents that one is capable of being admitted under highly competitive circumstances and then has the fortitude to stick with the program, and finish the requirements, and the moral fiber not to have been kicked out. The signaling will always be of value and the rate of return from college should stay relatively constant.

Russ Sears comments:

Very similar qualifications could be said about homeownerships, commitment to paying a mortgage and good citizenship of being a good neighbor. When a persons limit to leverage has no bearing to what they could reasonably expect… many with nothing to loss will gamble with somebody else's money. This of course creates a bubble in some areas where there will be large oversupply of X degrees. For instance everybody will think in 2022, "what were they thinking taking forensic science and $100 grand of loans?"

The problem is when you use the argument that is it "should" be worth it to argue that everybody has a "right" to upgrade there lives. Further when you grant this "right" to any 18 year old capable of getting a high school degree you are bound to get many that should not have been given this privilege without working a few years and tasting responsibility. I still believe orginially there was a segment of responsible people that were granted sub-prime loans. These people however, proved to be the exception to the rule when everybody was given this right.The difference may be that those youth that are the sharpest will see the "bubble" within these areas and avoid them.

Could we be looking at the class of 2011? on a resume and subconsciously think what a deadbeat?

James Goldcamp writes: 

 I agree with chair's analysis of the signaling value of education, but one also wonders at what cost. I would find it hard to believe the return on invested capital has not gone down with both greater real costs and general degree (volume) inflation over time. It occurs to me that a rigorous self study program with standardized tests against which one could be compared might provide some lesser but nonetheless valuable signaling vehicle at 1/20th the cost of the current college education. Interestingly, one hire we had years ago was more known for his perfect SAT than his multiple Ivy degrees.

Thomas Miller writes:

This anti college education and anti home ownership "debate", seem to reflect a negative attitude that is growing in this country. The theme seems to be "dont even bother to go to college or strive to own your own home. it's not "worth it." just give up and settle for less." Of course college education or home ownership is not for everyone, but those that propagate these defeatist platitudes, (especially the ones that do it on internet blogs read by a large audience), are doing a great disservice to young people. "just settle for less" is not the attitude that made this country great. A generation ago, many that chose not to pursue college could get a decent job with benefits and be fairly sure of being able to retire from that job. There are very few of those jobs available now. The gap between those with a college degree and those without will continue to widen.

Russ Sears comments:

 I believe those that are "anti" college are saying take more risks start a business instead.

And for those that it will not turn out for the better, it's not good government to guarantee the loan. More responsible decisions will be made if they have to compete for access to loans like anyone else.

Ralph Vince replies:

I cannot speak for others, but I am not advocating a "give up," or defeatist attitude here. I speak with those who have children of college age frequently, as well those who ARE of college age frequently too. One of these day, I'm going to stop speaking to people who don;t take my advice (most people are incapable of taking advice, we simply have to learn things the hard way, and usually more than once)

I hear an awful lot of talk from all of these people that a college education is necessary to enter the American job market, as though it were a ticket to the dance, a means to an end as it were.

(I should point out in full disclosure I do not have a college education. I am self taught. When I decided I should learn math, I started with algebra, geometry, trig, analytic geometry, calculus, topology…..eventually stochastic differential equations, which is used (with near exclusivity) to model prices with (a nice target for a math track for someone interested in the markets, but I find these methods model prices with a degree of reality akin to Oz modeling Kansas). When I wanted to learn literature, I started with Homer, then Virgil….through to the 1950s. Of course one cannot study everything and anything, you have to make selective, intelligent decisions (which is where talking with others comes in) and someone must WANT to dispal their ignorance (and this is the key attribute, the acknowledgement of our ignorance and a desire to overcome that — whether formally educated or not).

The last time anyone ever asked me about my educational background was probably when Reagan was running against Carter.

So when I look at what people are learning, and WHY they are learning it, I DO come away in MOST cases with a "Why bother with that?" attitude.

So once we acknowledge that there are two reasons for edication:
1. To dispel our ignorance, and ultimately, to study material we are passionate about, should have such good fortune, and
2. To make ourselves, personally, a marketable product (i.e. posses a marketable "trade," be it electrician, brain surgeon, or truck driving certificate)

people can make better decisions. Unless they are fortunate enough to be a trust fund kid, they need #2. A mere college degree does NOT provide that — this is a wives tale that floats about America wherein a lot of money is being wasted in its pursuit.

#1 is a luxury — one must have the good fortune of finding what fires their jets at a young age, aside from pornography, and find a way to pursue it. If they have the resources and time, college is the way to go. If not, anyone with a spark and a modicum of resourcefulness will find a way to pursue it.

I've spoken of this before. The number of persons from the 2000 census to the 2010 census is up 20%, the number of households, nowhere near that amount. Clearly, in the not-so-distant future, either much housing must be created or much work must be done to convert the "cul-de-sac development" McMansions into 2 and three household homes. What young person is a yeoman plumber out there, or plasterer? Not many, certainly not many over the past 10 years — but it is the fastest track to acquiring #2, above, for most.

And most need #2. Not everyone needs #1, and if they have that luxury, nothing will stop them from pursuing it. But the notion of borrowing a lot of money for a ticket to a dance based on some parent's misguided model of reality (Oz!) is something the educational institutions feed on, benefit by and play to.

Jim Lackey writes:

 College is the time to meet your mate, your equal. For the fortunate men, it's  the better half you spend life with.

In your college years, there is only so far you will go…. Either to fake it, to fit in/get ahead or rebel against, to get off easy and/or explore the adventures of danger. The gist is how you act when no one you know is looking. Sin may resurface later in life. For certain people, the hypocrisy of life will rear its ugly head. If a married couple knew each other during these years of growth and uncertainty it's near impossible to argue later the lack of full disclosure prior to marriage.

A grievance can always be resolved. A slight, an imaginary hurt, the lack of full disclosure–the "I thought I knew that person". That person will hate you til the day they die.

My guess that is how/why bitter divorces ruin families… vs the much higher than average success rate of current marriages from my anecdotal evidence of family, friends and cohorts that married some one they knew from school.

Jeff Sasmor writes:

Good article on "What's a Degree Worth" :

What Are You Going to Do With That?

For the first time, researchers analyze earnings based on 171 college majors

By Beckie Supiano

Tuition is rising, the job market is weak, and everyone seems to be debating the value of a college degree. But Anthony P. Carnevale thinks these arguments are missing an important point. Mr. Carnevale, director of the Georgetown University Center on Education and the Workforce, has argued that talking about the bachelor's degree in general doesn't make a whole lot of sense, because its financial payoff is heavily affected by what that degree is in and which college it is from.

Now, new data from the U.S. Census Bureau sheds light on one big piece of Mr. Carnevale's assertion: the importance of the undergraduate major. In 2009, the American Community Survey, the tool the bureau uses to collect annual estimates of population characteristics, included a new question asking respondents with a bachelor's degree to give their undergraduate major.

After combing through the data, Mr. Carnevale says, it's clear: "It does matter what you major in."

Laurence Glazier writes:

After the signalling provided by college qualifications, the deliberate undertaking of full-time employment may signal the willingness to allow creative fruit to wither on the vine. A shibboleth of perspective. So many wait for retirement (which may not come) to allow vent to such aspirations, but the law of the farm dictates regular irrigiation throughout a lifetime.

To this end there would be much benefit to all if full-time work became less the norm. The end of government subsidy of unsound housing loans would reduce the pressure on people to suppress their finest qualities.

The Harry Potter books emerged not in spite of the writer's modest circumstances, but aided by them.

David Hillman writes:

Very astute observations.

A laborer can be trained to dig a ditch to a certain depth. A monkey can be trained to dance to the organ grinder's tune. Even a plant can be 'trained' to grow in the desired fashion. But few of the former are, nor neither of the latter can be, trained to *think* and creatively problem solve.

One might speculate that emphasizing skills, specialization and technology in educational curricula and employment qualifications may be the culprits.

While a college education being increasingly available only to the affluent because of financial considerations is, indeed, an issue, perhaps another of our chief concerns should be that we are creating a nation of people who are trained, rather than educated.

Kim Zussman writes:

The "education ruins thinking" argument has value, but simply looking at dollars a college degree pays more than just HS diploma. BLS stats below shows increasing income with formal education: about $400/week more for college grads - which of course does not include harder to value assets like volume of learning, tutored critical thinking, facility of life-long learning, status, access to better mates, good memories, signalling, etc.

One would need about 10 years of the additional (median) college grad salary to pay for 4-year private degree (ignoring taxes). Would the degree be worth it if it took 20 years to pay off?

Unemployment rate     Education attained        Median weekly earnings
in 2010 (Percent)                     in 2010 (Dollars)

1.9%            Doctoral degree            $1,550
2.4            Professional degree         1,610
4.0            Master's degree             1,272
5.4            Bachelor's degree         1,038
7.0            Associate degree           767
9.2            Some college, no degree           712
10.3            High-school graduate           626
14.9            Less than a high school diploma       444

8.2                     All Workers                        782

Note: Data are 2010 annual averages for persons age 25 and over.

Earnings are for full-time wage and salary workers.

Source: Bureau of Labor Statistics, Current Population Survey

Rudolf Hauser writes:

The question of a rate of return on a college education is not that easy to measure. For one, it will vary greatly on the college attended both by cost and quality of education. It would also vary greatly by the course of study and how much a person actually learned as opposed to just getting by and having fun. Even taking account of these variables, it is not an easy question to answer. The math is a simple discounted present value calculation, but the inputs are something else. For one, the attributes of those attending college and those not attending will differ. Those with an interest in learning and working hard, more personal discipline and more ambitious are more likely to be attending college than those who are not. Those people are more likely to earn more than the group that does not go to college even if they had not gone to college. So while the value of the education is the difference in what they earn in the future compared to what they could have earned had they not gone to college, one cannot just assume the latter is what those without a college education currently earn. In addition what is actually earned will not be a single average or medium figure but will have a wide distribution around it based on good or bad fortune, who you know, and countless factors beyond one's control. Costs while being educated in addition to direct costs of tuition ,books include difference in living costs relative to what they would be had one not gone to college and opportunity costs of lost potential earnings from working rather than going to school. Then there is the question of how much of the difference is due to signaling as opposed to the value of what was learned and contacts made during school. That is real but could change if the marketplace found alternatives to such signaling. If lower education had more strict criteria for graduation and grades the signaling value of a college education might lessen as employers had more confidence in that and prior work experience. The cost of loans may also vary, so that how the education is financed will matter a great deal.

In addition to monetary economic measurement, there are other benefits that might be gained. Meeting a spouse has been mentioned by list members as one such benefit. Learning about many areas and learning how to learn, may enrich one's life as a person, contributing to the value one has to society and family and to one's personal richness of life and happiness. But if prospects do not turn out as one hoped, it can also lead to unhappiness. The question then is how much one wishes to pay for these other potential benefits or negatives (i.e., the probability of disappointment). Some areas of study such as general liberal arts, might be expected to have a higher risk of low or negative economic returns than more specialized fields, but specialization runs risks if those skills become of less use to society.

 
On a personal level, I do not believe it make sense to send a kid to college unless they are actually going to work hard to learn. If not, it might be best for them to work for a time and see how difficult life can be without a college education. Often they may then go to college and actually make the most of it rather than going at a younger age and goofing off.

I might also add that education need not be in the classroom. The time spent learning on one's own is also education. One need not attend college to learn. It might not have much signaling value but it certainly helps in many areas. The cost is the value of the time spent either in terms of the value of one's leisure or economic opportunity cost.
The ability to learn might be enhanced by a formal education. One of the things I would advise a person attending college to learn is how different disciplines think. The way a lawyer thinks about problems, the way a scientist does, the way a creative writer thinks , the way an economist thinks differ and are specialized in some ways that takes a time to learn. The first course in microeconomics is difficult for many students, for example. The more ways of thinking one understands, the broader ones ways of understanding the world, understanding other people and in solving problems. Some of the great innovations come from taking of advantages in knowing something about other areas of learning that provide insights into the problems in your area of interest.

David Hillman writes:

Ok, then, I meant the focus to be on the point of training versus education. If it requires more updated or timeless references than those to the 20th Century, so be it, and I beg pardon.

(1) Backhoe operators are *trained* to operate them, but there are many instances of heavy equipment being stuck because the operator failed to *think* about the application.

(2) Musicians can be *trained* to play an instrument, but without a proper foundation, i.e., *education* in music theory, history, etc., while the music may be technically correct, it is often dry and mechanical, uninspired and with an 'off-the-shelf' feel.

(3) An air traffic controller can be *trained* to direct aircraft, but when an emergency arises, he/she must *think* of how to resolve it, not unlike,

(4) A 9-1-1 operator being *trained* to follow protocol, but when that protocol does not apply, hopefully, that individual may be capable of *thinking* of a way to prevent loss of life.

And, what of entrepreneurs like you and me? How can one be *trained* to brainstorm an idea out of thin air, then take it from the drawing board to reality? But, one can certainly be educated broadly enough to think creatively, make connections, take calculated risks and solve problems. Even in strategic planning, one can follow a plan, but the successful execution of it requires feedback from the real world and adjustment, which requires the ability to think, not just the ability to follow an SOP manual.

Clearly, a liberal arts education is not for everyone and the rise of tech schools and alternative forms of education and training should be applauded. For those who require training, the more well-trained they are, the better off will be all of us who depend upon their services. But, one should not necessarily depend upon them to do anything other than the job for which they've been trained, nor to be able to *think* creatively when faced with a situation or event for which they have not been trained. Trained mechanics may depend upon a diagnostic computer and trained line cooks upon a recipe, whereas a great mechanic might 'feel' a rough idle and a great chef might improvise a dish. The latter two have the ability to think and create, some of which is natural, but a good deal of which may also come from an education.

Nor is a college education always the right thing for someone at any given time. There are plenty of examples of individuals who failed to perform well in college as a recent high school grad, but did stellar work 'going back to school', my own being one of them.

Some eschew those who are 'too educated' as being 'troublesome' precisely because they can think. However, if I knew nothing of one's natural intelligence, and had to choose, I'd probably go with the educated over the trained.

That said, neither education nor training has much to do with 'smarts.' For that, you either are, or you are not. Some of the dumbest guys I've known have had PhD's, but so have some of the smartest. Likewise, some of the least educated have been the smartest and most capable, but there have been many that are dumb as a box of rocks.

As someone once told me, "it's better to healthy and rich, than to be sick and poor." I'm kinda thinking it might also be better in the long run to be smart and educated, than to be dumb and trained.

Stefan Jovanovich writes:

David is right. If there is any fault to his argument, it would lie in his optimism about the capacities of higher education. But, then, my cynicism about schooling comes from having literally grown up in the business and from being a 2nd generation academic bum. (There are not many fathers and sons who share the distinction of having gone to graduate school in English literature solely because they had no better idea of what to do and the GI Bill would pay for it.) School, like most things, is what you make of it. My difficulty is that "education" is now what "national defense" was in the 50s and beyond; an open-ended appeal for more money that is always justified in the name of some higher good that is incapable of being questioned.

Jeff Rollert writes:

I concur with Ralph, and if you believe in the concept of singularity, then a repetitive answer method is most likely to be replaced by a machine.

For me, I believe that standard problems will have standard solutions already applied to them before I'm even aware of the problem. So if one were to find employees who where good at sensing/finding the "unknown-unknowns" then they would have to have a non-standardized approach - in other words a non-academic approach.

Lastly, in a logic sense, how can something be a "value" but still be "expensive"? Aren't these mutually exclusive?

Tim Melvin writes: 

We have dealt with both sides of the college issue here in the past few years. My daughter on her quest to be the world only libertarian teacher had no choice. To teach you must have three degrees and credentials. She has on semester left and has pulled a 4.0 throughout. She may have learned some basic teaching techniques she did not know but the general education element was lost on one who reads like her. When I look at the top 10 majors in US colleges I have a hard time seeing what we are producing except middle managers. Teaching and nursing are the only to that offer a truce vocational choice. I would love to have had four years to study literature, but I question the employment value of the degree itself. The top tier schools may be different but is seems to me that our universities are teaching fixed values and information, not how to think. How to think has to be either installed by your parents or learned on your own. I cannot see where this can possibly be worth the cost today. Perhaps Colonel Depew can add a though on this but I think teaching the young to read the Great Books Curriculum would go farther than the current middle management factory that are most schools today.

I never went to college. Truth be told I dropped out of high school at the enthusiastic recommendation of the local authorities. What education I have I obtained from between two covers in the style of Louis L'Amour– I suggest that book as a manual on learning to think by the way. I read constantly when I was a kid. My mother was wise enough to let us read anything we wanted regardless of content. If there was something we didn't understand she made us find the source material to explain it..and this was back in the day when Encyclopedia Britannica was still the source of knowledge not the internet. I have continued to read ravenously all my life. I read anything and everything. I have found that even fiction often contains lessons for life and can be a source of knowledge. As an example, I read two or three of Robert Parker's excellent Spenser series. Great detective books, but read a few and you will learn two or three good quick dinner recipes, several literary quotes worthy of further research and how to win a fight. Many of us on the list have followed the chair's lead and studied the great lessons of Monte Walsh, Don Quixote and Patrick O' Brian. Randy Wayne Whites Doc Ford novels often contain insights into the biology of floridian waterways and the everglades. Knowledge is everywhere if you know how to think. I fear today's world of standardized testing and assembly line universities may not be teaching that valuable skill.

Think about this. The two greatest innovators and business men of the past thirty years both dropped out of college. Some schools may be worth the price tag. I suspect most are not.

My son on the other eschewed school in favor of making a few bucks. He discovered he had a real talent for and love of business. Within six months or so of going to work at Boater's Worlds he was managing one of the top producing stores in the company…at the age of 20. We talked about school and he told me flat out "I can't see the value of spending the money. I have two MBAs working for me now because they can't find jobs that pay enough, and my part time staff includes a phd in English." He moved on when the Ritz family folded the chain. His former district manager brought him over to his new company and he is moving up the rank there. He just undersands the art of working hard and making money. He may need a few accounting classes some day but four years at some state university would have been a waste of time and money.

We need more thinkers who have a passion for knowledge and more curious explorers and fewer managers and chair holders. That's on us as parents as much as the schoools. If our children go onto college make sure they know how to think and the univerisity allows them to do so.

Stefan Jovanovich writes:

Dropping out can be useful even for scholars. Peter Green (the #1 biographer of Alexander the Great) did it.

So did Eddy's favorite professor who didn't teach art history.

Eddy's most treasured legacy from 4 years at Cal was giving Professor Jacobson the recording of her version of the Super Mario tune. He had heard her play it on the UC Carillon and wanted it for the ring tone on his phone.

Dan Grossman writes: 

Found this interesting blog post by Steve Sailer proving the value of higher education:

 A column on a new Gallup Poll asking "Just your best guess, what percentage of Americans today are gay or lesbian?"

"The mean guess was a ridiculous 24.6%. Only 4% said less than 5%, which is probably the best guess.

Polling companies seldom ask questions on which people can make obvious fools of themselves, since those can raise questions about the value of opinion polls.

Looking at the demographic crosstabs, it's evident that low intelligence people were most likely to wildly overestimate the percentage of homosexuals: 53% of people making under $30,000 annually said that at least 25% of the population was gay, and 47% of those with no more than a high school education. 43% of Democrats versus 24% of Republicans got the question wildly wrong.

In general, people are terrible at estimating or remembering demographic statistics. A 2001 Gallup survey, right after the release of 2000 Census results, found that the average American estimated that 33% of the population was black and 29% were Hispanic. That adds up to 62%, but who's counting? Not most people.

In that 2001 survey, nonwhites estimated that 40% of the population was black and 35% was Hispanic (adding up to 75%). In contrast, people claiming postgraduate degrees estimated that 25% were black and 24% Hispanic (only about double the Census numbers), which proves the value of advanced education."

May

10

 Just got an earful about Comex manipulators. Care to put a few holes through it?

Really? It's always a conspiracy when the market moves against you? I really have no explicit knowledge one way or the other about silver but people sure do like conspiracy theories– in government, in finance, etc. Plenty of this sort of "journalism" in the blogger financial press– it draws in the eyeballs.It always seems that people like to rationalize that it's someone else's fault where losing money is concerned since no one wants to face the shame of admitting a mistake. I have this theory that people like to use financial advisors so that they can blame someone else when their investments lose money: "That damn stockbroker sold me that loser, honey; it's not my fault".

Jeff Watson comments:

Having been on a margin committee (among many other exchange committees) before, my experience is that the margin will always be set in a way that will protect the exchange clearing house, the membership of the exchange, and to a lesser extent, the trade, end users, or what have you. Plus, the membership usually has an inkling that margin rates will be changed, no real surprises there.

Alston Mabry writes:

I love the author's analysis: in hindsight we shouldn't have gone long when we did. We should have gone long at the bottom and also a lot bigger.

And the conspiracy is:

1) Either using control over the exchange committee system to induce sudden hikes in performance bond requirements, or opportunistically using such hikes….

2) Using analysts to make extensive commentary to the mass media to the effect that the "silver bubble has burst" in the hope of inducing fear in the marketplace….

3) Using trading "bots" to transiently create thousands and, sometimes, tens of thousands of intra-day short positions….

4) Closing most intra-day positions into the mass of involuntary liquidations.

my favorite bit is "or opportunistically using such hikes".

Interesting profile, by the way:

Avery B. Goodman has been a licensed attorney for 26 years, and has concentrated in securities law related cases. He holds a B.A. in history from Emory University, and a Juris Doctorate from the University of California at Los Angeles Law School. He is a member of the roster of neutral arbitrators of the National Futures Association (NFA) and the Financial Industry Regulatory Authority (FINRA). He has also been an independent investor for many years. Snapshot Description: Independent / boutique research firm analyst. Trading frequency: Infrequent

Apr

20

 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.

13.
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.

Apr

6

My best friend, Jeff, runs a filter/HVAC business and specializes in cleaning the HVAC units of small businesses. He cleans the units on a recurring schedule….a very nice business model.

I have found that Jeff, is a pretty good "tell" for the economy. When his business is hurting, the small business world is hurting. He says that he sees a notices drop off in business, speed of pay from his customers and his ability to land new clients when gas prices get above $3.00/gallon. Every increase in the price of gas thereafter has a noticeable negative impact on his business.

His business is down. His customers are paying more slowly. He hasn't picked up a new customer in several weeks. More than the usual number of customers are going out of business.

Contrary to what you hear on the news and from DC, the price of gas has a very immediate and negative effect on what happens on main street when it goes up too much.

Apr

5

 Burton Fulsom in his book The Myth of the Robber Barrons shows that many of the great industrialists of the 19th century, the ones that didn't get government help like Harriman and Fulton, but the independent productive geniuses like James Hill, Cornelius Vaderbilt, The Mellons (My friend Dan Grossman wrote a great review of the recent Mellon bio), and the Scrantons and the Rockefellers were great men who opened up new vistas of consumer benefit and weath.

It totally disproves the myth that has the world in its grip, and things like the Palindrome who calls them crook capitalists. We know who the crook capiatalists are today, and they're not the men like Steve Jobs, and many others.

Who else would you nominate as the opposite of the cronies? Let us come up with some good ones in honor of Rocky's Humbert's request for us to honor the creation of value.

Alston Mabry writes:

Deng Xiaoping and John Doerr.

Also here is something interesting from the original foreword to The Robber Barons, by Matthew Josephson, first published in 1934:

When the group of men who form the subject of this history arrived upon the scene, the United States was a mercantile-agrarian democracy. When they departed or retired from active life, it was something else: a unified industrial society, the effective economic, control of which was lodged in the hands of a hierarchy. In short, these men more or less knowingly played the leading rôles in an age of industrial revolution. Even their quarrels, intrigues and misadventures (too often treated as merely diverting or picturesque) are part of the mechanism of our history. Under their hands the renovation of our economic life proceeded relentlessly: large-scale production replaced the scattered, decentralized mode of production; industrial enterprises became more concentrated, more "efficient" technically, and essentially "coöperative," where they had been purely individualistic and lamentably wasteful. But all this revolutionizing effort is branded with the motive of private gain on the part of the new captains of industry. To organize and exploit the resources of a nation upon a gigantic scale, to regiment its farmers and workers into harmonious corps of producers, and to do this only in the name of an uncontrolled appetite for private profit — here surely is the great inherent contradiction whence so much disaster, outrage and misery has flowed.

…and from the Foreword to the 1962 edition:

In the crisis years of the 1930s economic intervention by the Federal Government was employed on an unprecedented scale, not only in the interests of human welfare, but also to regulate and control the masters of capital who, by their excesses and bad leadership, had helped to bring about the debacle of 1929-1933. At that period a critical literature also arose (of which the present work may perhaps be taken as an example), providing background material to the men of the New Deal.

Of late years, however, a group of academic historians have constituted themselves what may be called a revisionist school, which reacts against the critical spirit of the 1930s. They reject the idea that our nineteenth-century barons-of-the-bags may have been inspired by the same motives animating the ancient barons-of-the-crags—who, by force of arms, instead of corporate combinations, monopolized strategic valley roads or mountain passes through which commerce flowed. To the revisionists of our history our old-time moneylords "were not robber barons but architects of material progress," and, in some wise, "saviors" of our country. They have proposed rewriting parts of America's history so that the image of the old-school capitalists should be retouched and restored, like rare pieces of antique furniture. This business of rewriting our history — perhaps in conformity to current fashions in intellectual reaction — has unpleasant connotations to my mind, recalling the propaganda schemes used in authoritarian societies and the "truth factories" in George Orwell's anti-utopian novel 1984. 

Sam Marx writes:

Every time I'm in NYC going up the ramp at Park Ave So. I see the statue of Cornelius Vanderbilt and I'm reminded of how he created a shortcut to California by way of Panama.

After the California '49 discovery of gold, increasing the migration there, he cleared that thin strip of land in Panama, placed boats on the Pacific side and transported passengers by boat from NYC to Panama, horse and wagon to the Pacific and then by boat to California, thereby saving the long and dangerous trip across country or around South America. No robber baron in that endeavor.

Pitt T. Maner III writes: 

How about Ray Kroc? McDonalds in the news for hiring 50,000 new employees this month.

Kroc created a new kind of fast food with McDonald's, implementing Henry Ford's assembly line idea into his restaurants. He also utilized standardization, a business tactic that he used to make sure that every Big Mac would taste the same whether a person is in New York or Tokyo. Kroc also revolutionized the art of franchising, where he set strict rules on how the food was to be made. These strict rules also were applied to customer service standards with such mandates that moneys be refunded to clients whose orders were not correct or to customers who had to wait for more than 5 minutes for their food. However, Kroc let the franchisees decide their best approach to marketing the products. For example, Willard Scott created the internationally recognized figure known as Ronald McDonald to improve sales of hamburgers in the Washington, D.C. area. Kroc established various foundations for alcoholics, and also started the Ronald McDonald House foundation.

Jeff Sasmor writes:

A later Vanderbilt created one of the first concrete roads in the nation, the Vanderbilt Motor Parkway . Some remnants remain, my wife and I used to bike on a part of it that I believe still remains between Cunningham Park and Creedmore hospital in Queens NYC.

Allegedly the VMP was the first road designed for autos only.

A much later Vanderbilt, a great^n granddaughter, used to work for me and my partners in the early 1990s, but got fired because the wife of one of my partners got jealous of her good looks.

Jeff Watson writes: 

 Jay Gould was my favorite robber-baron, although he was deeply flawed, and a vile and disgusting cheat. One could say that Gould had an inner drive and a pronounced sense of pluck. Getting his speculative stake from the ashes of the Panic of 1857, he astounded the financial world with his decades of manipulations. His railroad corners were amazing. His attempt to corner the gold market resulting in Black Friday was something out of a novel, His bribery to influence legislation was legendary. His chicanery with using forged stock certificates set the bar for all other cheats and swindlers. He controlled Western Union. His corners in the Chicago commodities markets were equal to those of Armour, Cutten, and Gates.. As bad as he was, he still managed to combine a bunch of railroads together and creating value by achieving a better operating scale. I have problems with the way he treated the help, but at that time, laborers were very shabbily treated. Finally, when Gould died, he had an estate of $75 million dollars, so he must have done something right.

Mar

26

Here are some interesting bits of history:

75 Years of American Finance: A Graphic Presentation 1861-1935

In 1861 the public debt (according to this doc) was 75 million, a whopping $2.83 per capita.

1862 saw the Legal Tender act "150,000,000 Greenbacks authorized".

1866 "this year income tax collections hit peak $73,000,000".

And so on.

Mar

16

If you are an Ameritrade user you can download the Think Or Swim platform (TOS) for free– you probably know that.

If you click on the support/chat button you can pick from a number of so-called chat rooms. Actually most of them have useful audio and multimedia (e.g., curated charts and such in a window) commentary during the day, like the really good SnP pit squawk from "tradersaudio.com" (this one is audio). The squawk is a lot of fun to listen to at least during the open/close period. Whatever you might say about the usefulness of the sp pit the action and actually the commentary is quite educational for those limited to ES screen trading. It gets pretty rough-and-tumble at times.

A new one that TOS added is a 10-second delayed version of the premium RANSQUAWK service. This is really good. No chatter all day long just important news much faster than you can glean it yourself. The 10-second delay is only a minor nuisance for the big reports like oil inventories and econ reports (I say that as a mere daytrader for whom these things often have significance). It covers news worldwide (it's based in London) and they seem to monitor a vast array of global news releases and remove the chaff.

Dec

10

 The Collab points out that Ron Paul is taking over the Fed oversight panel and he promises it will not be a rubber stamp. "Skip to my loo" as Stubby would say and what consternation there must be at those marbled floors, and the executive dining halls. To say nothing of how bearish it is for the market if the flexions will not find it as easy to chip the first billions off the top of the find. (Pitt help me with the proper geological thing).

Pitt T. Maner III replies: 

A few geological metaphors and terms I think Chair is looking for…

Overburden provided by oversite members of the Party of the Elephants?

Marble is of course metamorphized limestone created by heat and pressure– an appropriate stone for the floors of the deliberaeors.

Styolites are those wonderful pressure solution features that make marble so attractive. 

Vince Fulco writes: 

It would also seem a strange twist of fate that the Dems are verbally pushing back hard on the tax/unemployment deal Obama reluctantly agreed to. He may find himself more isolated than he ever imagined soon.

Gary Rogan writes:

He knew that he would be isolated from the very beginning. The extra significance of how quickly he reached the deal and how quickly he changed his position from "no likelihood of a double-dip" to "we will get a double dip if we don't pass the measure" is that for the first time he provided an important tell that he cares more about reelection than ideology. He basically threw his base under the bus because the positives for his reelection outweighed the negatives in a very complex calculation. 

Jeff Sasmor comments: 

Neither party (if you think we actually have two) shows any real effort to rein in deficits. But I agree that it won't go on indefinitely…

Gary Rogan writes: 

Well, clearly some portion of the population responded to the bewildering decay around them with some degree of cohesion. The two parties are not some static entities with permanent agendas, and that's why saying that Bush "your own man" creating multi-billion dollar deficits is proof positive that nothing will ever be done doesn't work. Politicians do respond to the mood of the country over time. Ron Paul will have now a platform to accuse gentle Ben of mortal sins, the same Paul Ryan who voted for the TARP and bailouts will channel Von Mises and Mitch McConnell will support the ban on earmarks because of the "important symbolism". This is a rich country with a lot of assets to sell if push comes to shove. Until recently I saw absolutely no path to stopping the madness in time, and it may be too late, but when Jon Stewart stars mocking Bernanke and Bam can talk about the connection between taxes and recessions, as opposed to stimulus and recessions, the future at least depends on whether the voters will continue to stay involved as opposed to being completely hopeless.

Rocky Humbert writes:

Moving the conversation back to the markets, (which I justify as my reason for participating on SpecList), I note with interest, Mr. Rogan's comment: "Alan, I see a lot of the same things. I've seen them for two years. But I see some positive future results from the recent political changes. The tax deal was more notable for it's speed and cooperation at the top than anything else. Even with the rising rates I now like stable dividend payers and have acted accordingly in the last two days."

Mr. Rogan: I welcome you with open arms to the camp of us optimists. It is admirable when people publicly change their opinions when they believe the facts have changed. I believe Winston Churchill got it right when he said: "Americans can always be counted on to do the right thing …. after they have exhausted all other possibilities." (It just took you a little bit longer to realize this than did Winnie.)

In my humble opinion, however, stock markets are tricky beasts — and during the past two years, while you were cooking spam over sterno in your bomb shelter, the market capitalization of US equities increased by approximately $8 Trillion — with a most notable inverse correlation between President Obama's popularity and US stock prices — this phenomenon climaxing with last month's election.

Given the extremely low levels of the President's current popularity plus Zeno's Paradox, a new convert to the cult of equity should pray that this anti-president correlation breaks down in the months ahead…resulting in a Clinton-esque p/e expansion. However, I do believe that your dismissiveness of the bond vigilantes seems imprudent, and I believe is a huge risk that only increased with the "quick" tax deal.

Lastly I want to go on record as wishing you all the best in your stock purchases, and look forward to chocolate, roses and champagne in your future posts as your portfolio optimism translates to your verbal optimism.
 

Nov

7

 The leading historian says that he'll buy me a $ 8 cup of coffee under certain considerations. And I don't know much about coffee. But I've had occasion to have coffee at Stumptown Coffee, an Oregon firm with branches in New York now, and it's far and away the best coffee i've ever had. Next in line is the coffee at Kaffe that Mr. Florida surfer has recommended. The web mistress is a vegan, and I don't pay her that much to do all the editing and picturing so she usually doesn't put our stuff on barbecue up unless I get her mother on the case, which isn't that effective since she doesn't believe in coercion. Let us expand our mandate from bar b que to good beverages like coffee and tea.

Vince Fulco comments:

I wouldn't say THE top tier but for solid, day-in, day-out coffee, a NYC mail order institution which we order from is portorico. It's been around for over 100 years and we especially like their couple times a year sale with numerous versions of beans $5.99-7.99/lb, a veritable bargain when retail goes for similar prices for 10 ounces. They also have a weekly sale of one kind or another.

Jeff Sasmor writes:

For NJ suburbanites, the local roasting of primo beans and a nice college town quasi-hipster atmosphere is provided by Small World Coffee in Princeton. In spite of a Starbucks opening around the corner, Small World has actually grown larger.

David Hillman writes:

Stumptown is among best ever drunk here, too. We have a pound or two shipped in regularly. They ship the same day they roast and deliver in about 2-3 days, so coffee is very fresh. Currently in the cabinet is Indonesia Sulawsi Toarco and the African's are exceptional this year. An admirable direct trade business model worthy of support.

 Also, when in Portland, breakfast at Mother's. They serve Stumptown varieties in a french press at the table. That and the wild salmon hash is more than worth the long weekend a.m. waits.

Boom Bros. in Milwaukee is also happily recommended. Excellent roastmaster, their Velvet Hammer is the 'every morning' coffee at Cafe DGH.

Another favorite is this coffee from the D.R. Very cheap, very good. Best drunk in a cafe on the beach in Sosua. Maybe there's a Caribbean store of some sort in NYC?, but if not, there's always Bonanza:

"…..Always the most fresh production guaranteed! Manufacturer send my orders 3 times a week…..Thanks for looking!!!"

Chris Cooper writes:

Coincidentally, I have recently embarked on a quest to brew (consistently) the best cup of coffee. I have started roasting my own beans, and now it is evolving to importing my own green beans. Next month on the container arrives 300 kg of single-origin green beans from Indonesia from five farms. We call them Bali Kintamani, Java Jampit, Aceh Gayo, Sumatra Lintong, and Torajah Kalosi. I guess this may become more than just a hobby.

 While Mr. Surfer and family visited not so long ago, we served some Kopi Luwak, famous due to the journey of the fresh beans through the digestive tract of a civet. It turns out that there are various grades of Kopi Luwak, and since that time I've found a verifiably authentic version, which is rarer because often the growers will mix in other beans. I may try to import that as well, but it's very, very expensive, and I can probably only get 10 kg per year. The taste is really different, much earthier.
 

Larry Williams comments:

My cup runneth over with coffee from these guys, but thanks for the tips. I will begin my journey again for greatest java.

By the way, Overstock.com seems to have the best deals on espresso machine.

T.K Marks writes:

All this talk of coffee has gotten me nostalgic for one of my life's more squandered opportunities.

There was this little coffee spot on the Upper West Side, just a stone's throw from Lincoln Center, called Cafe Mozart. I used to spend much time there.

I would get a pot of coffee. Once even this thick Turkish stuff that perhaps made one look of Left Bank sensibilities, but tasted like tar. Would while away the hours there with reading, backgammon, or chess. It was a peaceful place.

So one night I'm sitting alone at my table reading when walks in and approaches, a woman.

A woman with a very fetching smile.

Bob?…she asked hesitatingly, as one would when meeting a blind date.

I stood up politely, smiled at her for a few seconds, and, No, was all I said.

Till this day I regret not lying through my teeth.

Had nothing to lose.

Jeff Watson writes:

 Many of my friends are coffee experts but I am sadly lacking in that department. One thing I do know is how to make is one of the better pots of coffee on the planet. The following recipe will even make even the most mediocre coffee taste good, and good coffee taste……delicious.

1. Wash an egg then break it into the bottom of an old fashioned metal campfire coffee pot, beating the egg slightly, leaving egg, shells and all in bottom of the pot..

2. Add a cup of very cold water to the pot, covering the egg and then add a pinch of salt.

3. Pour in a whole cup of course ground coffee to the water and egg mixture, and stir it up.

4. Pour enough boiling water over the coffee, egg, mixture to almost fill the pot up, and stir until mixed.

5. Cover the pot and plug the spout with a dish towel.

6. Put the coffee pot over a fire, heat it up to a gentle boil, back off, then let it simmer for a couple of minutes.

7.
Take the pot off of the fire, let the coffee settle for a couple of minutes then add a cup of very cold water to precipitate the coffee grounds/egg mixture. Let the coffee settle for another minute, then serve.

My grandfather was taught to make coffee this way from some real cowboys when he went to the Arizona Territory for a trip sometime before 1910. He taught me how to make coffee when I was around 7 or 8, and put me in charge of the coffee every time there was a family picnic or outing. The secret to wonderful coffee is the egg, the pinch of salt, and good water. Coffee prepared in this manner evokes many good memories, and the good smell alone will attract any friends or neighbors in the near vicinity. Once in a great while, I will make this coffee on the stove and it's almost as good as on a campfire.

I have often wondered what a Kona coffee would taste like if prepared in this manner.

J.T Holley writes:

 I'm not a professional roaster or barista, but the keys that I learned in the 8-9 years that I mentored to roast, grind, and brew coffee are the following:

1) The time between roast and grind needs to be minimal (oils of the roast and storage important)

2) Method of brewing important to your individual tastes (percolate, press, or electric drip)

3) Water is 99% of a cup of coffee! Good tasting waters need to be used and free of chlorines, flourides, and impurities

4) Filtration choice and cleanliness of the brewer of choice imperative for consistent cups of good flavor

5) Once pot is brewed then stirring the pot and stirring the cup is important regardless of cream and sugar for consistency of coffee.

That's the basics!

All good shops should know this regardless if its a private house, private shop, franchise or friend.

Kim Zussman queries: 

How can coffee gourmets taste fluoride but not civet excrement?

Jim Sogi writes:

Chris's special Java java was distinctive and earthy. A treat especially in the palatial surroundings.

The key to brewing good coffee from whatever origin, is:

1. Be sure the parchment is sun dried, not machine dried. It has a much mellower smooth flavor.

2. Roast your own coffee. My favorite roast is 462 degrees, 11 minutes give or take based on humidity and ambient. Roast until the oil just starts to show, but is not oily. The oily roast is more for show. Roast only what you can use in 3 days.

3. Grind your own fresh roast. This is the most important of all. Don't try to freeze coffee beans.

When brewing in filter, only pour a little, not boiling, water through at a time.

Oh yes, Kona Coffee is without doubt the best in the world.
 

Oct

25

 "Liberals come in three varieties: evil, stupid, naive?"–Bill O'Reilly

The statement is factual IF one believes contemporary "liberalism", as defined by the American mainstream, is merely the gauzy smiling mask hiding those who yearn to be the next Stalin.

Axelrod, Rahm, & the dr0me, arguably fit in the first bucket.

Those who do not know what comes after "social democracy", to wit, socialism (where all political conversations end at the point of a gun) and finally communism (where all political conversations start at the point of gun), go into the third bucket.
The second bucket is populated by those who who've been shown the historical arcs of the 1930s and believe their would-be masters are intrinsically benevolent and that the examples of the past are not relevant. "It's different with us. We're good guys, really."

Jeff Sasmor writes:

It's interesting that most liberals also think the same thing about conservatives: evil, stupid, and/or naive. If this is true on both sides then are there any altruistic, bright, and informed (?) persons at all?

And what happens to R's if they go against R orthodoxy? They're RINOs, correct?

Exactly what's the difference (aside from each side believing they're right). It's a remarkable situation…

Is it possible for disagreement without contempt?

To be clear, I think what NPR did to Williams was wrong.

Oct

11

 With S&P, Crude, Naz, Dow, Euro, Bund, gold, Yen, Dax, Estox, Silver, corn, wheat, soybeans, oats, and hundreds of individual stocks at 1 month highs, it is interesting to reflect how long a bull move can last and how far it can go, when fueled by all the wealth that other bulls have and helped along by expansionary policies by the central banks.

Ken Drees comments: 

Since QE is the direct stock and bond market impetus at the moment through indirect likely promises of a recent fed statement and made very pseudo real by the never interviewed but very smart and successful David Tepper on CNBC who basically spelled it out for everyone that the markets are indeed going higher, I say that this rally lasts at least into election day and into the fed meeting where rumor/fact becomes real. All other momo markets are induced as well to grow since the QE feeds them too as collateral liquidity buckets.

As long as I read and hear topaganda I lean bullish.

Gary Rogan writes:

Wow, that was an interesting thought. On Friday I bought something for the first time in 1.5 years, and the first thing ever that wasn't a stock, and that was UNG. I just figured the risks over the next year which is the shortest period of time I intend to hold it are not that high. And for somebody who only buys at 52 week lows the chart looked like the most beautiful thing in the world.

Jeff Sasmor comments: 

Just be aware of how UNG has to roll the underlying position once a month. I happen to be in this one too– but it can grind lower and lower on you. And once a month it's gamed when it rolls to the next month. The effect has been discussed to death in many venues. So it's tricky to hold it for a long time if it stays in a range.

Craig Mee adds:

Certainly might drive the speculators out, (or clobber them if they fade it), as runaway markets present less and less opportunities if one isn't in and sitting tight.

Kim Zussman writes: 

About the only asset class that hasn't been goosed limit up is real estate. A big up-move in house prices would be very useful, driving LTV down, reducing foreclosures, and re-priming the dual wealth effects of McMansion braggadocio and cash-out refinancing. Not to mention fulfilling the campaign promise of re-establishment of the American Dream.

Oct

7

 I found this book online while searching for something else. I'ts out of copyright (from 1910).The "Read Online" mode is interesting in that it shows the underlining that someone made to this volume.

Here's a section (I haven't had time to go through all of this tome) that seemed to me to have some parallels to today's situation. Actually, it's more than a bit eerie! There's also mention of the "curb market" — something I posted about recently. Later sections (~pg 57) show some stocks– none of the names I saw still exist, but most had nice healthy dividends from 5-7%.

Those were the days!

The financial and business panic of 1907 serves as the latest illustration of the significant fact. The business conditions of 1906 were the best that this country has ever enjoyed. Mills were running overtime, railroads were congested with traffic, and real estate operations were booming. The press was filled with the most roseate "write-ups" and predictions, yet despite the good news security prices showed little gain following the month o*f August. The earmarks of coming financial and business distress were at hand. The stock market was serving its purpose as the pivotal point where thousands of the brainiest men of the world were acting on judgments which-*had reference to the future and not the present.Stocks were for sale by those who reasoned correctly and knew, and were purchased by those who did not know so much. They were even sold at a sacrifice, and as knowledge of the coming state of business affairs percolated from one strata of investors to another, the selling movement became more violent, and in March of 1907 we had our first stock exchange panic. A rebound in prices occurred, but stocks were still for sale, and in July we had our second panic. In the meantime, however, business was excellent, and the press of nearly the whole country wondered what all the trouble was about, and why the Wall Street gamblers were thus losing their senses. The business depression, however, followed, and when it was a reality to even the most ignorant, the stock market had clearly discounted the event, and prices of securities refused to yield further. When business was at its worst, complaints the loudest, and the public press blue as indigo, stock market prices were again merrily ascending The exchange was again the pivotal point where thousands of the best minds of the country were ex- pressing their judgment of the future, and were willing to convert their cash into securities, because of the anticipated increase in value.

It is the failure to understand this fundamental law of price movements which has been the cause of enormous losses to the un- thinking and unknowing, whose judgments are based on what is seen and heard at the time. When the good news, whether it be big crops or large earnings, becomes common property, it has been discounted by the stock market ; and similarly, when the bad news is apparent to all, it has likewise been discounted. It is only natural, therefore, that the rank and file should regard the stock market as a most incomprehensible affair, "a bottomless pit," always going contrary to what is so perfectly evident at the time. But one should remember that the stock market is not distinct from other markets. The manufacturer, the merchant, the produce dealer and the real estate operator, all have an interest in its fluctuations, since they have an important bearing on their own transactions. Many of the stock market fluctuations, especially those of a few days or weeks, have little significance, since they may represent only some particular local cause or the whim of some speculator. But if the market steadily and rapidly declines, many business men, who know its "discounting" significance, will assume a waiting attitude as regards their planned undertakings, or curtail their production ; and this waiting attitude, since all business is closely interrelated, will react upon all other forms of business effort.

In this connection attention should be called to the operations of the so-called "bears" who speculate for the fall of stocks through the process of selling "short" that which they do not possess with the object of buying back later at a lower price, and fulfilling delivery on their contract. Many condemn and few sympathize with the "bear" in the market, because of the belief that it is wrong to sell that which one does not possess, that no economic good is performed by this practice, and that "short selling" artificially depresses security prices. In fact many have recently strongly urged the prohibition of such sales.

A moment's reflection, however, will show that all these conclusions have little basis in fact. These critics forget that "short" selling is a common practice in practically all kinds of business. The manufacturer is expected by the wholesaler to sell his finished wares at a definite price for some definite future delivery, and to insure the delivery of his goods at a stipulated price and time, the manufacturer expects the commission man or produce broker to sell the raw cotton or grain or metal for future delivery at a definite price, long before the crop has been harvested or the metal obtained. Contractors, likewise, in contracting for work at a definite price, are constantly selling labor and materials short. The general practice of "hedging" on our exchanges, resorted to by nearly all business men handling our important staples, must necessarily involve a short sale. In business generally, "short selling" is regarded as a necessary means of insurance against business or speculative losses. If recognized here by all persons who have an understanding of business methods, it certainly cannot be maintained that it is wrong in the stock market to sell something which one does not now possess and intends to buy later.As regards the two other contentions, that short selling does not perform an economic good, and that it actually depresses the prices of securities, these critics are in the wrong. The short seller in the stock market is often the greatest benefactor in repress- ing rampant speculative enthusiasm on the one hand, and in checking the effects on security prices of excessive pessimism on the other.

Sep

21

 Prechter says to sell rally, one reads. One recalls a chapter one wrote about the man who I facetiously said may have caused more financial harm to more people than anyone. The chronic bear of Barron's. One concluded that he never could close out his bearish calls which had been unanimously, completely negative every seek since he started writing in 1966. (For once this is not hyperbole. I was forced to read every one of his columns before a certain collab would let me say it). Prechter is in a similar situation. How could he say that any time is a good time to buy since most of the time he has been bearish since Dow 500 when he took the six month boat ride which regrettably came back to the US. However one must compliment him on his very propitious bullish call near the lows in 2009. As one said about the chronic bear at Barron's, "how one wishes he had stuck to journalism (subtly recapping what B said about Rossini." "how one wishes he had stuck to comic opera)". "If E did not say to sell the rally, he would be closing out a position at a 5000% loss. May both of them join Livermore in a place reserved for those who have inflicted more financial harm than any one else in history. P.S in saying this, one calls out to Dr. Jov for augmentation as to who from history has caused more financial harm. Napoleon? Lenin? John Law?

Jeff Sasmor adds:

Add the legions of "Financial Consultants" working for the big retail brokerages who advised buy and hold no matter what. Couple that with "averaging in" (there was some spiffy term for it I can't recall) we now have a population of boomers who demographically have most of the wealth but have no feeling of confidence in the stock market and no trust in the available advisers.

Burned badly 2x in 10 years has profound negative implications for aging boomers who are concerned that they have no time to make back the losses and just want steady income. Will they feel good when the bonds they've been advised to buy go down in price? Or feel helpless that they get hosed no matter what they do.

Peter Earle writes:

For the most harm caused in financial history - a topic I cannot, if I tried, avoid weighing in on– I put forth he who informed both the philosophical and argumentative implementaria of agrarian reformers of many stripes most plentifully, in my estimation, over the last nearly two hundred years: Claude Henri de Rouvroy, comte de Saint-Simon. Saint-Simon, an early intellectual who disavowed his wealthy, aristocratic moorings, was an advocate of positivism and, applying that practically, a sort of technocratic central planning which, as history has shown, was far more workable than other philosophies he inspired; specifically, Marxism. A contemporary of Hegel, I consider him the rightful heir to the modern scourges of Communism, Socialism, Fascism, the "Third Way", and central planning as a holistic species.

Sep

21

PrechterPrechter says sell this rally off of yahoo finance headlines–no need to link, that's probably all you need to know about this move.

But if it is a market bluff, yesterday the market bet before the flop and today you should see the continuation bet on the turn and then a big bet to come on the river. If it's a bluff, then they gotta sell it.

Anatoly Veltman comments:

He's often quoted out of context, just like everyone else– thus everyone's track record may appear roughly same.

Prechter does certain analysis well. Those who understand his writings can benefit by incorporating some of his effort into own analysis. Those few who would actually enter trade on his conclusions– risk not knowing how/why to exit.

Ralph Vince writes:

Entirely true, Anatoly. I may not agree with his prognostications, but he does his work very well. What's more, he is often quoted in overly simplistic terms– such as to be a seller on this rally. I am certain he has a point where he would flip and go long, an alternate count or something. I am also sure he has a downside target– is it Dow 5000 ? Dow 10,500 ? These quotes of his floating around don't really tell you want his strategy is, and that's key. He's a guy who, if/when he is wrong, I have found he has not been wrong by much, often able to adapt to changing market conditions as well as any I have seen.

Larry Williams observes:

Prechter go long? Has he ever? His bearish book riding the wave came out the low the 2002, at the recent market low the clarion call was to sell. Be alert to broken watch correctness.

Dylan Distasio asks:

Hi Vic,

I'm genuinely curious as to why you lump Livermore in with the rest of the financial ne-er-do-wells. I'm not an expert on the man by any stretch of the imagination, but I've read assorted stuff on him, and while he was far from perfect in both trading and life (but then again who is?), I've never seen fit to paint him with that brush based on what I've read. Why do you have such a low opinion of him?

Larry Williams attempts an answer:

Livermore and the Reminiscences are two different stories. The Saturday Evening Post serial that became the book is oh-so well written but it is not just about Livermore it is/was a novel with a fictional character that paralleled Jesse but was also a collage.

In real life once Joe Kennedy took over the SEC, Jesse seems to have never made another penny; in other words he was most likely a runner of stocks not some brilliant trader like Steve Cohen, etc.

Sep

20

They just announced 1 1/4 years late that the recession ended. Many interesting questions arise. What would happen if you bought and sold a swing system, when they announced recession and when the announced expansion? What are the chances that a random number generator or intelligent robot could do better at calling turns in the economy than the NBER? Many others.

Scott Brooks comments:

The recessions over?!?!!!?

I find that hard to believe. Just a minute….let me turn around and check something….looking….looking….OH MY GOSH!!!! There ARE monkeys flying out of my butt….the recession MUST BE OVER!!!

I work with a lot of insurance related organizations (brokerages, TPA's, insurance companies) and there is nothing happening in the insurance world that indicates the recession is over. Workers insured under workers compensation is down 20%+ off it's high. Workers comp premiums are down. Business insurance premiums are down. There are still more companies that are going out of business than there are start ups. There are still more companies that are contracting than there are companies that are expanding.

At the grassroots level, there is a lot of pain….and the bad stuff outweighs the good.

The recession is not over.

Jeff Sasmor writes:

What they said was that the last one ended June 09. They also said a decline now would count as a new recession. Talk about a lagging indicator!

NBER said "The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

Pitt T. Maner III writes:

Not only is the recession over but now the technical purists say it is impossible to have a "double-dip" since another downturn would be counted as a separate recession. Let the cheerleading begin…

Stefan Jovanovich shares:

"The Business Cycle Dating Committee was created in 1978, and since then there has been a formal process of announcing the NBER determination of a peak or trough in economic activity. Those announcement dates were: June 3, 1980; July 8, 1981; January 6, 1982; July 8, 1983; April 25, 1991; December 22, 1992; November 26, 2001; July 17, 2003; December 1, 2008; and September 20, 2010."

From NBER FAQ

NBER Cycles

Sep

15

 Assume that only daytraders are left trading. Assume they all enter in direction of recent moves sometime after open. One would believe that they try to maximize profits by trailing or waiting til near close to close position, then on close close position and pull orders. What would market result be? I am guessing something like today's price action might result. It is difficult to verify this, but perhaps the assumption is not too far off or just a case of fitting the theory to the facts after the fact?

Jeff Sasmor asks: 

Are you talking about human daytraders or robot daytraders?

I doubt human daytraders have much effect on anything these days. Isn't it so that something like 3/4 of volume is robots trading about 100 stocks?

Jim Sogi replies:

The "robot" trader needs to be defined. There are human system programed execution bots, and perhaps a few "intelligent" trading systems which do not have pre-programed systems, but rather gather current info, process that, make a quick rule, test it, and trade on it, but I strongly doubt it. There might be market making algorithms which might be classified as bots, but I doubt they are making directional bets all day long looking for legs. IB has some entry algo's such as VWAP and I think a few more algos for order execution. Seems on the 5-6 flash crash some skirts were lifted with a glimpse into some order spamming systems which would have to be automated at that speed. You and Russ might be best to say what is out there and what is possible and I sure would appreciate what might be possible.

Russ Herrold comments:

 Yes, real time adaptive and intuitive systems are to some degree possible and exist– consider robotic market maker assistant algorithms, that are permitted to 'fly themselves' with no-one with sentient hands on a 'dead man's' switch, assuming so long as the market stays within known parameters [some of these gone haywire (or simply unimaginatively constrained) clearly could have been 'goaded' into playing on May 6]

I took the open question to be tested to be a restatement of the buy (or sell) at close, and to sell (or buy) at open, [perhaps biased by an anticipated mean reversion 'bias' to decide which way to lean, as a first extension].

As I recall we've had posts on this in the past here, and I was just going to run a couple of simple scenarios through some back testing and do some 'binning' or anticipated 'regime changes' based on the a look-back of 'scheduled news' calendar.

The market making algorithms that could be classified as Bots have performed well, all day long; other times, they fall off the tracks wildly as well. Thus the need for that 'dead man's switch'. The question becomes, can one train a few 'turtles' to spot regime changes that a bot cannot, at a low enough cost to pay them to 'play the video came' in shifts and cover a trading day.

Concerning what you said about how "IB has some entry algo's such as VWAP and I think a few more algos for order execution. Seems on the 5-6 flash crash some skirts were lifted with a glimpse into some order spamming systems which would have to be automated at that speed"…

The data response feedback loop rates have long since gone beyond the limits of a remote link and having an electron crawl back and forth. Local computers in a data center are competing with one another, and the trick at this point may simply to predict how the battle will progress, grab hold, and hang on for a ride!

I am set up to test it fairly readily, and that ZH listing seemed promising. I rather hate to publish my personal culling screens rather than to use one explicitly in the public domain, as I invest some effort 'sharpening' how I look at data and would lose the benefit of the effort by floating that personal symbols list.

Ken Drees comments:

The motorman–someone drives the train, someone slumps and the dead man's switch kicks in. The Taking of Pelham 123, the great movie from the 70s, not the butchered remake, was telling about an operation–a good sleuth can sniff out your footprint and catch you as you sneeze unknowingly. Gesundheit!

Robots all have humans in charge and humans are chained to their human condition and flash speed just makes a human's mouth open on occasion and then they do something emotional. We are now into the area of advanced human overload error–flash crash redux will not be hiccup. 

Russ Herrold replies:

I was approached a few years ago by a couple of vendors on the design of such feeds, and the meta-tagging to be added. An XML delivery is easy to parse with existing Open Source tools, about which I wrote a couple of years ago.

Just as one of the themes of this list is 'ever changing cycles', it seems to me that another 'ever changing scales' having fractal repetition of patterns as one 'zooms in and out' (a la Mandelbrot). Interestingly, the site includes a 100 page Word document of capsule reviews of 'The (Mis)behavior of Markets', for those of you who have not slogged through the whole work… the takeaway being that the bots can play for the penniescompeting against one another, without a lot of analytic skill perhaps; while the humans still can play in longer time frames, again (perhaps) with the benefit of deeper insight.

It is a Brave New World, every morning, and perhaps the trick is to adapt and swim with the flow of what one cannot control, and to stand firm when one can make a difference.

Aug

20

 Just get rid of the TV cable all together. TV is evil and rots the minds of children. It glorifies evil, immorality, bad attitude, consumption. I have not had TV for 35 years. Its absence has allowed time for the family, for exercise, for reading.

Throw it out.

Nigel Davies comments:

I'm not convinced that banning either computer games or television is the only way. There are lessons to be learned from television shows just as there are interesting computer games.

My son currently chooses not to watch television, earlier he had a period in which he watched a favourite show at every opportunity. He also plays a computer game called 'Hotel Giant' in which you build hotels and increase profits if you find out what the customers want.

He knows he's free to play shoot 'em up games if that's what he wants, but for some reason he's just not interested. OK, it's probably clear to him that I think this stuff is garbage so it doesn't come with parental approval. But he knows it's not banned either, and maybe that reduces the attraction. 

Jeff Sasmor comments:

We have 7 TVs in our house. Once over 14 I let the kiddies watch whatever they want.

My kids have had their own internet connected computers since they were 6 years old. I don't block anything.We have a PS1 PS2 PS3 Dreamcast Wii Gamecube NES.

Only 1 rule: No TV until homework is done.

Both have A- averages in HS. The older one is in college and is running a 3.8 in freshman year at Barnard, which is not an easy school. Neither is a libertine nor a drug user nor an underage drinker. Unfortunately I was never able to get them interested in Python programming.

Funny thing– with all that availability they don't watch that much TV. Younger one draws all the time (illustrator) and the older one writes all the time (fantasy fiction).

One good thing– they have me in the house every single day (well maybe they don't think that's all that good…).

I think parental encouragement and involvement in a non-shaming fashion is more effective for positive child development than anything else one can do. It worked for my family. I don't believe in any restrictions aside from those necessary for safety reasons.

Jul

15

winnings from a NL Poker gameStocks are much like no limit these days… you have one or two 10 minute bars to decide to go all in risk all or fold.

Vince Fulco writes: 

Phenomenal observation. It's a function of fake liquidity. You've got to pick your spots wider and expect the reactions to be more severe in both directions. I read somewhere the other day the theory that folks are pricing in too much tail risk. Is this what happens when an economy is built on sand?

Jeff Watson writes:

Interesting comparison of stocks with no limit poker. While the risk of ruin approaches 100% in NL poker, I wonder what the risk of ruin would be in the stock market, especially with short term trading. I suspect that it would be higher than one would expect, with the vig, mistakes, and just being wrong factored in. 

Jim Lackey writes:

No…anyone is capable of "not taking risk" and to see people brag about not losing is hilarious. No profits either, at least none to brag about vs. some indexing. To make real money you have to take real risk. Period. End of story. 

Rocky Humbert comments:

How return is related to risk is a subject worthy of extended discussion, and I don't have the time to launch that thread right now.

However, I want to note that Fama has backed away from his early work that pioneered the model that the two must go hand-in-hand.
I for one do not accept the proposition that one must take large risks to have large returns and this distinction is a key difference between gamblng and investing.

This is a fascinating subject… I hope others will contribute. I have a plane to catch.

Jeff Sasmor comments:

"To make real money you have to take real risk period end of story." Yes!

Isn't the ultimate metric whether or not you make money? If you are good at scalping the E-mini SP on a 5 min chart and make money doing that then IMO it trumps the issues of risk and vig. Personally and IMO, and I know that most here will disagree (except maybe Jim) scalping has the lowest risk albeit with more vig (vig is pretty cheap these days at $4/round trip for the Emini SP and since one Emini SP ~= 500 SPY it's much less vig than the ETF). I don't even factor commissions into my thinking anymore.

But longer time frames are more comfortable for most people - and yes the vig is proportionally less but one downside among many is that you're much more susceptible to your own emotions about getting out of a losing trade (or a winning one) - and that's an additional term in the vig equation.

With computers (Skynet) running the show these days you can get your "head handed to you" no matter what time frame you're using. They seem to love chaos and high volatility, sort of like the Shadows in the old TV show Babylon 5; or for real sci-fi nuts - the eddorians from the Lensman space opera series. Or for others: think of computerized Sith.

Jul

1

 Sitting on the plane yesterday on my arrival into Singapore, I was trying to work out why everyone stands with no where to go as they wait for the doors to open (happens all the time as everyone clearly knows). It occurred to me that cabin fever has probably got something to do with it–the need to escape. In comparing this phenomenon to the markets and cycles, maybe the same can be said, and maybe the reason for short coverers coming in, about a clear downtrend. Anxiety, the need for air, itchiness… all these things conspire to limit profits instead of sitting comfortably and waiting for larger gains.

Victor Niederhoffer writes:

Mr. Mee, this interesting idea has many hidden and untested assumptions in it, and I would think such a test would indicate a trade opposite from the one you seem to think would work.

George Parkanyi comments:

Holding a short position for the bigger move looks really obvious in retrospect when you look at any chart of a failed market. But markets, like all living things, do not like to die easily, and fight vigorously, at least until the latter stages when despondency sets in. Bear market rallies can be quite powerful. As you can tell from the ride from the top in this particular decline, the moves have been violent. Depending on where you enter, because of the volatility, profits– long or short– can vaporize right before your eyes. So you'll have to excuse the shorts for being a little paranoid. 

Craig Mee writes:

Sure George, no doubt that's why entry levels on moves are so important and most indicators lag so much that you come in too late. Most of these weak shorts are probably following the latter and their hands are forced with high volatility reactionary bounces, but for the ones positioned well … how many take their foot off the gas too early when they should be adding on the bounce, not liquidating, and what can help us, fundamentally or otherwise, establish this?

It was interesting that the high on the last bounce in equities was established during Asia and sold off during the U.S session. It appears the flight was landing in New York and everyone was up in the isle ready to run off the plane…what scared them so much that they ran and kept running? Maybe turbulence on the way, or they saw something scary in the mid flight sleep.

Jeff Sasmor writes:

money burning a hole in the pocketAnd you often see people lining up at the gate, even though they know they they can't board in the order of their line. They look annoyed as others board ahead of them. Personally I stay seated upon arrival till I can see some of the standees move. Drives everyone else in my family crazy though.

My dad used to call it "the money is burning a hole in your pocket" — the monkey urge to "do something". Explains to me why some days I have trouble sitting on my hands when my logical minds says no no no.

Bill Rafter writes:

For 13 years I commuted from my home in NJ to NYC, almost all of it by train. One thing that was always of interest is the way human traffic flowed down the staircases at Penn Station to the trains. Wind and water flow is almost always strongest in the middle of the stream. Not so with people. If you want to get to the train faster you are much better off by coming in from the periphery.

Somewhat the same happens in automobile traffic. A lane will be closed a click ahead and there will be signs to that effect. Many people immediately get out of the soon-to-be-closed lane, where the obvious choice is to remain in that lane as long as possible.

I am certain that both of these (the steps to the train and the closed auto lane) are the result of behavioral instincts, but so too is the market.

But my question for the list (particularly the international members) is if the human flow in different countries is different from that in the U.S. Is this behavioral tendency human or merely American?

Paolo Pezzutti replies;

 Bill, I would say that in Italy is pretty different and I find the pattern of traffic different in every country I visited. And I have visited many over the past 3 years. It seems that the culture of the peoples influences their behavior although on paper they have to follow rules on the road that are very much the same in the various countries across Europe and America at least. Similarly for markets, different cultures may give life to different types of herd behaviors. And I much believe it. In Italy, however, we tend to stay in the soon-to-be- closed lane as long as possible…

Did you have any doubt? I wonder what kind of herd behavior Italians would develop on the market and how this would be different from the Germans' way of managing the same situation for example.

Rudy Hauser writes:

herdlike behaviorMy experience on the LIRR at Penn and Jamaica stations in that a left flank approach works almost every time. When it comes to crowds most people seem to behave like a herd of sheep.

George Parkanyi adds:

Holding a short position for the bigger move looks really obvious in retrospect when you look at any chart of a failed market. But markets, like any living thing, do not like to die easily, and fight vigorously, at least until the latter stages when despondency sets in. Bear market rallies can be quite powerful. As you can tell from the ride from the top in this particular decline, the moves have been violent. Depending on where you enter, because of the volatility, profits - long or short - can vaporize right before your eyes. So you'll have to excuse the shorts for being a little paranoid.

Nick White writes:

Personally, off the plane, I just want to get to customs as soon as possible - and every little advantage in this quest helps. I think this is especially pronounced on the international flights I take, as they always tend to arrive at dawn - along with about 2 dozen other 747 / A380 flights full of punters. Nothing worse than sitting in that endless, spiraling queue at Heathrow. On this point, one of the best airport strategy expositions I've seen is the "Airport Security" scene in the brilliant George Clooney film, "Up in the Air".

I also fully agree with Paolo on the regional variations. I suppose, as everything, it depends on the incentive offered to "be first" - and whether such incentives weigh heavier from observance of social "rules of thumb" or conventions, versus a true, rational expectation and "doing what works".

Rocky– i HATE the tailgating thing. I always try to drive behind other cars with a good error margin relative to the speed of the traffic. Yet, in morning traffic, this safety margin ends up causing me deep and abiding road rage because opportunistic scum bags (*ahem*) keep plugging into my safety gap….this then makes me want to tailgate like crazy.

driving over the sydney harbour bridgeDriving over the Sydney Harbour Bridge in the morning presents some classic herding examples. There is one lane on the north-side approach toll gates that everyone considers "quickest". Yet, because so many people flock to this lane, one of the peripheral lanes often ends up being relatively traffic free and presents a much speedier option. This is probably a good analogy to the ever-changing cycles and market participants flocking to tired old relationship trades that may only be effectual because they believe it to be (I'm thinking Gold here) rather than any empirical reality behind the herd belief.

In the UK, you can count on people loving a queue and not trying to exploit the fast route. Trying to enter the tube doors from the periphery during rush-hour is usually a sure winner to come first in the seat-quest….however, it may earn you some opprobrium, too.

Universally though, I think in all instances we can count on the majority following convention and herding. The rest will be trying to game this instinct….sometimes successfully, other times getting slotted.

The markets are just an extension of regular life. The empirical, quant approach works in both, with the same limitations. I guess, ultimately, they are the same game of expectation - where those who best measure potential outcomes most likely end up with the shekels - or at least through the queue quickest!

Stefan Jovanovich comments:

The old (1970) NYC solution to Nick's dilemma in rush hour was to respond to any "challenge" — i.e. someone began pulling up on either side of your lane with the clear intention of cutting in– by acting like a cat with her food bowl. You simply lurched forward and closed up the space without showing any indication that you knew the other driver was there. Stupid indifference was a far more effective deterrent than any amount of threatening eye contact. (Of course, it helped to be driving a Checker Cab with fenders that already had multiple dents and scrapes. Even the Road Warriors behind the wheels of the Chevelle 454s owners didn't want to kiss metal with a road tank whose price at auction– less the medallion– would not have covered the cost of their engines.) 

Rocky Humbert writes:

Bill: A highway toll both model might also be one approach for understanding the Cabin Fever phenomenon. Traffic engineers have written extensively about the behavior of drivers as highways merge into toll booths.

One common observation is that drivers hate to have other cars cut-in in front of them, hence they tailgate — even if it's not productive and reduces the opportunity for more-productive lane switching. Might standing in the aisle be an airplane equivalent of tailgating?

Spann, et al: Lane changes and Close Following, UMAP Jrl (2005) [14 page pdf]

Personally, I stand in the aisle because it's a pleasure to stretch my legs and spine after sitting for hours in an uncomfortable airplane seat. Entirely rational.There's probably a cultural aspect too. While in Frankfurt, I was caught in a downpour and crossed a busy street against the light in a futile attempt to save my suit from ruin. Two residents started yelling at me in hostile German for this infraction. Perhaps I would be rotting in prison right now if I had jay-walked too! 

Tim Hewson writes:

 One thing I have read is people do most unusual things in aircraft emergencies, such as try to secure their belongings to take with them even though their lives may be in danger and the priority should be to get out pronto.
So irrationality in transport situations is not any more unusual then in market situations. And its also understandable. Going to a spec party a few years ago the plane I was on had to turn back an hour over the Atlantic as the hydraulics went and the cabin filled with smoke and people were screaming, etc. It's not a very nice experience. But I would recommend observing the air hostesses: if they appear calm it's probably ok for you to continue reading your newspaper. If you can't see them or they look panicked you might as well continue reading your newspaper because there is nothing you can do.

On the subject of crowd behavior on train stations: Escalator etiquette in most countries tends to match the rules of the road. So why do passengers on the London Underground stand on the right-hand side of escalators when the rules of the road dictate that we drive on the left?

Jim Wildman comments:

At one point I commuted 115 miles each way to work between Tyler, TX and Dallas on I20. Most of the time, traffic out in the country where there was little traffic traveled within 5 MPH of the speed limit. Once I got to more congested areas, there were more speeders. Of course the congestion meant speeding was thrilling, frustrating and ultimately useless. I assumed those speeding felt better at all the cars they were passing. Activity substituting for progress. 

Scott Brooks writes:

Speaking of panic on a plane….

I was flying on a Southwest Airlines flight back in 2001 when we hit the worst turbulence I had ever experienced (times 10). The plane was bucking, like a bull with unwanted rider on his back, the people that were unfortunate enough to be standing were tossed around like rag dolls. The stewardess barely made it back to her "stewardess seat".

People we screaming and crying in fear.

I was sitting in the front of the plane in one of those seats where the person in front of you is facing you (I think you only see that on LUV planes). The faces of the people in my row were ashen with fear. I looked around to do a mental calculation of the exits and noticed the stewardess. It was not a good sight. She was obviously terrified.

It was at that moment that I decided to do the unexpected. I raised my hands over my head, put a big smile on my face and started screaming, "Roller coaster, roller coaster, Wahoooo!", over and over again.

It took a few seconds for the people in my area to catch on, but when I yelled at them, "Come on, roller coaster with me, roller coaster, roller coaster", they began to join in.

I looked across the aisle at those people and started screaming the same thing, within a couple of seconds they were joining in. I told them to pass it back in the plane. We then yelled at the people behind and told them to pass it back. It was then I saw the stewardess. She was not only scared to death, but she was livid with anger towards me. She was screaming, "Stop it, stop it".

But it was too late….like "The Wave" at the ball park, it took over the whole plane and pretty soon most of the people on the plane were "roller coaster-ing" with us.

I smiled at the screaming stewardess, and I think I mouthed the words (don't remember exactly), "it's ok". She calmed down and bit.
I then started yelling "roller coaster" to her and after a few seconds, she joined in.

Of course, eventually the turbulence subsided and slowly went away.

As it lessened, people started laughing and applauding. Personally, I felt something I had never felt before to this extent…….the exhilaration of the adrenaline rush associated with fear coupled with the joy and relief associated with the removal of the danger, all mixed together with the "shakes" associated with such fear. I felt the sweet and sour sauce of emotions….joy and fear at the same time!

The plane was abuzz with excitement and all forms of emotion!

A few minutes later the Captain even came over the loud speaker to explain what had just happened. I don't remember exactly what he said next, but he basically said something along the lines of never having had an entire group of passengers do the "roller coaster" before and he thanked the gentlemen in the front who had started the roller coaster. He then offered to go back to where the turbulence was so we could do it again.

His offer was met with a resounding, "NO!" and laughter.

I'm sure every passenger on that plane will remember that 5 or so minutes of that plane ride for the rest of their lives.

George Parkanyi replies:

Scott, great story, and an important leadership dynamic involved.

In a situation over which people have little control, particularly dangerous situations, there is huge psychological benefit in giving them something to do. It alleviates the helplessness and gives back some feeling of control that can be the difference between reason and panic. Throwing their hands up and chanting "roller coaster" in coordinated fashion gave them that something to do, and also provided comfort from a "we're in this together" sense of community.

Jun

9

Bucharest, RomaniaThis is left wide open for every reader of the site to make the call…

It seems now that you are going to need an intelligent electorate to accept the tough calls, pull their heads in, bunker down, and not cry for mum when all of them knew they shouldn't have their hand in the cookie jar and thus are all responsible for the outcome, (granted banks are a joke) but because there was NO SIGN, saying don't be greedy, it's apparently for the masses, everyone else's fault.

So on this basis, we need a intelligent voting population to be the first to put their hands up, and say let's take the heat and get on with the pain.

So on that basis, and of course there are factors to consider including the currently state of said economies, debt levels, housing booms, and credit excesses….what is the best placed country or countries?

Well, maybe luckily for me I found this through surfing the web. Although it was written in 01, (maybe nothing's changed), someone agrees, albeit on the surface. I'm open to other suggestions….

Finally, Lynn and Vanhanen peer into the future. They predict future growth is most likely in countries with high national IQ scores but currently bad economic systems. The countries of the former Communist Bloc—Russia, Poland, Bulgaria, and Romania, and the People's Republic of China, and Vietnam—are good bets.

Jeff Sasmor answers:

The good old US of A.

I'm not being sarcastic. Not to offend those not living here, but personally, I wouldn't leave even if Palin is the next prez. Wait– I was talking about Michael Palin…

Vancouver, Canada
China may be headed for their 1929 moment. A populace not used to investing in any sort of asset is seeing an exponential tulip phenom that the gov't can't control (yet). It's gone open-loop. And they're too connected to the US to decouple as many like to think. We're too big a market compared to anywhere local for the near-term. And their population wants decent wages– guess how long it will take foreign capital to pull up stakes and move where labor is cheaper– probably Africa as soon as (if/when) nations there wise up and become politically stable. I used to think S. America, but it's not as biz friendly as it used to be where foreign capital is concerned.

Europeans think that the way to solve their problems is to ban shorting– déjà vu– they're hosed.

The world's economy is in for a tough time just about everywhere. I'll pick right here as the place to ride it out. All the political stuff is just noise– psychohistorians take note.

Alan Corwin writes:

I like Canada. They have more resources per capita than any other place on the planet, a relatively sound financial system, and a sense of humor that I can understand. The only time they lose resources is that their citizens move someplace warm when they get enough cash.
 

Jun

2

 A visit to a New Jersey Gas Station sparks many sad reflections on dead weight loss and its impact on the current position. One sees lines of 20 cars waiting for gas at the stations as gas attendants amble about filling the cars. The cost in wasted time, the alternatives of productive work that could have been done by the attendants and customers in other fields is never seen the same way a dead weight loss impacts the reduction of consumer and producer surplus and other interferences with the natural order of things.

How much of the current malaise comes from such dead weight loss? Many trillions of dollars have been spent for the benefit of the flexions and their clients by the interior folks. This money has been allocated to areas that are green and organized agrarian in input. Yes, the money has been spent and used to buy assets from the above. And there is certainly the dead weight cost of the administrative involved.

But at what cost? Who would have spent this money? How were incentives to start businesses and hire workers and buy things that are useful in the day to day fray affected by this? What rational expectations come into play as to the ultimate impact of these expenses when they have to be paid back? What are the dead weight costs involved, and what goods have not been bought, and what investments in stocks have not been made because of this?

A visit to an ice cream store outside of Kira's graduation ceremony at St. Andrews in Middletown told wonders. They make a very good banana almost as good as Cones. And their peach has as much fresh peach as I've had the pleasure of eating. But they tell me their business is down considerably this year, and they cant figure out why. The owner does a nice job of making balloons outside to keep the kids happy. How many others are in similar predicaments with no explanation as we morph into a European style struggle?

Rocky Humbert writes:

One has sympathy for The Chair as he sits in a long service station queue and laments the NJ no-self-service law. And, as the early summer sun beats down upon his countenance, his thoughts evidently turn to Dead Weight Loss. Since I've started regular daily exercise (including checking my oil and pressure) I've paid more attention to live weight loss and proffer the following alternative hypotheses/observations:


1.
New Jersey has some of the lowest gasoline taxes in the nation. Gasoline in New Jersey costs as much as 40 cents per gallon less than Westchester County, NY. I frequently fill up my gas tank on the NJ side of the George Washington Bridge; and perhaps the Chair's queue is attributable to the arbitrage of high gasoline taxes in surrounding states– rather than the NJ no-self-serve law.

2. The NJ Turnpike is a toll road with limited access. There is scant evidence to suggest that off-highway service stations have longer queues and/or poorer service in New Jersey than in other self-service states. Former Governor Corzine proposed an elimination of the self-service ban in 2006– and it actually ran into popular revolt: "I'm not against a lot of things, but I don't want to pump my own gas. It's part of the Jersey identity. It's our thing," said Rose Maurice. See this article.  

3. New York State and Connecticut both permit self-serve gas stations, however, they both require full service on certain highways. Having had an unfortunate brush with this business, my understanding is:

(1) the number of drivers who leave without paying on highways is much greater than on local roads.

(2) The throughput for a WELL-RUN busy full service station is actually higher than for a self-serve.

(3) Post-9/11, it is believed by Homeland Security that full-service highway gas stations provide a platform for surveillance. Your oil-soaked, slow-moving, non-English speaking gas jockey may actually be a highly-trained FBI agent checking your car for emissions from a concealed nuclear/biological/chemical weapon.

4. Our local town Shell station has four pumps. Two are self-service. Two are full-service. There is only one attendant for the entire station. The full-service pumps charge about $.20/gallon more than the self-serve ones. The station has maintained this model for years, and it suggests that there must be demand amongst the Chanel-clad soccer moms in Land Rovers and the very-important-Dads (in Brioni suits) not to soil their clothes while pumping gas or checking oil. In this example, the full-service pumps are a profit-enhancer, since the attendant would be there anyway.


5.
During a recent visit to Switzerland, I observed that many gas stations have NO attendants and are open 24/7. One simply inserted a credit card, pumped gas and drove away. One should note that (due to taxes) gas in Switzerland is still massively more expensive than the USA, and it is unclear whether the absence of any attendant results in lower prices or higher profits (or both). I suspect that I would feel uncomfortable if there were NO attendants at a US gas station — on a deserted road — at 3:00 am … and the pump isn't working right … and a car filled with four youths and twice as many tattoos pulls in front of my car … and …. involuntary and not-so-politely relieves me of my wallet and luggage. I guess that's another sort of dead weight "loss."

There is no question that the NJ law introduces dead weight loss. However, the Swiss model (at the other extreme) introduces other costs (such as theft, liability risks, soiled clothes, spilled fuel etc) which are difficult to quantify.

While personal choice is usually preferable , my point is that things are almost always more complex than they appear… And policies need to consider an accurate cost/benefit analysis for the world that we actually live in - not a world that we wished we lived in.

Jeff Watson writes:

A prime example of dead weight loss is when a truck makes a delivery to a distant point and has no cargo to bring back to the warehouse wasting time, fuel, and labor. Wal Mart has engineered out much of the dead-load waste and has increased efficiency of its shipping fleet. They have automated their ordering, delivery schedules, and shrunk the number and size of their warehouses, as they consider warehousing a waste of inventory, space, time and labor. Now, with their "Just in time" ordering and shipping, they are able to use their trucks as rolling warehouses, cutting costs in so many ways and passing along the savings to the consumer. They engineer every step of the production of a product, from the manufacturing to the time it leaves the store. Wal Mart's business model is to be admired as they have introduced many products at low cost to people who otherwise couldn't have afforded them.

In addition to their main retail, Wal Mart has taken only 15 years to become the largest purveyor of groceries in the world because they applied their revolutionary methods in dry goods to the otherwise staid food business. The naysayers decry Wal Mart, but I salute them as an example of a company that took a page from Hank Reardon. Walmart is having it's moment right now, and will until something or someone comes along with a better business model. Never fear, there will be a better model, there always an evolution in business as long as man is allowed to be creative and earn a profit with minimal government interference. To those who complain that Walmart is decimating the business of Main Street, in 1920 the A&P Tea Company had 25% of the retail grocery business because it was light years ahead of the general stores of the day with the modern supermarket concept. The populists and anti-trust people took a careful look at A&P but thankfully never broke the company up. Other businesses should salute and try to emulate the way Wal Mart reduces costs, provides careers, brings a good assortment of products to market, and earns the shareholders a good return on investment.

Jeff Sasmor writes:

When I first moved to NJ from southern CA in 1996 I used to get into trouble with the gas station attendants because without really thinking about it I kept trying to operate the pumps myself. Now after being used to the attendants for so long, when I get gasoline in another state I just tend to sit in the car for a while waiting for the attendant till I remember that I have to do it myself. The attendants are nice to have if you don't want to smell like gasoline; and perhaps it's better not to have pregnant ladies handling gasoline pumps and breathing fumes. OTOH, the attendants end up breathing a lot of gasoline fumes. I recall when I was a youth (pattern recognition subroutines running in my brain just fished up that courthouse scene with Fred Gwynne from the great film "My Cousin Vinny") they used to wash your front and rear windows and check the oil on your car. Ah. My wife's car doesn't even have an oil dipstick anymore….

The great Fred Gwynne

Jeff Watson replies to Rocky Humbert:

Rocky, I know I used the term differently than how the economists use it. However, on the ground floor, the truckers use the words "Deadhead, dead load, dead log, or dead weight" interchangeably when referring to the loss experienced when driving with an empty trailer. Aside from excessive DOT regulations, the aforementioned is the biggest complaint of truckers as it eats into the bottom line, at least the ones I talk to who are non-Teamster. The union drivers don't worry about such things as empty trailers and bring a whole new subset of inefficiencies and extra costs into the equation.

Jeff Sasmor writes:

I don't think that the queue is a function of the presence of an attendant. That's an assumption that may seem natural (like a policeman directing traffic slows things down). I've not seen it in practice. Traffic in and out of gas stations is lumpy.

It's not demeaning to women– I can't imagine why anyone would want to get that smelly stuff on their hands if someone else does it and the cost is the same. And for preggos who want to keep away from things that are toxic (even if the exposure is infrequent and small) not pumping your own gas may be a good thing. And you can stay in your car in the rain and when it's cold out.

Personally I like having the attendants.

Sri Viswanath writes:

I liked your idea and explanations of dead weight loss… In my market experiences some observations that have warranted pin pricks include (fat specialists claiming to smooth order flow, short skirted well-heeled quaffed FX brokers, account reps talking about how they can get you special margins, analysts of rating agencies, mortgage brokers with outdated actuarial tables (see Bacon), derivative structured product specialists trying to sell libor cubed or some mathematically elegant swaps). All apologies to Hicks and Mr. Marshall.

It is amazing that the whole market structure can function given its oligopolistic government based subsidies (a la Citi etc) in excess of a lil' lagniappe. One case of classic deadweight loss is charging for exchange prices. Is this ecosystem capable of being quantified of such costs?
 

Easan Katir writes:

Charging extra to know the score at a baseball game would not sit well with fans. Somehow, the market fans are more docile and pay up. 

Craig Mee Agrees:

You say one case of classic deadweight loss is charging for exchange prices. I couldn't agree more. Isn't this a form of "restraint of trade"!

May

29

 I wonder if the computers that do most of the trading have programmed Puetz windows, bull/bear ratios, etc. into their algos. Mostly they seem to trade off newsflow and momentum. They seem to find attractors in moving averages, pivots points, and big point numbers.

My own experience and training as an EE can only compare the current environment to a closed-loop feedback control system gone open-loop; as if elephants constrained in their pen in the zoo have burst out of their cages, running this way and that as they bang into walls.

Phil McDonnell writes:

The trouble with the Puetz window is that an eclipse sounds like a very rare occurrence. After all I have only seen maybe 1 or 2 eclipses in my lifetime. Would you be surprised to know that 4 of them occur every year and sometimes more than 4. There are 2 solar and 2 lunar ecipses every year minimum. The fact is that they only occur in certain relatively small swaths somewhere on the Earth. So the 4 that will occur this year will probably not be visible to most people. Add to that the fact that we are less likely to go outside at night or be asleep explains why we see them so rarely.

Next consider the Puetz window definition. Start with the 4 eclipses then construct a 12 week window from 6 weeks before to 6 afterwards. That covers a period of 12 x 7 x 4 = 336 days if eclipses were randomly spaced. Adjusted for the relationship between solar and lunar eclipses the the Puetz window covers 196 days out of the year. That is more than half of all the days in a year. Adding the full Moon cuts down the number of allowable days to 10 days, 6 before, 3 after and the day of the full Moon. The allowable number of days in the window every year now becomes an average of 68 or 18% of the year.

This has all the classic earmarks of a theory that was hand fitted to a small sample of 8 crashes.

May

24

the pitIt is regrettable that the pit is dry as a witches heart with only 15000 contracts trades a day versus the old 100000 and all its trades must now be made for logistic or officious or immediate arbitage profit of 10 points reasons rather than it being the hurly burly take no prisoners den of iniquity that it was (where all trades in a customers favor were taken down ) in the old days when it was not dwarfed 100 to 1 by the electronic market. It is interesting to note that the prices are so outdated in the non-robot market that the swings are often 70 points less on each side during the day.

Jeff Sasmor comments:

For sure it's not the hub it used to be. But it's a lot of fun to listen to (although there are long stretches in the middle of the day where nothing's going on at all). And while I certainly can't speak from any authority on the swings, the prices that I hear called out are usually within a few ticks of the electronic prices seen while listening. Actually I've wondered how they can be so close… Maybe I don't get what you mean by "70 points less on each side." 

Anatoly Veltman writes: 

Intra-day chart of electronic trade will regularly travel further to each extreme than pit transactions would. Because way fewer transactions will in fact be consummated in open outcry, many extreme prices will never land on pit-contract chart. On May 6th, it was quite possible for someone on the opposite side of the pit to offer at 1060-even (and possibly lower) for split-second; but final chart doesn't show any transaction done below 1060-even. Electronic trades did touch the session-limit level some six handles lower!

Dec

23

 I read an article about High Frequency Trading on Technology Review:

"High-frequency traders are making money by delivering a service: liquidity. In today's highly decentralized market, defenders say, their systems are simply the most efficient way to match buyers and sellers".

What happens if "they" shut the machines off and pull the bids — or throw the big knife switch to "bias = sell"?Makes me think about that scene in "Trading Places" where the Dukes scream "turn those machines back on!"

Dan Costin writes:

They're users of liquidity, not creators of it. Know of any less than liquid stocks that a high frequency trader would get involved with? The stocks they play with are already plenty liquid.

Jeff Sasmor replies:

200+ MM shares / day in C where on many days the price bounces up and down by 1 cent for minutes or hours (aside from the open) is creating liquidity? If the HFT guys aren't churning C then who is?

Dec

16

 I'm looking for some clarity about the issues of immunity, allergies, etc. Possibly this question will reach a reader with expertise.

In my college biology class, about 26 years ago, the professor explained that we've all got antibodies to "everything", but the antibodies only multiply themselves to large numbers when the body is attacked by an invader. At the time I asked the professor, "what's everything?", and the professor answered only "everything". I wanted to follow up and ask if "everything" included anti-neutrinos? Buicks? But there were >100 other students in the lecture, and anyway I don't think the professor really knew the answer. (Maybe the answer is "proteins"?)

What about foods? There has been much recent publicity about allergies to gluten, protein(s) found in wheat. Presumably gluten in included in "everything", and so everyone should have antibodies to it. Why then do some people react to gluten, multiplying the gluten antibodies up to big numbers, while others don't?

More broadly, since "everyone" has antibodies to "everything", why is that in only some people an allergen is treated as an invader?

Mr. Justa Guy replies:

JanewayYour professor was indeed correct, we all do have antibodies against virtually everything, or at least everything proteinacious. That is because of (i) continual recombination, and (ii) ongoing mutation.

Antibodies are made up of two heavy chains, and two light chains. Each heavy chain and each light chain have a unique specificity for a particular target (aka antigen). There are three genes which contribute to the specificity of each heavy chain, or light chain, called the variable (v), diversity(d) and joining (j) regions. There are multiple (ie dozens) of different V regions, dozens of different D regions and a few different j regions. This number is constantly increasing because of somatic hypermutation. One heavy chain made up of a specific combination of V, D and J chains, and one light chain made up of a different combination of V and D chains are made by one particular B cell. Mathmatically this diversity allows for tens of thousands of different antibody specificities. The presence of somatic hypermutation where one amino acid (there are 26 amino acids) is mutated with each round of cell division allows for a virtually infinite total number of antibody combinations, which in principal will include antibodies specific for every possible antigen (except perhaps Buicks).

Lets take the case scenario of a B cell that makes an antibody against influenza. In the case of the flu, a naive B cell which is specific for flu, is activated when it encounters flu antigen (either vaccine or flu virus). This causes the B cell to proliferate and make different kinds of antibodies, starting with IgM and IgD, and then maturing into either IgA, IgG, or IgE which help with either defense at mucosal surfaces, in the blood, or in causing allergy. Ultimately the activated B cell makes daughter cells of memory B cells, or plasma cells whose job it is to produce large amounts of antibody.

That is a short version of how it works.

There are many excellent intro level immunology texts, one of my favorite is by Janeway. They can provide a much more detailed explanation.

Jeff Sasmor writes:

Recently there has been much publicity about allergies to gluten, protein(s) found in wheat. Presumably gluten in included in "everything", and so everyone should have antibodies to it. Why then do some people react to gluten, multiplying the gluten antibodies up to big numbers, while others don't?

But Gluten Intolerance, also known as Celiac Disease isn't an allergy — it's an autoimmune disease; gluten sensitive enteropathy.

My older daughter has it… so I learned more about it than I ever wanted to know.

Justa Guy adds:

That is where it get more complex.

In order for B cells to maximally proliferate, they require "help" from another cell, the CD4 T cell. The CD4 T cell that helps a given B cell is specific to that same antigen. When CD4 T cells recognise antigens, it is done in concert with recognising another class of molecules called MHC class II, which is what defines self. So If a CD4 cell recognises an antigen but does not see MHCII, it is non self, and the CD4 cell helps coordinate the immune sytem to attack the non self antigen. If the CD4 cell recognises antigen, but also sees MHC II, then it is self and the CD4 cell is prevented from proliferating, and so it does not supply the necissary "help" to the B cell so that the B cell cannot proliferate to produce antibody.

Celiac Sprue is felt to be a food intolerance, where antibodies are produced that also react with self antigens expressed in the small bowel. In essence the antibodies are reacting against self, and so Sprue ( and many other diseases - eg lupus, rheumatoid arthritis etc) are circumstances where the process of tolerance ( breifly outlined above) to self antigens fails.

Riz Din responds:

As Justa Guy says, it's all about finding one's optimum dose. Unfortunately this is very difficult to do with vitamin D, as official lines are quite wishy-washy.

In order to get to where you want you first have to know where you are, and having a vitamin D blood serum test has to be the best first step in this direction. After spending a long summer outdoors I had my blood taken and my level came in a rather pitiful 63 nmol/L. It isn't woefully inadequate, though it does fall in the 'insufficient' zone. I shudder to think what my winter reading would have been. My doctor simply recommended a multi-vitamin tablet of all things as a solution, which is not wise as many of the other vitamins can be toxic at much lower multiples of the RDA. I'll eventually get retested to make sure I'm not at an risk of toxicity from vitamin D supplementation (currently taking 1000IU a day), but I think this is close to impossible on the existing dose.

From (a rather wobbly) memory, I understand the benefits for many conditions (bone fracture risk, etc) really kick it at the slightly higher doses of 800IU upwards, and also that the negative effects are very rare and tend to occur at extremely high doses, except for people who display a particular sensitivity. For my mother, who is also taking supplements, vitamin d has bought significant improvements. For me however, I haven't experienced anything beyond stronger nail growth, but I guess that's the point.

My 'vitamin d' bookmarks folder is on another machine, so I've put together a few interesting links for people who want to dig a little deeper (see below).

Here are the links:

- Dr Holick is a significant figure in the field of vitamin D research and he is also the most recent winner of the Linus Pauling Award. His UV Advantage website contains links to articles, videos, interviews, etc . I know the site looks a bit cheesy, but this guy is pretty well respected.

- On the issue of life extension, a recent study of lymphoma patients found that 'Patients with deficient vitamin D levels had a 1.5-fold greater risk of disease progression and a twofold greater risk of dying, compared to patients with optimal vitamin D levels after accounting for other patient factors associated with worse outcomes.' Pretty impressive stuff.

- The Institute of Medicine is reviewing the daily reference intake recommendation for vitamin D. Their work is ongoing but if you follow the link and click on 'presentations' in the 'other resources' section on the right, you can download presentations from people who attended the workshops (Holick is among the names).

- An AJCN Editorial from 2007 states: 'The balance of the evidence leads to the conclusion that the public health is best served by a recommendation of higher daily intakes of vitamin D (3). Relatively simple and low-cost changes, such as increased food fortification or increasing the amount of vitamin D in vitamin supplement products, may very well bring about rapid and important reductions in the morbidity associated with low vitamin D status.'

- An older AJCN review article looked at toxicity levels and reported 'Throughout my preparation of this review, I was amazed at the lack of evidence supporting statements about the toxicity of moderate doses of vitamin D. Consistently, literature citations to support them have been either inappropriate or without substance.'

The author presents this insightful graph and comments that 'The serum 25(OH)D concentration is maintained within a narrow range (Figure 2Go), {approx}75–220 nmol/L across vitamin D supplies from 20 µg (800 IU) to the physiologic limit of 250–500 µg (10000–20000 IU)/d. The most reasonable explanation for this kind of relation is that there are homeostatic control systems to regulate serum 25(OH)D and to buffer against variability in vitamin D supply. … Beyond the vitamin D supply limit, which is comparable with that attainable with sunshine, there is a classic rise in the dose-response curve. The sharp rise reflects the introduction of vitamin D and 25(OH)D at rates that exceed the capabilities of the various mechanisms to regulate 25(OH)D.'

Jun

3

MitGiven that one can listen at low cost/free on the Internet to the best professors in the country giving courses in many leading subjects (MIT has all its courses free online, Yale and Stanford some of theirs), how long will consumers be willing to pay $200,000 for four years of Ivy League and other leading private courses often taught by uninspiring assistants and graduate students — often, in the case of math and science courses, mumbling foreign graduate students whose English is incomprehensible? I well realize that a degree from a leading private university is a considerable signal to employers, potential spouses and others, of one's intelligence and diligence (and I also realize that the $200,000 cost is usually not borne by the consumer him- or herself). But still, how long in this age of technology, outsourcing and arbitrage can such a differential persist?

Steve Ellison reports:

In an NBER paper, Avery and Hoxby state:

If [a student with very high college aptitude] acts as a "rational" investor, not bound by credit constraints … then he need make only two calculations for each college in his choice set. Supposing that the student has figured out the cheapest way to attend each college, given the aid offered him, his first calculation is the present discounted cost of attending each college j …

His second calculation is the present discounted value of the consumption he enjoys at college j plus the present discounted value of the stream of income generated by the human capital invested in him at college j …

Jeff Sasmor reacts:

What college student thinks this way? As someone who has just gone through this process with an intelligent child entering college (Barnard) next fall, the decision involved more emotional choices than rational ones.

1. What school best fits what I think I want to do with my life?

2. What school has the type of people I want to hang out with for the next four years?

3. I want to get out of NJ. Even though I was accepted into Rutgers' Honors program I don't want to go there, yuk. I want to go to a brand-name school. I want NYC because I want to experience an urban lifestyle. You know, I'll need a bigger allowance!

4. Don't lecture me, I don't care what it costs.

Riz Din shares:

I was painting our fence the other day while listening to a variety of quality podcasts and lectures (painting a fence takes longer than I thought) and I had similar thoughts.

The differential has to fall over time because the act of standing in front of a group of people and lecturing them is outmoded in today's world and is fast becoming commoditised through technology. The idea of an institution herding students into a room at a fixed time and having a one-sided conversation with them while they rapidly jot down all the salient points just doesn't hold water when there are much better, more productive ways of teaching. I start to drift after the half hour mark in many lectures and being able to press 'pause' on the lecturer would have been a real boon.

Universities can be extremely slow to adapt (e.g. Latin was standard at Oxford and Cambridge several hundred years after other places of learning adopted English), so overhauling the entire way of teaching may be some years in the making. Nevertheless, I think the education establishments are going to have to figure out how to better differentiate themselves because we thankfully live in a world where one's prospects depend less on one's place of learning or social standing and more on one's capability. Just as increased competition in the forex world led to massive spread reductions over the years, forcing many banks to evolve and differentiate their forex offerings with value-added propositions such as better research, option strategies, trading systems, etc., so universities and other places of learning must adapt their models. As a hybrid model at least, I can foresee on-line lectures combined with seminars and other, more interactive modes of learning. In today's world, perhaps knowledge isn't power because it isn't scarce, and the emphasis is increasingly on the the application of knowledge.

May

2

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

Russ Herrold replies:

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

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

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

Jeff Sasmor adds:

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

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

Adam Robinson predicts:

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

Distinguished former intern Chris Hammond recounts:

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

Stefan Jovanovich reminisces:

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

What my Dad and I argued about was about "tail fins". My thesis was that publishing was only profitable for the publisher when there was a technological breakthrough that lowered unit costs of production by orders of magnitude - the original letter press, the steam press in the 19th century, the combined revolution in inks and paper-making and machine binding after WW II. The publisher could surf that wave of lower and lower unit costs as long as the public perception of what the fair price for a book or newspaper or magazine was still tied to memories of what prices were before the technological breakthrough. But, when a publisher found himself raising prices instead of lowering them, it was time to admit that the party was over. My Dad thought I was out of my head for saying that, by the time of Nixon's reelection, even the caterers had gone home. He thought the new imagining techniques in printing - particularly the ability to reproduce photographs - were so exciting that they would create a new generation of textbooks. My smart-ass reply was that they were tail fins.

After that time, whenever Dad came out to California and needed to see an author or look at a business opportunity, I was happy to see him and help him out by acting as his on-call chauffeur; but we never talked about his company or its profits again. We did speak briefly about the business one last time, when Robert Maxwell made his takeover attempt. My mother and I thought the wiser and safer course was for him to take the money and run rather than sell PIKs and put the company permanently in hock. That was the last serious conversation we ever had; thereafter, discussions were limited to the state of his health and the chances for the Giants to win another World Series.

Dec

31

Father/SonNoticing that my son (age 5) was not particularly assertive (e.g. if another kid took a toy he was playing with, he just cried) I decided to embark on argument training. The problem is that in this attempt at rounding I seem to have been rather too successful, and now he argues about everything. And that includes some chess positions, even though he can't play. He's also started memorialising examples of his being assertive in "folk tales," which need to be repeated several times a day. For example there was the time a 2 year old tried to take his plane in Pizza Hut…

I'm starting to wonder if the best someone can really do is to try to improve himself whilst just spending time with his kids, with no particular goal in mind?

Jim Sogi suggests:

One, no matter what, always let the child know that you love him, even when he fails or is bad.

Second, especially ages 2-8, be consistent with rewards and punishments.  Don't spoil the child, but guide him with firm rules. He will be happier for it in the long run.   I see so many parents unwittingly training their children to be spoiled brats, and they both end up miserable. After that, its almost too late.  Manners and etiquette should be a part of the  program.

See Living with Children by Gerald Patterson for specifics.

Kim Zussman remarks:

How to raise happy, well rounded kids? That's easy: stay married.

Mom and dad need to transcend herd psycoidology insisting that happiness-entitlement derives from the continuous hunt for new itches to scratch.  If this doesn't resonate, go to church. Then, when your kids grow up happier and well adjusted, mom and dad will be happy as well.

At a Bar Mitzvah yesterday, the rabbi and new man discussed at length the reluctant leadership of Moses on his way to Exodus, as well as themes of peace, forgiveness, avoiding war, etc.  Ironically 80% of the audience had been divorced, and the audience included numerous young people with various parent/step-parent complexes.  So much for Ashkenazi IQ.

Russ Humbert writes:

PuppiesWatching a dog raising pups, you will see that the adults are pacifist during the first weeks. The pups can cause all manner of pain and annoyance, and both the male and female dog will take it all without any aggression. Then, once they are old enough to understand, comes the discipline. They are taught to understand hierarchy of the pack. They are also taught to become top dog you must fight. This shows us several things about ourselves that many modern parents ignore.

In a society that is becoming less and less hierarchical in nature and more team oriented, less discipline is needed, but more proper peer pressure. And, governmental attempts to ban corporal punishment by parents is doomed to failure. Like prohibition, the war on drugs, and sexual abstinence. When you go against the brain's natural response, the police lose. Anyone who has been close to the foster care system in this nation, knows first hand how dismal this failure is likely to be all at the expense of the most innocent, the child.

I would suggest that in raising a child one must consider his innate strengths and weaknesses in deciding how much of team player/hierarchical structure he needs. But also one must consider that most parents simple follow the "team" approach because it is popular.

In other words, teach a child to stick up for himself, but draw the line when he disrespects you.

Scott Brooks follows up:

Unless there is something biologically wrong with a child, there is no reason for that child to become depressed and miserable if he is raised to be happy and find joy in life. Becoming "genius-like" I believe is far more about nurturing than biology. Sure, biology helps, but the right environment is far more important. A good environment can make a kid, whereas a bad environment can break him, even if has the grey matter necessary to become a genius. Training your children how to think is the key. Not just how to think about intellectual endeavours, but how to think about philosophical and emotional endeavours.

Being happy is a choice. Having a good attitude is a choice. Being smart is a choice. I was beaten down in school because they thought I wasn't very smart. They wanted to put me in special school, but my mom wouldn't let them. But I was always raised with a belief system that my life was my choice. When I went away to college, I decided to make a fresh start, since no one knew me. I played the role of the smart guy and — surprise — I was smart and got good grades. I credit all that to my upbringing: being taught to be happy, find joy, to look on the bright side and always believe that good things would happen. I "got smart" as a result of that.

Jeff Sasmor recounts:

I let my kids (girls, 14 & 16) mostly do what they want as long as they keep up good grades. When they don't I hire tutors. As a result one has an A average and the other B+ with no nagging from me. About the only exception is that I never let them fall behind in math. They have had unfettered and unmonitored Internet access since they were each about 5 or 6.

I let them explore what they want to do and I don't push them in any direction; rather, I think it's more appropriate to encourage them in what they appear to be interested in. One has become a really quite good writer. The other has self-taught herself to become a good artist and is starting a band with some friends.

They should explore while they are able; most adults do not have that luxury once they have to pay rent. They do have friends whose lives are scripted to strict schedules of sport and other activities. I don't understand this sort of parental behaviour, but then I don't understand many things that involve people's minds.

Nov

18

TxgivingOne of the memes developing this year is that Black Friday is being de-emphasized at the margin. WalMart et. al. have started their promotional activities 1-3 weeks early, trying to capture the estimated reduced spend this season. Separately the Street usually gets their hands on very good customer count data from independent (industry specialist) research houses which triangulate physical counts, aggregate credit card data and check-cashing activity among other metrics. Hit up your friendly retailing analyst from one of the big shops for a better vantage point.

Jeff Sasmor adds:

The day after Thanksgiving is always interesting - there are sometimes spectacular pump/dumps in the stock market as the oodles of folks with their Ameritrade and E*TRADE accounts have nothing better to do that day than to lose money till 1 PM E.S.T.

There are also the sales, both in physical and virtual space. I don't go near any mall that day. You usually can't even get a parking space. How full will the parking lots be this year, with all the media talk of belt-tightening and consumer reticence to buy? With modern-day inventory systems, we will know the results over the weekend.

Kim Zussman presents his Thanksgiving analysis:

In recent years, the 30 days before Thanksgiving have been quite bullish (SPY 93-06):

One-Sample T: pr 30D

Test of mu = 0 vs not = 0

Variable N Mean StDev SE Mean 95% CI T P

pr 30D 14 0.04775 0.05824 0.01556 (0.01412, 0.08138) 3.07 0.009

However barring an explosive rally in the next 3 days, this year is not (assuming Weds closes about current levels); the pre-Thanksgiving 30D is about -6%. Which could make the pre-holiday period of 2007 the worst of of the prior 13 years:

Date pr 30D
11/24/2006  0.043
11/25/2005  0.081
11/26/2004  0.065
11/28/2003  0.013
11/29/2002  0.089
11/23/2001  0.053
11/24/2000 -0.032
11/26/1999  0.107
11/27/1998  0.179
11/28/1997 -0.013
11/29/1996  0.072
11/24/1995  0.036
11/25/1994 -0.031
11/26/1993  0.005

Oct

30

Picture of the day: An animated image demonstrating the Quicksort algorithm used to sort a list of items in computer programming

Oct

4

I've been shorting stocks (intraday) most of this week, and it's notable that many stocks that weren't available to short earlier in the week, now are available. Maybe it's just my broker…

Sep

14

New Star Trek episode: World Enough and Time, based in the original Star Trek milieu. Starring George Takei ("Sulu") and a few other originals you'll notice (like Yeoman Janice Rand). Really quite well done; consistent with the original in style. Highly recommended for those who enjoyed classic Star Trek! The ending is quite touching. Following the ending, there's a teaser for the next episode. Streaming video, 65 minutes, requires Flash player.

Rich Bubb agrees:

World Enough and Time rivals any of the original and the subsequent Star Trek spin-offs. Very well done writing, good plot weaving. Special effects and sound effects are very similar to the original Star Trek, but not exact copies. The actors are darn good too. And no commercials!

Vitaliy N. Katsenelson extends:

TV-Links contains links to every TV show and most newly-released movies. Not all the links work but a good portion do. I tried Stargate Atlantis and Star Trek: The Next Generation — both work. I even watched The Illusionist.

Aug

24

 Doesn't this whole 'yes, we've had the long-awaited 10.00% correction so now it's time for the market to go up again' seem very, well, scripted, for lack of a better word? Just seems all too pat.

It's like watching a TV crime drama, where it's the character you see for a few seconds near the beginning of the show who turns out to be the bad guy in a 'surprise' twist at the ending.

If you take the tack that it's the person who's somewhat invisible in the plot, but who was actually shown, even if only for a moment, then you can usually guess the culprit before the first half of the program is over.

Somehow I think that's what's going on here.

Aug

2

 I have archives of almost all my old programming and hardware designs going back 20 years or so. I was poking through some of it, written for DOS, 80 x 24 screens. No GUI. I have to detect monochrome monitors, Hercules Graphics, ISA backplane boards, fixed I/O ports, swapping overlays in and out of the huge 256 KB memory to make large (for that time) programs possible.

What a nightmare. But the program I was looking at (a DSP chip debugger) was about 400 KB. Source is about 200,000 lines of C. It is hard to find a big program of merely 400 KB these days.

Another one was an audio disk recorder using SCSI disk drives attached to a PC (sort of a precursor to what Avid's Digidesign became) circa 1988. The whole thing was 270 KB, including a custom handwritten DOS for the SCSI drives. With the slow processors of those days (8 MHz was a screamer IIRC), I had to mix in assembly language with the C code to get it all to work in real-time. I learned to write ASM on Z80s and DSP chips. Wonderful stuff. No debuggers.

Yes, I had no life in those days; married but no children yet.

All the bloatware that passes for software these days is just a big conspiracy to sell more RAM. But I appreciate the 4 GB RAM, the Quad Xeons, the six monitors, the PCI-E bus, the SATA2 and 320 MB/second 15K RPM SCSI drives on my current PC even though it bogs down when the market is running too fast. Sigh - can't win.

Tim Richmond adds:

Bloatware occurs because 1) RAM is relatively inexpensive, 2) clock speeds continue to increase, and 3) Moore's Law continues to hold true. Software developers will not be compelled to create more efficient, streamlined code when semiconductor physics offers them such an unconstrained playing field.

Alex West remarks:

I started programming on Turbo Pascal 5.5, IBM PC XT, 640 RAM. All I needed was stored on 3" disk: turbo.exe, help file and library file. It was indeed a very good time.

Jun

23

 There is a proposal before congress (H.R. 2755) to abolish the Board of Governors of the Federal Reserve System and the Federal Reserve.

Jeff Sasmor adds:

This is the second time, it seems. The first time was in 2003.

Scott Brooks remarks: 

I'm starting to become a Ron Paul fan. But I'm worried about what I've referred to as the Russia effect, meaning that Russia melted down into chaos after they went straight from socialism to capitalism resulting in anything but a capitalist society.

As much as I want to abolish the IRS and 99.99% off all government agencies, what thoughts are there on us melting down into chaos if that were to occur, i.e., abolishing the fed?

Stefan Jovanovich writes:

"Russia melted down into chaos after they went straight from socialism to capitalism" is not a very good description of what happened after the U.S.S.R. formally dissolved.

Runaway drunkenness, near demographic suicide by abortion, absenteeism rates that made Lordstown look like a Toyota factory, extortion so much a part of ordinary life that someone's not demanding a bribe was cause for paranoia, had all been part of Russia life even before the defeatism and self-doubt that came after Afghanistan. Scott's post assumes that Soviet governmental authority had some moral force in 1988. It had none.

None of us can predict the future, but I would argue that the odds for Russia's future are as good as those were for what used to be known as West Germany in the 1950s. Then there were no local German politicians who could pass muster as anti-Nazis, and the new republic's democracy was a very brittle artifact. If Russia's current leadership seems tainted by associations with the old tyranny, that situation is little different from what was happening under Adenauer.

Ironically, Scott is far more likely to see Ron Paul's monetary regime created in Russia than in the U.S. I leave it to those who really know about currencies to correct my usual amateur errors, but it seems to me that the ruble is the one world currency that can currently be seen as being entirely backed by a gold/petroleum standard. 

Alex Forshaw writes:

Hmmm…with regards to Russia, the so-called "free/ democratic institutions" that "evolved" were anything but. It's one thing to have measured, organic evolution of a free press and robust markets as the US did. But in Russia, the robber baron tycoons immediately built up media machines to massage their public images.

Putin destroyed Russian "free media" because it was Boris Berezovsky's tool, and Berezovsky probably achieved greater control of the Russian economy than the Politburo did (with lots of help from Chechen gangsters, car bombs for his competitors, Russian government force, and other ridiculously coercive methods).

Stefan Jovanovich adds:

The admiration that the official American press (Time, WP, NYT - the usual suspects) showed for the "free/democratic institutions" that Professor Sachs helped "create" (sic) has its historical match in the obtusely wrong-headed enthusiasm that the Jeffersonian press showed for the progressive insanities of the French Revolution. 

Scott Brooks responds: 

Both Stefan and Alex are doing a better job of making the point I was trying to make. These countries were run by demagogues, despots, and gangsters who simply changed their styles, but ultimately remained in charge. They changed from being in charge in the form of a government to being in charge in the form of being the most powerful gangster. The gangsters, of course, whether under the guise of a legitimate government or as just plain gangsters, were able to manipulate powerless people because the gangsters had made them dependent on them.

In the US we don't have gangsters in charge per se, but we do have a system where a large group of people like welfare recipients (no offense intended) who are dependent on the government. So I ask if a country can go from a "dependent system" to one of independence overnight? If not, then how does one move away from that system? 

Alex Forshaw replies: 

If by "welfare recipients" you mean agribusiness, the tort bar (and to a lesser extent other unnecessary functionaries which use "the law" as an excuse to siphon money from businessmen who would otherwise have no need for them) then you're getting somewhere

Just in personal experience, I'm 21, I trade about 150k total in political futures (snobbier people would call it "gambling," I laugh at the pseudo-distinction). To get even the most rudimentary legal structure (a "pooling of interest") to facilitate moving the money offshore, (because it's simply stupid and/or prohibitively expensive to risk regulatory harassment over high-risk, novel securities trading in the United States, without the economy of scale of a tens of millions of dollars of a capital pool), I had to utilize the services of two accountants and a securities lawyer.

Fortunately I had friends of the family to do it for me, but what about someone who isn't as privileged as I am? Legal overcomplexity is an incredibly high fixed cost/ barrier to entry in this country.

And I don't even have day to day interactions with other people, unlike the Korean immigrants in DC who got sued for $100 million because they refused to give a lawyercrat a $1000 new suit, or the cerebral palsy doctor ruined by John Edwards.

Stefan Jovanovich writes:

I will let Alex speak for himself, but that is not the point I was making, Scott. No ordinary Russian thinks that the changes over the past 20 years have been merely a change of styles by "demagogues, despots and gangsters".

For one thing, there is now actual freedom of conscience. (Yes, I know the Russians are giving their own national faith preference and have been less than open to proselytizing by Westerners; but that is a world of difference from the situation that had Jews, Seventh Day Adventists, and devout Orthodox regularly jailed simply for what they believed.) It is also now possible for people to have savings that are not controlled by the government and private land ownership.

These are real changes for the better that have affected millions of people, and they are occurring. But at the same time the conditions of actual life continue to be dreadful. As for the question of dependency, that seems to me a near universal. I have never known a libertarian who actually turned down the offer of a good government job. As the first Mayor Daley once said, "Everyone wants a little honest graft."

No society has ever reached that peak of pure individualism that Ms. Rand dreamed about, but we can hope for a world with enough contending interests to limit the amount of loot that any one group can haul away. 

Gordon Haave remarks: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. Besides, there is no reason why abolishing the Fed would create a chaotic situation.

George Zachar writes: 

Russia went from a closed-economy kleptocracy to an open-economy kleptocracy. The commanding heights of Russian industry never saw capitalism. The looting, aggregation, and export of its wealth are well-chronicled. Using the word "capitalism" in the context of Russia is to deliberately smear the term as gangsterism. 

Peter Earle comments:

The Federal Reserve, when set up, was ostensibly created to maintain a stable value for the dollar. Looking at the 90%+ drop in the value of the dollar since the creation of the Fed, I'd say there's reason to doubt their somewhat self-serving perspective. A look at Panama, where there is only nominally a central bank, may be instructive as well. 

Stefan Jovanovich continues:

When Queen Elizabeth I came to visit the United States after WW II, my grandfather, who was born in Old Serbia, wrote about the news to my dad, who was born in the coal camp near Ludlow, Colorado that has now physically disappeared. In his letter Tata wrote to his American-born son that "your queen" is coming for a visit. What he meant was that Americans, regardless of their origins, end up having an Anglo-centric view of the world - at least as far as Eastern Europe is concerned.

The Hungarians, who were fervent Nazis and are more completely thorough anti-Semites than anyone to the east, got a better press in London and New York in 1946 than our allies, those awful Russians. They still do. The economic successes in Eastern Europe - Croatia, Slovenia, Poland, Hungary and the Baltic states - have far more to do with their proximity to Germany, Austria, and Scandinavia than with any special qualities of jurisprudence in "eastern" Europe.

For their citizens and for the average Rumanian, Serb, Bulgar, and Ukrainian, the rule of law is no better than it is for the average Russian. What is better for all of them is that now the police are merely corrupt; they are no longer true Marxist believers dedicated to liquidating all class enemies. 

Gordon Haave adds: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. 

J T Holley asks:

Can't we simply start with the IRS first as a warm-up? 

Gabriel Ivan writes:

Having spent the first 20+ years of my life in Eastern Europe (Romania) and being exposed to the first 13 years of transition from communism to capitalism, I can second Scott's comment about the melting into chaos in all Eastern Europe, not just Russia. The looting was mind-blowing and cannot be explained if you didn't live it.

With rampant inflation, no social net whatsoever for maybe 80% of the population and opaque legislation, I'm surprised things didn't get more explosive in all these years. I personally witnessed two national distribution companies with strong brand names and infrastructure vanishing in two weeks due to central bank's policies on the exchange rates. And this was '99 - '00 after 10 years of "free market economy".

Unfortunately, fundamentals haven't improved much despite the real estate boom and commodity prices run-up masking an economic growth that is not healthy. High profile businessmen - bank presidents - still get shot in daylight in Bulgaria, (the country is a member of EU for six months now… what a joke) due to their affiliation to organized crime (there is no other way to run a business). Imagine Sandy Weill getting whacked in a drive-by shooting to understand the strength of their banking system.

I expect the majority of "emerging markets" money managers to be separated from their wealth in the foreseeable future due to their lack of due diligence and reliance on official statistics.

Jun

10

 Shrek 3 is a great movie. If you have seen the first two this one is worth it. One of my interests is computer graphics and each one of these movies is more and more impressive. One of the things to watch is hair and clothes. At this point, with massive computer efforts, hair motion (look at Puss-in-Boots and Donkey's hair in particular) is very realistic. Also look at clothes.

Clothes now can realistically drape and move with the character. The first computer graphics that I played with was on the Commodore Pet - not bimapped but nothing much outside military systems in 1978. The creators of Shrek 3 threw in some classic rock music to hook the parents, like Zeppelin's "Immigrant Song," in one scene where Snow White becomes a riparian ninja. I've actually seen it twice in the last three weeks.

Pirates of the Caribbean is worth seeing if you want to know how it all ends (if it did end - I'm not sure). And the effects are really good. But it's way too long at three hours and the plot is a bit disjointed.

 If you have a Nintendo Wii, Super Paper Mario is highly recommended. It is fun and challenging for children and adults alike. You move between a linear two-dimensional world (side-scrolling for hipsters) and a 3-D representation of the same space. Press a button and features of the environment that are hidden in 2-D mode suddenly appear. It's intriguing and addictive as all h-e-double-hockeysticks. I've been playing it every afternoon apres 4 PM. It's actually a role-playing game to some degree.

While many people say that video games are bad for children, I think that properly-chosen games are actually very good for them. Platforming games (where you have to jump around from one place to another) are really good for building hand-eye coordination. Role-playing games are good to help young children learn to read as the interactions between characters largely appear in dialog boxes. I used this to help my younger daughter learn to read. It also helps kids learn to follow a story and the development of characters.

Jun

8

 I was looking for a book to read the last night on my way to take my daughter to Tae-Kwon-Do and grabbed Practical Speculation. I read the beginning where the talk is of Pod People and memes, and in full deference to the Pod People who have reappeared in the markets and on CNBC, here are some lyrics from Kraftwerk's "The Robots" from their album "The Mix."

This is one of my longterm favorite albums, and great to bop to as you are attempting to synch with the market music. Incidently, PracSpec is great for for hitting yourself on the head — not so heavy (like some Technical Analysis tomes that I have on my bookshelf) that you could hurt yourself, but substantial enough to knock some sense back into your brain. Re-read it today!

"The Robots" by Kraftwerk

We're charging our battery
And now we're full of energy
We are the robots
We are the robots
We are the robots
We are the robots

We're functioning automatic
And we are dancing mechanic
We are the robots
We are the robots
We are the robots
We are the robots

Ja tvoi sluga, (I'm your slave)
ja tvoi Rabotnik (I'm your worker.)

we are programmed just to do
anything you want us to
we are the robots
we are the robots
we are the robots
we are the robots

we're functioning automatic
and we are dancing mechanic
we are the robots
we are the robots
we are the robots
we are the robots

Ja tvoi sluga, (I'm your slave)
ja tvoi Rabotnik (I'm your worker.)

Ja tvoi sluga, (I'm your slave)
ja tvoi Rabotnik (I'm your worker.)

[repeat to fade]
We are the robots

May

22

The main usefulness of the Fed model is to identify risks in the bond market. Specifically when stock yields are low but the Fed model gives a "buy signal" anyway, it is evidence that bond yields are unusually depressed. That signal is typically followed by poor bond market performance (with no reliable implication for stocks). [More from Hussman]

Victor Niederhoffer adds:

In one sense, it is good to see such information disseminated , in that it's so wrong. Still, it is unfortunate to see because the public might believe such a conclusion and lose so much more than they should. 

Jeff Sasmor adds: 

If you look at this Hussman performance chart you'll see it doesn't show great performance. Reading his commentaries from time to time he reminds me of the permabear in Barron's weekly column. 

May

11

 I had the opportunity to go to Tides Inn for a wine tasting. When our host initially said "Austrian" you can imagine the look on my face, but I did find one good one: Gruner Veltliner "Bergdistel" Tegernseerfof Wachua 2004. The rest tasted like apple Ripple…

And If you want to hear a catchy vocalist who is more appealing than Bjork (who is known more for her Emmy show swan outfit than her music) then check out Feist . Her new album with the song Sealion is very good — a bare-bones pop-folk-indie sound.

Jeff Sasmor adds:

In July I'm headed out to Rocklahoma '07, also being called MulletFest. It features White Lion, Slaughter, Quiet Riot, Ratt, Poison, Winger, Dokken, all the Hair Bands. 

May

7

 In the current cycle, the derivatives boom, the ascent of London as a capital base, and China/Petro-sovereigns as enormous players have weakened the Fed's ability to understand, let alone influence, events.

I happen to believe that derivatives' stabilizing influence (via risk distribution) is a good thing. Self-interest is likely, in the short term, to make China and other sovereigns play nice.

But the days of Pax Federalis are fading into history, and we are headed into new seas that will offer a different mix of opportunities and risks.

Jeff Sasmor asks:

So at some time in the future will we no longer wait with bated breath for the Fed's interest rate decisions, or its Minutes releases?

Will the markets eventually discount the Fed's effect, at least to some degree? That sounds like the consequence of the idea behind George's essay.

George Zachar replies:

The Fed's influence, at the moment, is waning.

Perhaps the ECB will supplant them as the global marginal rate setter. Perhaps China will start treating the capital markets the way Putin is now treating Estonia. Perhaps the Fed will grow a pair and re-seize the initiative. Perhaps gold will re-take its former place at the center of the monetary universe.

I don't pretend to know where this cycle will lead, but I am keeping my eyes and my mind open.

May

7

 If there is one reason the market has doubled in the past four years, aside from the creative power of entrepreneurialism, its intrinsic ability to earn a return that is mutually beneficial to the public at 10% a year, and the earnings yield interest rate yield differential, it's the reduction in capital gains and dividends taxes instituted by the current US administration in 2003. Thus, I note with interest that the new president of France, Nicholas Sarkozy, claims that the vote in his favor is a mandate for cuts in the Service rate. This offers the same prospect for advances in French entrepreneurial activity as it did in the US.

When I was chief finder for thousands of acquisitions over 20 years, I could tell that the after-Service amount that owners received was the key to every transaction and that nothing was a greater motivator to them then the difference between capital and ordinary gains, with preferences truly crucial. However, the US cuts of 2003 are scheduled to sunset in 2010, and most politicians don't realize how important an incentive the rate is. The easiest way to kill an economy and a stock market is to let rates increase. This, according to Albert Jay Nock, is the Roman way of inevitable destruction and despondency. And I have found in my own studies that there will be much incentive to create despondency and destruction in 2010 by public officials acting in their own self interest, as predicted by the public choice theorists, who gain so much when the number dependent on redistribution is increased merrily as the economy sinks into revulsion.

Thus it's a great countervailing signal in France today, and perhaps it will serve as an offset to the coming revulsion in 2010 if public choice theory predictions in the US come true.

Louis Vincent Gave adds:

There was actually a lot of good news in this French election, beyond Sarko's obviously encouraging result.

Good News #1: The complete implosion of the far left. The communist party only did 2%. So they will have very little legitimacy in calling on strikes and blocking the whole country as they did in 1995 when Ch-Irak tried to reform the pension system. Better yet, the communist party could now go broke as it did not make the 5% of the vote necessary to get public funding as a political party … it couldn't happen to a nice bunch of people.

Good News #2: This dismal score for the left occurred when the participation in the election reached OECD records (close to 85% of people voting). Very encouraging for democracy.

Good News #3: the National front of Le Pen is basically imploding and may not survive the retirement of its charismatic (but completely nuts) leader.

Good News #4: The Socialist Party is, this morning, starting to tear itself to shreads looking for the reasons as to why they have lost the third presidential campaign in a row.

All in all, a lot to be happy if you are French and reform minded right now.

Jeff Sasmor notices:

07:24 TASR TASER: Sarkozy wins election; $100-120 mln order could drive $4.00 in incremental value per share - Merriman (9.53 )

Merriman notes Sarkozy was elected to a five-year term. Firm ests that the opportunity in France is worth as much as $300 mln in revs to TASR assuming the purchase of a TASR and TASR Cam for each of the 250,000 police officers in the Police Nationale and Gendarmerie Nationale. Firm says according to what TASR mgmt has last heard, a Sarkozy victory could mean the near-term purchase of 100,000 TASERs, which they est that could represent up to $100-120 mln in revs.

May

7

"Tomorrow Never Knows" by The Beatles
(there's more beyond the lyrics…)

Turn off your mind, relax
and float down stream
It is not dying
It is not dying

Lay down all thought
Surrender to the void
It is shining
It is shining

That you may see
The meaning of within
It is being
It is being

That love is all
And love is everyone
It is knowing
It is knowing

The Fab FauxI'd be willing to bet that anyone who was at least a teenager when JFK was shot remembers where s/he was when s/he heard about it. I was in Mr. Pinataro's French class in J.H.S #59 in New York City. The announcement came over the PA system. I can visualize it as if it was yesterday.

How many people who are in my age group (~5.6×10^3) remember where they were when they first heard a Beatles song? I do. I was in my homeroom in J.H.S. #59, wearing trend-setting, tight, iridescent-green pants (hot stuff), white shirt and a tie. Someone had on 57 WMCA-AM (which is now 'New York's Christian Radio,' to my surprise when I just checked). That's where I first heard the Beatles.

Tonight I went to a benefit at McCarter Theatre in Princeton NJ that featured a band called "The Fab Faux" - they're a Beatles Tribute band; supposed to be the best. It was really amazing! No, they didn't come out dressed in Sergeant Pepper outfits, rather, normal clothes. But they really were into recreating the music. They kept changing the guitars that they were using to better reproduce the original sounds. Highly recommended!

But you know, I have heard these songs SO many times that for the first half-hour or so, the pattern matcher in my brain heard every difference, every note that was different, every timing discrepancy. My wife said that I looked spaced-out. After a while I was able to ignore it and have fun.

I've often felt that the brain evolved as the ultimate pattern matching engine. How else can I recognize a song from the first note? See the predator, hear the noise, recognize the visual/aural pattern, flee, survive, reproduce.

Pass along the trait of good and quick pattern matching in your genes. Millions of years made us able to drive without perishing, cross a busy Manhattan street without getting run over, play tennis or chess, appreciate and/or play music; so many, many things, including, in my opinion, trade. I can't believe there isn't some instinct involved.

I wonder how that works as you age. Why is it that the music we grow up loving in our youth becomes mostly all we want to listen to? Do we run out of memory? Are there co-related patterns of music and experience that can't be dislodged? When I was listening to the Beatles my parents said it was garbage - why didn't I like to listen to Frank Sinatra? Why can't I get into the Fallout Boy, My Chemical Romance, and 'Emo' music that my kids love? I don't think it's 'crap' but I can't get into it. Although I finally have a greater appreciation for Sinatra and big-band music.

So the song remains the same - is that dangerous? This weekend I have read articles in various magazine about 'sell in May…' and similar. The intraday news service I use has been warning 'keep an eye on your longs and consider taking profits. So my expectation is that there will be some sort of a gap-down on Monday morning that will reverse up; I'll probably be wrong.

I think that it was in Chair & Collab's Practical Speculation that we learn about how when a certain pattern emerges and is recognized by everyone, it will shift and/or change. Excuse the misquote if I didn't get it exactly right. I've always taken this to be valuable advice.

Right now we're in sort of a no-man's land. There are a lot of conflicting bits to think about. People have been getting really used to the pattern of buying the dips. There've been huge short squeezes, especially recently. What is the song we are about to hear? Will it be All You Need is Love?

Scott Brooks adds: 

Could it be that we associate the music with fond memories?

The worry free days of youth, the hot balmy days of summer with our friends playing the neighborhood, the blustery days of winter with our friends in school, or maybe a birthday party.

I can't help but think of Mo-Val Summer youth camp, whenever I hear "Indian Summer" by Poco, or my first make out session with Cheryl C. from Mexico, Missouri (yes, I still remember her name) on the dock at camp Mo-Val while the song "More Than a Feeling" played in the background.

Put on Sammy Hager's "Turn up the Music" and I'm back cruising with my buddies on the Lindbergh Ave. to Tesson Ferry loop.

Starland Vocal Band's "Afternoon Delight" reminds me of baseball practice with dad coaching the team. We always came in first place!

Van Halen's "Runnin' with the Devil" was in the cassette 8-track on the way to football practice.

Of course, every time I hear "Sister Christian", I think of the time I pulled out into traffic and smashed into by another car.

But I'll take the good with the bad. It's all the memories that make up my life.

Apr

16

 RIP: 2/6/2004 - 4/13/2007

No, this isn't about someone who died. It's about selling a stock that I held even though it tanked after I bought it. The Buy-and-Hold Blues. Perhaps one of the usual suspects will regale us with a modified song of that name.

A little over 2 years ago, Feb 6 2004, to be exact, I bought a little bit of MRK. You know, of Vioxx fame. It was down in the mid-40s, a bit from its recent peak of about 60, so I bought in. Just a few hundred shares to get started; I planned to add more later (fortunately never did since it sort of oscillated in a narrow range). I didn't pay a lot of attention to it.

Well, we all know what happened to MRK. Come around the beginning of Oct 2004 it went over a cliff and proceeded to go down to nearly $25. But for some reason I decided to hold on to it. Can't tell you why. Little did I know it would take more than 2 years to come back! Something gnawed at me - take the loss, dummy. But I didn't. Nope, can't tell you why. Felt a bit dumb about it, actually. Watched it claw its way up, fall down, dust itself off and climb again.

Well, I said goodbye to my old friend on Friday when it gapped up on news of Vioxx trial success, several upgrades, and earnings. I was used to seeing it on the screen every day. It became an old friend. But my hand reached out, I clicked the mouse, and sold within 20 cents from the HOD (not bragging, just fortunate). My suspicion is that a lot of people will be selling it on Monday as they prime the pump via Schwab and Ameritrade websites over the weekend. So what if I'm wrong? So it goes.

But what's odd to me about how I handled this was how I anthropomorphized this stock. Maybe it was a way of deflecting the shame reaction: rationalizing my bad decision not to sell it when it originally broke down on the bad news. Because it had to be a rationalization - there was really no good reason to hold on to it.

RIP, my MRK shares. May you enliven someone else's life. You're out of mine.

Paolo Pezzutti adds:

If you like them so much you can buy them again lower on Monday! 

Feb

28

Stand-in mistress sought to take wife's abuse…

Monday, Feb 26, 2007 7:40AM CST

BEIJING (Reuters) - A Chinese businessman has advertised on the Internet for a stand-in mistress to be beaten up by his wife to vent her anger and to protect his real mistress, Chinese media reported on Monday.

"When the woman found out her husband had a mistress, she insisted on beating her up," the Beijing Youth Daily said, citing the advertisement posted on a popular online jobs forum on sina.com.

More than 10 people had applied for the job, the newspaper said. The "successful" candidate would be 35 and originally from northeastern China and would be paid 3,000 yuan ($400) per 10 minutes, it said.

Many Chinese businessmen keep mistresses in second homes, a trend banished after the Communists swept to power in 1949 but which has made a comeback with market reforms in recent decades.

Susan Turner remarks:

This has a Doug-and-Dinsdale sound to me. Why not just beat him up? No doubt this has already occurred to many people reading this…

Feb

24

 On January 22 I took my older daughter to the allergist for a checkup; she's been having allergy shots for about a year. Prior to seeing the doctor (a cursory exam where he mostly talked about his real-estate taxes, essentially the same conversation as last year. I didn't have the heart to tell him I have it even worse than he does) a nurse did a test using a device that I'd never seen before called a Peak Flow meter. It's used to test the airways of asthmatics. My daughter isn't an asthmatic but they test everyone.

A Peak Flow meter is a small tube that you blow into after taking a deep breath. My daughter registered about 350 somethings. Curious, I decided to try it as well. I took a huge breath, thinking that there would be some resistance and blew hard - and to no one's surprise, with a result of about 550 somethings, I am quite the blowhard. Interesting, there's almost no resistance at all. The nurse told me that the idea is to measure the volume of air that comes out, not how hard you can blow.

So naturally on a slow day like today (Friday) when I watch the Brownian motion of numbers and screen-wigglies up and down, my mind began to wander and I thought about the Peak Flow test and how we've been having a situation where lately there's no resistance at all to blowing through one peak after another. Almost like blowing into the Peak Flow meter.

Spec Listers often talk about the market mistress (if you Google "market mistress," the only direct hits seem to be the Daily Spec blog), and I for one have an anthropomorphic view of the market organism as well. However my personal visualization is of a character, a group mind, that's definitely manic depressive, often paranoid, and certainly schizophrenic. Not a nice thing to say about a lady. Or a fellow, for that matter.

Maybe today he or she was catching its breath? Maybe she can only take a deep breath and blow a 550 a certain number of times; then she has to take a day off? I was glad that he did. Maybe she was taking the day off to think about what to do next. How to confound those who are trying to foretell, the bulls who are looking for a nice neat 10.00% pullback to some recognizable moving average, or Fibonacci retracement so that they can load up again on stocks, or the bears who predict that mortgage derivatives have already bankrupted a bunch of hedge funds and banks last week due to Thiotimoline contamination, and we should all buy gold.

I have no idea. Maybe that's the best approach as I can't be wrong that way. Nobody knows what will happen Monday at 9:30 EST. I could guess. But I'd probably be wrong. There's a signpost up ahead. It's a 4-way stop. Four cars (interesting that the character for the '4' key is a '$') waiting to see who will go first. Each one edges out a little bit to see what the other guy will do. If they figure it out, it's orderly. If they don't, it's a crash.

Now I have to take off my thinking cap and get ready to watch Bill Maher insult President Bush on HBO.

Feb

8

 There has been entirely too little thought given to the mechanism, pathways and reasons that negative feedback works in markets. Perhaps the main reason is that the feeding web is based on a reasonable stability in what and how much is being eaten and recycled.

The people who consume and redistribute must maintain a ready and stable supply of those who produce. They develop mechanisms to keep everything going. One of them is the specialization and great efficiency in their activities. If markets deviate too much from the areas and levels within which the specialization has developed, then much waste and new effort and mechanisms will be necessary.

Aside from the grind that trend following causes (i.e. the losses in execution), and the negative feedback system of movements in the supply and demand schedules that equilibrate, which Marshall pioneered and are now standard in economics, and the numerous other reasons I've set forth (e.g. the fixed nature of the system and the flexibility to profit from it), this appears to me to be the main reason that trend following doesn't work.

Here are a few interesting articles on the subject:

How Great Traders Make Millions in Up or Down Markets 

Does Trend Following Work On Stocks?

Interviews At RealWorld Trading

Why I Don't Believe in Trends

Briefly Speaking . . . 

Bill Rafter writes: 

Dr. Bruno had posed the idea of beating an index by deleting the worst performers. This is an area in which we have done considerable work. Please note that we do not consider this trend-following. The assets are not charted, just ranked.

Let us imagine an investor who is savvy enough to identify what is strong about an economy and invest in sectors representative of those areas, while avoiding sectors representing the weaker areas of the economy. Note that we are not requiring our investor to be prescient. He does not need to see what will be strong tomorrow, just what is strong and weak now, measured by performance over a recent period.

What is a market sector? The S&P does that work for us, and breaks down the overall market (that is, the S&P 500) into 10 Sectors. They further break it down into 24 Industry Groups, and further still into 60-plus Industries and 140-plus Sub-Industries. The number of the various groups and their constituents changes from time to time as the economy evolves, but essentially the 500 stocks can be grouped in a variety of ways, depending on the degree of focus desired. Some of the groupings are so narrow that only one company represents that group.

Our investor starts out looking at the 10 Sectors and ranks them according to their performance (such as their quarterly rate of change). He then invests in those ranked first through fourth (25 percent in each), and maintains those holdings until the rankings change. How does he do? Not bad, it turns out.

www.mathinvestdecisions.com/Best_4_of_10.gif

From 1990 through 2006, which encompasses several types of market conditions, the overall market managed an 8 percent compound annual rate of return. Our savvy investor achieved 10.77%. A less savvy investor who had the bad fortune to pick the worst six groups would have earned 7.23%. Those results are below. (Note, for comparison purposes, all results excluded dividends.)

www.mathinvestdecisions.com/Worst_6_of_10.gif

How can our savvy investor do better? By simply sharpening one's focus, major improvements can be achieved. If instead of ranking the top 4 of10 Sectors, our savvy investor invests in a similar number (say the top 4, 5 or 6) of the 24 Industry Groups, he achieves a 13.12% compoundedannual rate of return over the same period. Note that the same stocks are represented in the 10 Sectors and the 24 Industry Groups. At no time did he have to be prescient.

www.mathinvestdecisions.com/Going_to_24_groups.gif

One thing you will notice from the graphs above is that the equity curves of our savvy and unlucky investors mimic the rises and declines of the market index itself. Being savvy makes money but it does not insulate one from overall bad markets because the Sectors and even the Industry Groups are not significantly diversified from the overall market.

Why not keep going further out and rank all stocks individually? That clearly results in superior returns, but the volume of trading is such that it can only be accomplished effectively in a fund structure - not by the individual. And even ranking thousands of stocks will not insulate an investor from an overall market decline, if he is only invested in equities. The answer of course is diversification.

It is possible to rank debt and alternative investment sectors alongside equities, in the hope of letting their performances dictate what the investor should own. However the debt and commodities markets have different volatilities than the equities markets. Anyone ranking them must make adjustments for their inherent differences. That is, when ranking really diverse assets, one must rank them on a risk-adjusted basis for it to be a true comparison. However if we make those adjustments and rank treasury bonds (debt) against our 24 Industry Groups (equity) we can avoid some of the overall equity declines. We refer to this as a Strategic Overlay:

www.mathinvestdecisions.com/Strategic_diversification.gif

Adding this Strategic Overlay increases the returns slightly, but more important, diversifies the investor away from some periods of total equity market decline. We are not talking of a policy of running for cover every time the equities markets stall. In the long run, the investor must be in equities.

Invariably in ranking diverse assets such as equities, debt and commodities, our investor will be faced with a decision that he should be completely out of equities. It is likely that will occur during a period of high volatility for equities, but one that has also experienced great returns. Thus, our investor would be abandoning equities when his recent experience would suggest otherwise. And since timing can never be perfect, it is further likely that the equities he abandons will continue to outperform for some period. On an absolute basis, equities may rank best, but on a risk-adjusted basis, they may not. It is not uncommon for investors to ignore risk in such a situation, to their subsequent regret.

Ranking is not without its problems. For example, if you are selecting the top 4 groups of whatever category, there is a fair chance that at some time the assets ranked 4 and 5 will change places back and forth on a daily basis. This "flutter" can be easily solved by providing those who make the cut with a subsequent incumbency advantage. For a newcomer to replace a list member, it then must outrank the current assets on the selected list by the incumbency advantage. This is very similar to the manner in which thermostats work. We have found adding an incumbency advantage to be a profitable improvement without considering transactions costs. When one also considers the reduced transaction costs, the benefits increase even more.

Another important consideration is the "lookback" period. Above we used the example of our savvy investor ranking assets on the basis of their quarterly growth. Not surprisingly, the choice of a lookback period can have an effect on profitability. Since markets tend to fall more abruptly than they rise, lookback periods that perform best during rising markets are markedly different from those that perform best during falling markets. Determining whether a market is rising or falling can be problematic, as it can only be done with certainty in retrospect. However, another key factor influencing the choice of a lookback period is volatility, which can be determined concurrently. Thus an optimal lookback period can be automatically determined based on volatility.

There is certainly no question that a diligent investor can outperform the market. By outperforming the market we mean that he will achieve a greater average rate of return than the market, while limiting the maximum drawdown (or percentage equity decline) to less than that experienced by the market. But the average investor is generally not up to the diligence or persistence required.

In the research work illustrated above, all transactions were executed on the close of the day following a decision being made. Thus the strategy illustrated is certainly executable. Nothing required a forecast; all that was required was for the investor to recognize concurrently which assets have performed well over a recent period. It is not difficult, but requires daily monitoring.

www.mathinvestdecisions.com/about.htm

Charles Pennington writes:

Referring to the MathInvestor's plot:

www.mathinvestdecisions.com/Worst_6_of_10.gif :

At first glance it appears that the "Best" have been beating the "Worst" consistently.

In fact, however, all of the outperformance was from 1990 through 1995. From 1996 to present, it was approximately a tie.

Reading from the plot, I see that the "Best" portfolio was at about 2.1 at the start of 1996. It grew to about 5.5 at the end of the chart for a gain of about 160%. Over the same period, the "Worst" grew from 1.3 to 3.2, a gain of about 150%, essentially the same.

So for the past 11 years, this system had negligible outperformance.

One should also consider that the "Best" portfolio benefits in the study from stale pricing, which one could not capture in real trading. Furthermore, dividends were not included in the study. My guess is that the "Worst" portfolio would have had a higher dividend yield.

In order to improve this kind of study, I would recommend:

1.) Use instruments that can actually be traded, rather than S&P sectors, in order to eliminate the stale pricing concern.

2.) Plot the results on a semilog graph. That would have made it clear that all the outperformance happened before 1996.

3.) Finally, include dividends. The reported difference in compound annual returns (10.8% vs 8.0%) would be completely negated if the "Worst" portfolio had a yield 2.8% higher than the "Best".

Bill Rafter replies:

Gentlemen, please! The previously sent illustration of asset ranking is not a proposed "system," but simply an illustration that tilting one's portfolio away from dogs and toward previous performers can have a beneficial effect on the portfolio. The comparison between the 10 Sectors and the 24 Industry Groups illustrates the benefits of focus. That is, (1) don't buy previous dogs, and (2) sharpen your investment focus. Ignore these points and you will be leaving money on the table.

We have done this work with many different assets such as ETFs and even Fidelity funds (which require a 30-day holding period), both of which can be realistically traded. They are successful, but not overwhelmingly so. Strangely, one of the best asset groups to trade in this manner would be proprietarily-traded small-cap funds.

Unfortunately if you try trading those, your broker will disown you. I mention that example only to suggest that some assets truly do have "legs," or "tails" if you prefer. I think their success is attributed to the fact that some prop traders are better than others, and ranking them works. An asset group with which we have had no success is high-yield debt funds. I have no idea why.

A comment from Jerry Parker:

 I wrote an initial comment to you via your website [can be found under the comments link by the title of this post], disputing your point of view, which a friend of mine read, and sent me the following:

I read your comment on Niederhoffer's Daily Spec in response to his arguments against trend following. Personally, I don't think it boils down to intelligence, but rather to ego. Giving up control to an ego-less computer is not an easy task for someone who believes so strongly in the ability of the human mind. I have great respect for his work and his passion for self study, but of course disagree with his thoughts on trend following. On each trade, he is only able to profit if it "trends" in a favorable direction, whether the holding period is 1 minute or 1 year. Call it what you will, but he trades trends all day.

He's right. I was wrong. Trend following is THE enemy of the 'genius'. You and your friends can't even see how stupid your website is. You are blinded by your superior intelligence and arrogance.

Victor Niederhoffer responds:

Thanks much for your contributions to the debate. I will try to improve my understanding of this subject and my performance in the future so as not to be such an easy target for your critiques.

Ronald Weber writes: 

 When you think about it, most players in the financial industry are nothing but trend followers (or momentum-players). This includes analysts, advisors, relationship managers, and most fund or money managers. If there is any doubt, check the EE I function on Bloomberg, or the money flow/price functions of mutual funds.

The main reason may have more to do with career risk and the clients themselves. If you're on the right side while everyone is wrong, you will be rewarded; if you're on the wrong side like most of your peers you will be ok; and if you're wrong while everyone is right then you're in trouble!

In addition, most normal human beings (daily specs not included!) don't like ideas that deviate too much from the consensus. You are considered a total heretic if you try to explain why, for example, there is no link between the weak USD and the twin deficits. This is true, too, if you would have told anyone in 2002 that the Japanese banks will experience a dramatic rebound like the Scandinavian banks in the early '90s, and so on, or if you currently express any doubt on any commodity.

So go with the flow, and give them what they want! It makes life easier for everyone! If you can deal with your conscience of course!

The worse is that you tend to get marginalized when you express doubt on contagious thoughts. You force most people to think. You're the boring party spoiler! It's probably one reason why the most successful money managers or most creative research houses happen to be small organizations.

Jeremy Smith offers:

 Not arguing one way or the other here, but for any market or any stock that is making all time highs (measured for sake of argument in years) do we properly say about such markets and stocks that there is no trend?

Vincent Andres contributes: 

I would distinguish/disambiguate drift and trend.

"Drift": Plentifully discussed here. "Trend": See arcsine, law of series, etc.

In 2D, the French author Jean-Paul Delahaye speaks about "effet rateau" (rake effect), here and here .

Basically, our tendency is to believe that random equals equiprobability everywhere (2D) or random equals equiprobability everytime (1D), and thus that nonequiprobability everywhere/everytime equals non random

In 1D, non equiprobability everytime means that the sequence -1 +1 -1 +1 -1 +1 -1 +1 is in fact the rare and a very non random sequence, while the sequences -1 +1 +1 +1 +1 +1 -1 +1 with a "trend" are in fact the truly random ones. By the way, this arcsine effect does certainly not explain 100% of all the observed trends. There may also be true ones. Mistress would be too simple. True drift may certainly produce some true trends, but certainly far less than believed by many.

Dylan Distasio adds:

 For those who don't believe trend following can be a successful strategy, how would you explain the long-term performance of the No Load Fund X newsletter? Their system consists of a fairly simple relative strength mutual fund (and increasingly ETF) model where funds are held until they weaken enough in relative strength to swap out with new ones.

The results have been audited by Hulbert and consistently outperform the S&P 500 over a relatively long time frame (1980 onwards). I think their results make a trend following approach worth investigating…
 

Jerry Parker comments again: 

All you are saying is that you're not smart enough to develop a trend following system that works. What do you say about the billions of dollars traded by trend following CTAs and their long term track records?

Steve Leslie writes:

 If the Chair is not smart enough to figure out trend following, what does that bode for the rest of us?

There is a very old yet wise statement: Do not confuse brains with a bull market.

Case in point: prior to 2000 the great tech market run was being fueled by the hysteria surrounding Y2K. Remember that term? It is not around today but it was the cause for the greatest bull market seen in stocks ever. Dot.com stocks and new issues were being bought with reckless abandon.

New issues were priced overnight and would open 40-50 points higher the next trading day. Money managers had standing orders to buy any new issues. There was no need for dog-and-pony or road shows. It was an absolute classic and chaotic case of extraordinary delusion and crowd madness.
Due diligence was put on hold, or perhaps abandoned. A colleague of mine once owned enough stock in a dot.com that had he sold it at a propitious time, he would have had enough money to purchase a small Hatteras yacht. Today, like many contemporary dot.coms, that stock is essentially worthless. It would not buy a Mad magazine.

Corporations once had a virtual open-ended budget to upgrade their hardware and software to prepare for the upcoming potential disaster. This liquidity allowed service companies to cash in by charging exorbitant fees. Quarter to quarter earnings comparisons were beyond belief and companies did not just meet the numbers, they blew by them like rocket ships. What made it so easy to make money was that when one sold a stock, all they had to do was purchase another similar stock that also was accelerating. The thought processes where so limited. Forget value investing; nobody on the planet wanted to talk to those guys. The value managers had to scrape by for years while they saw their redemptions flow into tech, momentum, and micro cap funds. It became a Ponzi scheme, a game of musical chairs. The problem was timing.

The music stopped in March of 2000 when CIO's need for new technology dried up coincident with the free money, and the stock market went into the greatest decline since the great depression. The NASDAQ peaked around 5000. Today it hovers around 2500, roughly half what it was 7 years ago.

It was not as if there were no warning signs. Beginning in late 1999, the tech market began to thin out and leadership became concentrated in a few issues. Chief among the group were Cisco, Oracle, Qwest, and a handful of others. Every tech, momentum, and growth fund had those stocks in their portfolio. This was coincident with the smart money selling into the sectors. The money managers were showing their hands if only one could read between the lines. Their remarks were "these stocks are being priced to perfection." They could not find compelling reasons not to own any of these stocks. And so on and on it went.

After 9/11 markets and industries began to collapse. The travel industry became almost nonexistent. Even Las Vegas went on life support. People absolutely refused to fly. Furthermore, business in and around New York City was in deep peril. This forced the Fed to begin dramatically reducing interest rates to reignite the economy. It worked, as corporations began to refinance their debt and restructure loans, etc.

The coincident effect began to show up in the housing industry. Homeowners refinanced their mortgages (yours truly included) and took equity out of their homes. Home-buyers were thirsty for real estate and bought homes as if they would disappear off the earth. For $2000 one could buy an option on a new construction home that would not be finished for a year. "Flipping" became the term du jour. Buy a home in a hot market such as Florida for nothing down and sell it six months later at a much higher price. Real estate was white hot. Closing on real estate was set back weeks and weeks. Sellers had multiple offers on their homes many times in the same day. This came to a screeching halt recently with the gradual rise in interest rates and the mass overbuilding of homes, and the housing industry has slowed dramatically.

Houses for sale now sit on the blocks for nine months or more. Builders such as Toll, KB, and Centex have commented that this is the worst real estate market they have seen in decades. Expansion plans have all but stopped and individuals are walking away from their deposits rather than be upside down in their new home.

Now we have an ebullient stock market that has gone nearly 1000 days without so much as a 2% correction in a day. The longest such stretch in history. What does this portend? Time will tell. Margin debt is now at near all-time highs and confidence indicators are skewed. Yet we hear about trend followers and momentum traders and their success. I find this more than curious. One thing that they ever fail to mention is that momentum trading and trend following does not work very well in a trendless market. I never heard much about trend followers from June 2000 to October 2002. I am certain that this game of musical chairs will end, or at least be temporarily interrupted.

As always, it is the diligent speculator who will be prepared for the inevitable and capitalize upon this event. Santayana once said, "Those who cannot remember the past are condemned to repeat it."
 

From "A Student:"

 Capitalism is the most successful economic system in the history of the world. Too often we put technology up as the main driving force behind capitalism. Although it is true that it has much to offer, there is another overlooked hero of capitalism. The cornerstone of capitalism is good marketing.

The trend following (TF) group of fund managers is a perfect example of good marketing. As most know, the group as a whole has managed to amass billions of investor money. The fund operators have managed to become wealthy through high fees. The key to this success is good marketing not performance. It is a tribute to capitalism.

The sports loving fund manger is a perfect example. All of his funds were negative for 2006 and all but one was negative over the last 3 years! So whether one looks at it from a short-term one year stand point or a three year perspective his investors have not made money. Despite this the manager still made money by the truckload during this period. Chalk it up to good marketing, it certainly was not performance.

The secret to this marketing success is intriguing. Normally hedge funds and CTAs cannot solicit investors nor even publicly tout their wares on an Internet site. The TF funds have found a way around this. There may be a web site which openly markets the 'concept' of TF but ostensibly not the funds. On this site the names of the high priests of TF are repeatedly uttered with near religious reverence. Thus this concept site surreptitiously drives the investors to the TF funds.

One of the brilliant marketing tactics used on the site is the continuous repetition of the open question, "Why are they (TF managers) so rich?" The question is offered as a sophist's response to the real world question as to whether TF makes money. The marketing brilliance lies in the fact that there is never a need to provide factual support or performance records. Thus the inconvenient poor performance of the TF funds over the last few years is swept under the carpet.

Also swept under the rug are the performance figures for once-great trend followers who no longer are among the great, i.e., those who didn't survive. Ditto for the non-surviving funds in this or that market from the surviving trend followers.

Another smart technique is how the group drives investor traffic to its concept site. Every few years a hagiographic book is written which idolizes the TF high priests. It ostensibly offers to reveal the hidden secrets of TF.

Yet after reading the book the investor is left with no usable information, merely a constant repetition of the marketing slogan: How come these guys are so rich? Obviously the answer is good marketing but the the book is moot on the subject. Presumably, the books are meant to be helpful and the authors are true believers without a tie-in in mind. But the invisible hand of self-interest often works in mysterious ways.

In the latest incarnation of the TF book the author is presented as an independent researcher and observer. Yet a few days after publication he assumes the role of Director of Marketing for the concept site. Even the least savvy observer must admit that it is extraordinary marketing when one can persuade the prospect to pay $30 to buy a copy of the marketing literature.
 

Jason Ruspini adds:

 "I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods."

I humbly corroborate this point. If one eliminates long equity, long fixed income (and fx carry) positions, most trend-following returns evaporate.

Metals and energies have helped recently, after years of paying floor traders.

Victor replies:

 I don't agree with all the points above. For example, the beauty of capitalism is not its puffery, but the efficiency of its marketing and distribution system as well as the information and incentives that the prices provide so as to fulfill the pitiless desires of the consumers. Also beautiful is in the mechanism that it provides for those with savings making low returns to invest in the projects of entrepreneurs with much higher returns in fields that are urgently desired by customers.

I have been the butt of abuse and scorn from the trend followers for many years. One such abusive letter apparently sparked the writer's note. Aside from my other limitations, the trend following followers apparently find my refusal to believe in the value of any fixed systems a negative. They also apparently don't like the serial correlation coefficients I periodically report that test the basic tenets of the trend following canon.

I believe that if there are trends, then the standard statistical methods for detecting same, i.e., correlograms, regressions, runs and turning point tests, arima estimates, variance ratio tests, and non-linear extensions of same will show them.

Such tests as I have run do not reveal any systematic departures from randomness. Nor if they did would I believe they were predictive, especially in the light of the principle of ever changing cycles about which I have written extensively.

Doubtless there is a drift in the overall level of stock prices. And certain fund managers who are biased in that direction should certainly be able to capture some of that drift to the extent that the times they are short or out of the market don't override it. However, this is not supportive of trend following in my book.

Similarly, there certainly has been over the last 30 years a strong upward movement in fixed income prices. To the extent that a person was long during this period, especially if on leverage, there is very good reason to believe that they would have made money, especially if they limited their shorts to a moiete.

Many of the criticisms of my views on trend following point to the great big boys who say they follow trends. To the extent that those big boys are not counterbalanced by others bigs who have lost, I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods.

I have no firm belief as to whether such things as trends in individual stocks exist. The statistical problem is too complex for me because of a paucity of independent data points, and the difficulties of maintaining an operational prospective file.

Neither do I have much conviction as to whether trends exist in commodities or foreign exchange. The overall negative returns to the public in such fields seem to be of so vast a magnitude that it would not be a fruitful line of inquiry.

If I found such trends through the normal statistical methods, I would suspect them as a lure of the invisible evil hand to bring in big money to follow trends after a little money has been made by following them, the same way human imposters work in other fields. I believe that such a tendency for trend followers to lose with relatively big money after making with smaller amounts is a feature of all fixed systems. And it's guaranteed to happen by the law of ever-changing cycles.

The main substantive objection to my views that I have found in the past, other than that trend followers know many people who make money following trends (a view which is self-reported and selective and non-systematic, and thus open to some of the objections of those of the letter-writer), is that they themselves follow trends and charts and make much money doing it. What is not seen by these in my views is what they would have made with their natural instincts if they did not use trend following as one of their planks. This is a difficult argument for them to understand or to confirm or deny.

My views on trend following are always open to new evidence, and new ways of looking at the subject. I solicit and will publish all views on this subject in the spirit of free inquiry and mutual education.

 Jeff Sasmor writes:

 Would you really call what FUNDX does trend following? Well, whatever they do works.

I used their system successfully in my retirement accounts and my kids' college UTMA's and am happy enough with it that I dumped about 25% of that money in their company's Mutual Funds which do the same process as the newsletter. The MFs are like an FOF approach. The added expense charges are worth it. IMO, anyway. Their fund universe is quite small compared to the totality of funds that exist, and they create classes of funds based on their measure of risk.

This is what they say is their process. When friends ask me what to buy I tell them to buy the FUNDX mutual fund if their time scale is long. No one has complained yet!

It ain't perfect (And what is? unless your aim is to prove that you're right) but it's better than me fumfering around trying to pick MFs from recommendations in Money Magazine, Forbes, or Morningstar.

I'm really not convinced that what they do is trend following though.

Dylan Distasio Adds:

 For those who don't believe trend following can be a successful strategy, how would you explain the long-term performance of the No Load Fund X newsletter?

Michael Marchese writes: 

In a recent post, Mr. Leslie finished his essay with, "I never heard much about trend followers from June 2000 to October 2002." This link shows the month-to-month performance of 13 trend followers during that period of time. It seems they did OK.

Hanny Saad writes:

 Not only is trend following invalid statistically but, looking at the bigger picture, it has to be invalid logically without even running your unusual tests.

If wealth distribution is to remain in the range of 20 to 80, trend following cannot exist. In other words, if the majority followed the trend (hence the concept of trends), and if trend following is in fact profitable, the majority will become rich and the 20-80 distribution will collapse. This defeats logic and history. That said, there is the well-covered (by the Chair) general market upward drift that should also come as no surprise to the macro thinkers. The increase in the general population, wealth, and the entrepreneurial spirit over the long term will inevitably contribute to the upward drift of the general market indices as is very well demonstrated by the triumphal trio.

While all world markets did well over the last 100 yrs, you notice upon closer examination that the markets that outperformed were the US, Canada, Australia, and New Zealand. The one common denominator that these countries have is that they are all immigration countries. They attract people.

Contrary to what one hears about the negative effects of immigration, and how immigrants cause recessions, the people who leave their homelands looking for a better life generally have quite developed entrepreneurial spirits. As a result, they contribute to the steeper upward curve of the markets of these countries. When immigrants are allowed into these countries, with their life savings, home purchases, land development, saving and borrowing, immigration becomes a rudder against recession, or at least helps with soft landings. Immigration countries have that extra weapon called LAND.

So in brief, no - trends do not exists and can not exist either statistically or logically, with the exception of the forever upward drift of population and general markets with some curves steeper than others, those of the countries with the extra weapon called land and immigration.

A rereading of The Wealth And Poverty Of Nations, by Landes, and the triumph of the optimist may be in order.

Steve Ellison adds:

 So Mr. Parker's real objective was simply to insult the Chair, not to provide any evidence of the merits of trend following that would enlighten us (anecdotes and tautologies that all traders can only profit from favorable trends prove nothing). I too lack the intelligence to develop a trend following system that works. When I test conditions that I naively believe to be indicative of trends, such as crossovers of moving averages, X-day highs and lows, and the direction of the most recent Y percent move, I usually find negative returns going forward.

Bacon summarized his entire book in a single sentence: "Always copper the public play!" My more detailed summary was, "When the public embraces a particular betting strategy, payoffs fall, and incentives (for favored horsemen) to win are diminished."

Trend Following — Cause, from James Sogi: 

Generate a Brownian motion time series with drift in R

WN <-rnorm(1024);RW<-cumsum(WN);DELTAT<-1/252;

MU<-.15*DELTAT;SIG<-.2*sqrt(DELTAT);TIME<-(1:1024)/252 stock<-exp(SIG*RW+MU*TIME) ts.plot(stock)

Run it a few times. Shows lots of trends. Pick one. You might get lucky.

Trend Following v. Buy and Hold, from Yishen Kuik 

The real price of pork bellies and wheat should fall over time as innovation drives down costs of production. Theoretically, however, the nominal price might still show drift if the inflation is high enough to overcome the falling real costs of production.

I've looked at the number of oranges, bacon, and tea a blue collar worker's weekly wages could have purchased in New York in 2000 versus London in the 1700s. All quantities showed a significant increase (i.e., become relatively cheaper), lending support to the idea that real costs of production for most basic foodstuffs fall over time.

Then again, according to Keynes, one should be able to earn a risk premium from speculating in commodity futures by normal backwardation, since one is providing an insurance service to commercial hedgers. So one doesn't necessarily need rising spot prices to earn this premium, according to Keynes.

Not All Deer are Five-Pointers, from Larry Williams

 What's frustrating to me about trading is having a view, as I sometimes do, that a market should be close to a short term sell, yet I have no entry. This betwixt and between is frustrating, wanting to sell but not seeing the precise entry point, and knowing I may miss the entry and then see the market decline.

So I wait. It's hard to learn not to pull the trigger at every deer you see. Not all are five-pointers… and some will be bagged by better hunters than I.

From Gregory van Kipnis:

 Back in the 70s a long-term study was done by the economic consulting firm of Townsend Greenspan (yes, Alan's firm) on a variety of raw material price indexes. It included the Journal of Commerce index, a government index of the geometric mean of raw materials and a few others. The study concluded that despite population growth and rapid industrialization since the Revolutionary War era, that supply, with a lag, kept up with demand, or substitutions (kerosene for whale blubber) would emerge, which net-net led to raw material prices being a zero sum game. Periods of specific commodity price rises were followed by periods of offsetting declining prices. That is, raw materials were not a systematic source of inflation independent of monetary phenomena.

It was important to the study to construct the indexes correctly and broadly, because there were always some commodities that had longer-term rising trends and would bias an index that gave them too much weight. Other commodities went into long-term decline and would get dropped by the commodity exchanges or the popular press. Just as in indexes of fund performance there can be survivor bias, so too with government measures of economic activity and inflation.

However, this is not to say there are no trends at the individual commodity level of detail. Trends are set up by changes in the supply/demand balance. If the supply/demand balance changes for a stock or a commodity, its price will break out. If it is a highly efficient market, the breakout will be swift and leave little opportunity for mechanical methods of exploitation. If it is not an efficient market (for example, you have a lock on information, the new reality is not fully understood, the spread of awareness is slow, or there is heavy disagreement, someone big has to protect a position against an adverse move) the adjustment may be slower to unfold and look like a classic trend. This more often is the case in commodities.

Conversely, if you find a breakout, look for supporting reasons in the supply/demand data before jumping in. But, you need to be fast. In today's more highly efficient markets the problem is best summarized by the paradox: "look before you leap; but he who hesitates is lost!"

Larry Williams adds:

I would posit there is no long-term drift to commodities and thus we have a huge difference in these vehicles.

The commodity index basket guys have a mantra that commodities will go higher - drift - but I can find no evidence that this is anything but a dream, piquant words of promotion that ring true but are not.

I anxiously stand to be corrected.

Marlowe Cassetti writes:

 "Along a similar vein, why would anybody pay Powershares to do this kind of work when the tools to do it yourself are so readily available?"

The simple answer is if someone wishes to prescribe to P&F methodology investing, then an ETF is a convenient investment vehicle.

With that said, this would be an interesting experiment. Will the DWA ETF be another Value Line Mutual Fund that routinely fails to beat the market while their newsletter routinely scores high marks? There are other such examples, such as IBD's William O'Neal's aborted mutual fund that was suppose to beat the market with the fabulous CANSLIM system. We have talked about the great track record of No-Load Fund-X newsletter, and their mutual fund, FUNDX, has done quite well in both up and down markets (an exception to the above mentioned cases).

For full disclosure I have recently added three of their mutual funds to my portfolio FUNDX, HOTFX, and RELAX. Hey, I'm retired and have better things to do than do-it-yourself mutual fund building. With 35 acres, I have a lot of dead wood to convert into firewood. Did you know that on old, dead juniper tree turns into cast iron that dulls a chain saw in minutes? But it will splinter like glass when whacked with a sledgehammer.

Kim Zussman writes:

…about the great track record of No-Load Fund-X newsletter and their mutual fund FUNDX has done quite well in both up and down markets… (MC)

Curious about FUNDX, checked its daily returns against ETF SPY (essentially large stock benchmark).

Regression Analysis of FUNDX versus SPY since inception, 6/02 (the regression equation is FUNDX = 0.00039 + 0.158 SPY):

Predictor    Coef         SE Coef           T             P
Constant    0.00039    0.000264        1.48        0.14
SPY            0.15780    0.026720        5.91        0.00

S = 0.00901468    R-Sq = 2.9%   R-Sq (adj) = 2.8%

The constant (alpha) is not quite significant, but it is positive, so FUNDX did out-perform SPY. Slope is significant and the coefficient is about 0.16, which means FUNDX was less volatile than SPY.

This is also shown by F-test for variance:

Test for Equal Variances: SPY, FUNDX

F-Test (normal distribution) Test statistic = 1.17, p-value = 0.009 (FUNDX<SPY)

But t-test for difference between daily returns shows no difference:

Two-sample T for SPY vs FUNDX

            N          Mean      St Dev       SE Mean
SPY      1169     0.00041  0.0099       0.00029
FUNDX 1169     0.00045  0.0091       0.00027   T=0.12        

So it looks like FUNDX has been giving slight/insignificant out-performance with significantly less volatility; which makes sense since it is a fund of mutual funds and ETFs.

Even better is Dr Bruno's idea of beating the index by deleting the worst (or few worst) stocks (new additions?).

How about an equal-weighted SP500 (which out-performs when small stocks do), without the worst 50 and double-weighting the best 50.

Call it FUN-EX, in honor of the fun you had with your X that was all mooted in the end.

Alex Castaldo writes:

The results provided by Dr. Zussman are fascinating:

The fund has a Beta of only 0.157, incredibly low for a stock fund (unless they hold a lot of cash). Yet the standard deviation of 0.91468% per day is broadly consistent with stock investing (S&P has a standard deviation of 1%). How can we reconcile this? What would Scholes-Williams, Dimson, and Andy Lo think when they see such a low beta? Must be some kind of bias.

I regressed the FUNDX returns on current and lagged S&P returns a la Dimson (1979) with the following results:

Regression Statistics
Multiple R                0.6816
R Square                 0.4646
Adjusted R Square   0.4627
Standard Error        0.0066
Observations           0.1166

ANOVA
                    df         SS          MS         F            Significance F
Regression       4      0.0444    0.0111   251.89    8.2E-156
Residual      1161      0.0511    4.4E-05
Total           1165      0.0955

                Coefficients  Standard Error  t-Stat        P-value
Intercept  8.17E-05     0.000194           0.4194        0.6749
SPX          0.18122      0.019696           9.2007        1.6E-19
SPX[-1]    0.60257      0.019719         30.5566        6E-151 SPX[-2]    0.08519      0.019692           4.3260        1.648E-05 SPX[-3]    0.04524      0.019656           2.3017        0.0215

Note the following:

(1) All four S&P coefficients are highly significant.

(2) The Dimson Beta is 0.914 (the sum of the 4 SPX coefficients). The mystery of the low beta has been solved.

(3) The evidence of price staleness, price smoothing, non-trading, whatever you want to call it is clear. Prof. Pennington touched on this the other day; an "efficiently priced" asset should not respond to past S&P price moves. Apparently though, FUNDX holds plenty of such assets (or else the prices of FUNDX itself, which I got from Yahoo, are stale).

S. Les writes:

Have to investigate the Fund X phenomenon. And look to see how it has done in last several years since it was post selected as good. Someone has to win a contest, but the beaten favorites are always my a priori choice except when so many others use that as a system the way they do in sports eye at the harness races, in which case waiting for two races or two days seems more apt a priori. VN 

 I went to the Fund X website to read up, and the information is quite sparse. It is a very attenuated website. I called the toll free number and chatted with the person on the other line. Information was OK, but, in my view, I had to ask the proper questions. One has several options here. One is to purchase the service and do the fund switching themselves based on the advice of their experts. The advisory service tracks funds that have the best relative strength performance and makes their recommendations from there, www.fundx.com.

Another is to purchase one of four funds available. They have varying levels of aggressiveness. Fund 3 appears to be the recommended one.

If one purchases the style 3 one will get a very broad based fund of funds. I went to yahoo to look up the holdings at www.finance.yahoo.com/q/hl?s=FUNDX.

Top ten holdings are 47.5% of the portfolio, apparently concentrated in emerging markets and international funds at this time.

In summary, if money were to be placed into the Fund X 3 portfolio, I believe it would be so broad based and diversified that returns would be very watered down. Along with risk you would certainly be getting a lot of funds. You won't set the world on fire with this concept, but you won't get blown up, either.

Larry Williams adds:

My 2002 book, Right Stock at the Right Time, explains such an approach in the Dow 30. The losers were the overvalued stocks in the Dow.It is a simple and elegant idea…forget looking for winners…just don't buy overvalued stocks and you beat the idex.

This notion was developed in 1997, when i began actually doing it, and written about in the book. This approach has continued to outperform the Dow, it is fully revealed.

Craig Cuyler writes:

Larry's comment on right stock right time is correct and can be used to shed a little bit of light on trend following. This argument is at the heart of fundamental indexation, which amongst other points argues that cap weighting systematically over-weights overvalued stocks and under-weights undervalued stocks in a portfolio.

Only 29% of the top 10 stocks outperformed the market average over a 10yr period (1964-2004) according to Research Affiliates (this is another subject). The concept of "right stock right time" might be expressed another way, as "right market right time." The point is that constant analysis needs to take place for insuring investment in the products that are most likely to give one a return.

The big error that the trend followers make, in my mind, is they apply a homogeneous methodology to a number of markets and these are usually the ones that are "hot" at the time that the funds are applied. The system is then left to its own devices and inevitably breaks down. Most funds will be invested at exactly the time when the commodity, currencies, etc., are at their most overvalued.

Some worthwhile questions are: How does one identify a trend? Why is it important that one identifies a trend? How is it that security trends allow me to make money? In what time frame must the trend take place and why? What exactly is a trend and how long must it last to be so labeled?

I think it is important to differentiate between speculation using leverage and investing in equities because, as Vic (and most specs on the list) point out, there is a drift factor in equities which, when using sound valuation principles, can make it easier to identify equities that have a high probability of trending. Trend followers don't wait for a security to be overvalued before taking profits. They wait for the trend to change before then trying to profit from the reversal.

Jeff Sasmor adds:

As a user of both the newsletter and the FUNDX mutual fund I'd like to comment that using the mutual fund removes the emotional component of me reading the newsletter and having to make the buys and sells. Perhaps not an issue for others, but I found myself not really able to follow the recommendations exactly - I tend to have an itchy trigger finger to sell things. This is not surprising since I do mostly short-term and day trades. That's my bias; I'm risk averse. So the mutual fund puts that all on autopilot. It more closely matches the performance of their model portfolio.

I don't know how to comment on the comparisons to Value Line Arithmetic Index (VAY). Does anyone follow that exactly as a portfolio?

My aim is to achieve reasonable returns and not perfection. I assume I don't know what's going to happen and that most likely any market opinion that I have is going to be wrong. Like Mentor of Arisia, I know that complete knowledge requires infinite time. That and beta blockers helps to remove the shame aspect of being wrong. But there's always an emotional component.

As someone who is not a financial professional, but who is asked what to buy by friends and acquaintances who know I trade daily (in my small and parasitical fashion), I have found that this whole subject of investing is opaque to most people. Sort of like how in the early days of computing almost no one knew anything about computers. Those who did were the gatekeepers, the high priests of the temple in a way. Most people nowadays still don't know what goes on inside the computer that they use every day. It's a black box - opaque. They rely on the Geek Squad and other professionals to help them out. It makes sense. Can't really expect most people to take the time to learn the subject or even want to. Should they care whether their SW runs on C++ or Python, or what the internal object-oriented class structure of Microsoft Excel is, or whether the website they are looking at is XHTML compliant? Heck no!

Similarly, most people don't know anything about markets; don't want to learn, don't want to take the time, don't have the interest. And maybe they shouldn't. But they are told they need to invest for retirement. As so-called retail investors they depend on financial consultants, fee-based planners, and such to tell them what to do. Often they get self-serving or become too loaded with fees (spec-listers who provide these services excepted).

So I think that the simple advice that I give, of buying broad-based index ETFs like SPY and IWM and something like FUNDX, while certainly less than perfect, and certainly less profitable than managing your own investments full-time, is really suitable for many people who don't really have the inclination, time, or ability to investigate the significant issues for themselves or sort out the multitudes of conflicting opinions put forth by the financial media.

You may not achieve the theoretical maximum returns (no one does), but you will benefit from the upward drift in prices and your blended costs will be reasonable. And it's better than the cash and CDs that a lot of people still have in their retirement accounts.

BTW: FOMA = Foma are harmless untruths, intended to comfort simple souls.
An example : "Prosperity is just around the corner."

I'm not out to defend FUNDX, I have nothing to do with them. I'm just happy with it. 

Steve Ellison writes: 

One might ask what the purpose of trends is in the market ecosystem. In the old days, trends occurred because information disseminated slowly from insiders to Wall Streeters to the general public, thus ensuring that the public lost more than it had a right to. Memes that capture the public imagination, such as Nasdaq in the 1990s, take years to work through the population, and introduce many opportunities for selling new investment products to the public.

Perhaps some amount of trending is needed from time to time in every market to keep the public interested and tossing chips into the market. I saw this statement at the FX Money Trends website on September 21, 2005: "[T]he head of institutional sales at one of the largest FX dealing rooms in the US … lamented that for the past 2 months trading volume had dried up for his firm dramatically because of the 'lack of trend' and that many 'system traders' had simply shut down to preserve capital."

I saw a similar dynamic recently at a craps table when shooters lost four or five consecutive points, triggering my stop loss so that I quit playing. About half the other players left the table at the same time. "The table's cold," said one.

To test whether a market might trend out of necessity to attract money, I used point and figure methodology with 1% boxes and one-box reversals on the S&P 500 futures. I found five instances in the past 18 months in which four consecutive reversals had occurred and tabulated the next four points after each of these instances (the last of which has only had three subsequent points so far). The results were highly non-predictive.

Starting        Next 4 points
Date      Continuations  Reversals
01/03/06        3            1
05/23/06        1            3
06/29/06        2            2
08/15/06        2            2
01/12/07        1            2
             —–        —–
               9           10
 

Anthony Tadlock writes:

I had intended to write a post or two on my recent two week trip to Cairo, Aswan, and Alexandria. There is nothing salient to trading but Egypt seems to have more Tourist Police and other guards armed with machine guns than tourists. It is a service economy with very few tourists or middle/upper classes to service. Virtually no westerners walk on the streets of Cairo or Alexandria. I did my best to ignore my investments and had closed all my highly speculative short-term trades before leaving for the trip.

While preparing for taxes I was looking over some of my trades for last year. Absolute worst trade was going long CVS and WAG too soon after WalMart announced $2 generic pricing. I had friends in town and wasn't able to spend my usual time watching and studying the market. I just watched them fall for two days and without looking at a chart, studying historical prices and determining how far they might fall, decided the market was being stupid and went long. Couldn't wait to tell my visitors how "smart" a trader I was and my expected profit. It was fun, until announcement after announcement by WalMart kept causing the stocks to keep falling. The result was panic selling near the bottom, even though I had told myself before the trade that I could happily buy and hold both. Basically, I followed all of Vic's rules on "How to Lose."

Trends: If only following a trend meant being able to draw a straight line or buy a system and buy green and sell red. The trend I wrote about several months ago about more babies being born of affluent parents still seems to be intact. I have recently seen pregnant moms pushing strollers again. Planes to Europe have been at capacity my last two trips and on both trips several crying toddlers made sleep difficult, in both directions. Are people with young children using their home as an ATM to fund a European trip? Are they racking up credit card debt that they can't afford? Depleting their savings? (Oh wait - Americans don't save anything.) If they are, then something fundamental has changed about how humans behave.

From James Sogi:

My daughter the PhD candidate at Berkeley in bio-chem is involved in some mind-boggling work. It's all very confidential, but she tried to explain to me some of her undergrad research in words less than 29 letters long. Molecules have shapes and fit together like keys. The right shape needs to fit in for a lock. Double helices of the DNA strand are a popular example, but it works with different shapes. There is competition to fit the missing piece. They talk to each other somehow. One of her favorite stories as a child was Shel Silverstein's Missing Piece. Maybe that's where her chemical background arose. Silverstein's imagery is how I picture it at my low level. 

Looking at this past few months chart patterns it is impossible not to see the similarity in how the strands might try fit together missing pieces in Wykoffian functionality. The math and methods must be complicated, but might supply some ideas for how the ranges and strands in the market might fit together, and provide some predictive methods along the lines of biochemical probability theory. I'll need some assistance from the bio-chem section of the Spec-list to articulate this better.

From Kim Zussman: 

Doing same as Alex Castaldo, using SPY daily change (cl-cl) as independent and FUNDX as dependent gave different resluts:

Regression Analysis: FUNDX versus SPY ret, SPY-1, SPY-2

The regression equation is FUNDX = 0.000383 + 0.188 SPY ret - 0.0502 SPY-1 - 0.0313 SPY-2

Predictor     Coef           SE Coef       T        P
Constant     0.000383    0.00029      1.35    0.179
SPY ret       0.187620    0.03120      6.01    0.000*            SPY-1        -0.050180    0.03136     -1.60   0.110           SPY-2        -0.031250    0.03121     -1.00   0.317 *(contemporaneous)

S = 0.00970927   R-Sq = 3.2%   R-Sq (adj) = 3.0%

Perhaps FUNDX vs a tradeable index is the explanation.

 

Feb

3

I have been thinking about kids' games. The purpose of these games is to prepare them for a productive and happy life. The game they seem to play first is one where they take something out of a bag and put it back in. I wonder how many market situations are like this in which the game prepares you. The gap to a new level is one. The refusal to go up a certain large amount is another. The inability of a market to be number one is another. Other situations include when the price hasn't been fulfilled, and when the stop hasn't been hit. I will attempt to quantify this and other lessons that we can learn from kids, and would appreciate your help and suggestions.

Mark Goulston comments:

While you're on the subject of kids' games, you might want to check out zoooos here. It's an educational interactive toy/device that three year olds can use to interface with educational DVD's rather than plopping in front of a tv.

J.T. Holley offers:

I have been thinking about kids' games. The purpose of these games is to prepare them for a productive and happy life.

When my three kids were each around one or two, my favorite activity was to play the interaction/game Peekaboo. That purpose, it seems, is to spawn and draw out those beautiful smiles and giggles in that specific stage of development. But it also could very well be the initial training of anticipation for earnings announcements, IPO's, government figures, AP headlines, CNBC guests talking, and spin offs. We all know what's coming within a half a deviation most of the time, but we so easily giggle and get all bent out of shape with enthusiasm and expectation. It's as if the Mistress places her hands over her face knowing that she can make us all giddy and put a smile on our faces. She controls our giggles.

Jeff Sasmor comments:

My younger daughter learned to read whilst playing Role Playing Games (RPGs) where there's a lot of dialogue popped up for everyone to read aloud. Many games are also good for hand/eye control improvement. That said, Grand Theft Auto is NG and other M-rated games are not for kids. Excessive use of games and videos as babysitters is also bad. It's also no good for kids to be so booked up with sports, tutoring, music, et al after school that they don't have any free time and can't have a social life!

But not everyone can afford a nanny and parents need some rest once in a while. What parent hasn't envied the DVD player in the minivan? What parent hasn't plunked down their child in front of the TV to watch Lion King so they could rest? A kid with a Gameboy in the back seat of the car lets you concentrate on the road rather than having to concentrate on the child's needs while driving. A kid reading a book in a car may throw up. And checkers in a car? Well, maybe magnetic checkers …

Many video games teach logic and thought in the same way that chess or checkers do. For example, strategy games where you battle various players against the AI in the game. You move around players and pieces which have various move types and capabilities - and the game tries to knock your players out. These games are very much like chess in spirit.

Both my kids have had an unrestricted diet (but a well selected choice!) of video games and computer use (but no games on school nights so I get a chance to play) and they're intelligent children & excellent students.

Parents have to modulate choices for children, but it's too easy for Grups to blanket-condemn a whole lifestyle and genre because some parents are too lazy to monitor what their kids do. Guidance and monitoring is what's important. Kids deserve to have some fun of a type that they choose. We don't need to control everything down to the last molecule.

Alan Millhone adds:

On our ACF website I always say: Checkers — the mental sport alternative to video games. Children of today are too addicted to video games and TV as babysitters. Children's minds have to be challenged in any way we as parents and grandparents can.

J.T. Holley adds: 

On our ACF website I always say: Checkers — the mental sport alternative to video games. Children of today are too addicted to video games and TV as babysitters. Children's minds have to be challenged in any way we as parents and grandparents can.

OK I'll speak up on this one. Now guys, really, I'm not a spring chicken and I grew up with a Stretch Armstrong, Green Machine, Red Rider, various board games, Cable TV, microwaves, and yes Atari. I also had a Commodore 64 that I won in a raffle from a minor league baseball fund raiser, and I also had my favorite 64 in one electronics kit from Radio Shack. That was only to establish background.

My point is "the ole gray mare ain't what she used to be." I do not, repeat, do not allow my children carte blanche the ability to watch hours and hours of tv, but have ya'll watched what is out there for children these days? I mean in the 70's when I watched tv it was Captain Kangaroo, Electric Company and Sesame Street and all those lingering cartoons from the 50's and the 60's that had smoking, gun shootin', Popeye's tatto's, and fist fights. These days it's Dora teachin' Spanish, Wonderpets dishing out principles, Little Einsteins introducing Classical Music to three year olds, Bear in the Big Blue house teaching four year olds to "Clean up the house," and my favorite on Discovery Kids Prehistoric Planet educating my children about dinosaurs that we were never told about! The bottom line is that it's good stuff and educational in content and delivery as long as you stay away from old man Turners Cartoon Network (junk) and be selective with duration and channel.

Now having said that, tv is no substitute for reading, flipping index cards with numbers and letters, and interacting with your children in the traditional sense. Heck, my little Addie loves reading Dick and Jane.

On the topic of boardgames, I'm an addict and I will say that we've advanced to higher levels as well, as far as education and skills. To once again show my lineage, I grew up with Risk, Stratego, Checkers w/ Grand Daddy Holley, Connect Four, Monopoly, Chutes & Ladders, Pay Day, Perfection, Simon, and Axis and Allies, my favorite game around 16 years old. These board games today made by Cranium are out of this world. If you want to see your children ages three to eight stimulated and become a ball of laughs while learning competition and creativity, then go buy Cranium's Hullabaloo either on DVD or with the Simon-esque plastic voice box. The other that I highly recommend is a newer game called Zingo! It is a mix of Memory and Bingo. Once again, the bottom line is that kids these days have far greater choices and boardgames to play than the classics that we had. If you play enough of these newer boardgames, you'll see that children at an earlier age are picking them up than it seemed before.

I won't even go into Leapad, Leapster, and the other computer stuff that exists out there in the electronics world today. It ain't all Doom, Drive-by Shoot 'em up either!

Yes, myself and my children spend countless hours walking paths identifying trees, birds, rocks and such. We run, bike, hike, and swim too! We also do Tae Kwan Do, Soccer, Golf, Bocce, Badmitton, Croquet, and Kick the Can.

James Sogi offers:

A favorite kid's game is "drop it." My kids would say, Dad pick it up … drop it, Dad pick it up, drop it etc. It's lots of fun.

A favorite market game is market drops. Dad picks it up … market drops, Dad picks it up … lots of fun. It's profitable too.

Nigel Davies adds:

I'd like to put in a word for computer games for kids, which don't necessarily include shooting aliens or others with laser guns etc. You not only get strategy and problem solving in quite realistic scenarios (well kind of realistic!), but also the development of computer and motor skills. The characters can also talk in context. The 'Thomas the Tank Engine' series are especially good, especially 'Thomas Saves the Day.'

Even with board games I think they can be made much more fun if they're on a computer with nice graphic presentations, warnings about illegal moves, ready made opponents etc. You and your child can take the same side against computer generated play, much better than having you beat them or letting them win I think.

My son's a bit young for chess right now but when I do start him off, it will be with Chessmaster, not a strong program but with nice graphics and teaching facilities.

Jan

31

I have to admit it here and now. I like White Castle burgers. I even buy them frozen and microwave them. How many parsecs does it take to walk one of those off?

Clive comments:

You would have to walk 160 miles to purge that one Big Mac from your body!

I'm in big trouble then. I eat those things at least three times a week by the bag full. In fact just today I bought two of them and six double cheese burgers. I can't explain why, but whenever I eat those, no matter what my P&L looks like, life is good. My dogs are fans too!

Jack Tierney adds: 

This is a painful thread for those of us consigned to a life of tofu and bean sprouts. But we put on a brave face and tell ourselves our path is not only straight but virtuous, that baseball is an allegory for life, that the market climbs a wall of worry, and that inverted yield curves are non-events.

However, if this thread continues, may you be visited by the Conductor of Cardiac Events.

Jan

21

Perusing the eagerly-awaited issue of Electronic Gaming Monthly, I came upon an article about this Japanese game called "Kabu Trader Shun" for the Nintendo DS portable game system.

…an 18-year-old whiz kid with goofy hair, and magical anime-style stock-fixing methods that'd get him 20 years in the federal pen anywhere else.

some weird rich girl challenges him to 'trading duels.'

So just for fun I scanned it: See it here (You might need to zoom in on the image a bit to read the text).

The article mentions another Japanese game (just released in U.S. on 1/16/07) called "Phoenix Wright." This refers to (believe it or not) Phoenix Wright: Ace Attorney, Justice for All.

 

Jan

13

Reading the talk about Verizon Fiber Optic (FIOS) Internet/TV bundles brings two thoughts to mind:

1. When you get FIOS, you lose your copper.
2. If the power goes out, you are relying on a small backup battery in the premises equipment that they give you. It only lasts a few hours (a Verizon tech told a friend that it lasts 6-8 hours). Implications of #2 are obvious. Your normal phone line is powered by the central office which has lots of backup batteries which will last much longer.

So back to the story:

About two years ago, after suffering with ISDN for eight years, I was able to obtain a cable modem. It was great except that the cable modem went down sometimes; like yesterday when a contractor cut a cable a few houses away from me. Fortunately, about a year ago, Verizon finally brought DSL to me ($15/mo for 768Kbps). It's an embarrassment of riches. This brings me to this lifesaver and very cool tech product:

Xincom Twin-WAN Router XC-DPG502 ~ $175.00

Now, this is for wired networks, but it saved my tush yesterday. The router connects to both the cable modem and the DSL modem (the WANs or Wide Area Networks), and then you connect the home network to the router. You can have it set to aggregate the bandwidth, but the cable modem has more than enough and so I have it set up to use the cable modem and only to switch to the DSL modem as a backup. It also has a very nice web-based interface as well as a good firewall, etc.

So yesterday at about 10:00 AM, Tradestation (what I use daily) blinked out for a second and then reloaded the data. I didn't think much about it. At 11:00 I decided to turn on the TV and watch the news. No TV! I logged into the router's web interface and hey! The cable modem was down too, and the router had switched to using the DSL backup. The cable was out until 11:00 PM (we now have an orange wire snaking down the street). It's just luck I guess, that they didn't cut the phone line as well.

I can't tell you how hosed I would have been yesterday if I didn't have this gadget.

J.T. Holley comments: 

The other option, if you want to further embarrass your richness (I can't afford), is to get a wireless card from Verizon for $49.95 a month for a notebook as back-up. That'll run you 35 more bucks, but at least you'll be mobile while traveling to a hotel that has power and a router.

Last week was the first time in my neighborhood that I had to call 911. I purposefully chose my house due to the fact that it has a cul-de-sac. In this cul-de-sac there are only three homes where usually there are five to six. The reason is that from ten o'clock to one o'clock, there is a Tot Lot that is part of my community, and from one o'clock to four o'clock there are modified wetlands. I live at nine o'clock, which is the house closest to the Tot Lot. Due to this, it is dark at night with no major street lights other than those of my house and neighbors.

When we first built it four years ago, no one would drive in our cul-de-sac. However, two years ago, I'd look out randomly and notice a single car parked in the darkest curve outside my house. I usually wrote it off as teenagers doing what teenagers do, so I'd flick my lights and that would flush them out. Last week, I had a car pull up around 1:30 A.M. and I watched the young man get out and take a leak on the other side of his car. He got back in and left the car running with the lights on. I thought nothing of it and then went back to crunching numbers. I looked out at 2:00 A.M. and noticed that the car was still there. I turned on the light above the garage door and the one outside and he drove away and then immediately came back. I went to bed finally a little later with the car still running outside. My wife woke up at 4:00 A.M. to use the bathroom, and I asked her to look outside to see if the car was still there. It was and that's when I said enough is enough and I dialed 911. I didn't turn any lights on, barely moved, and my wife never hits the blinds or anything. To my amazement the guy left as soon as I hung up with the 911 call. It was like he knew I was talking and had a scanner in his car.

Back to the point, later I shared this with my neighbors in our close community and one lady spoke up and said that in the wee hours of the morning, this happened to her. She said that they pulled into her driveway at 3:00 A.M. and parked behind her car. She walked out to the car and the person had a laptop on, surfing the net. She said that the police told her that they have caught kids between the ages of 16-18 sitting in cars in neighborhoods after sneaking out at night, using "wireless routers" and surfing the internet more than likely for porn! Geez. I called the police department to verify and they said you'd be amazed at how many people haven't encrypted their routers and have upgraded to wireless networks that are giving them more range.

Now I make it a habit to peek out of my window at night before I go to bed and I've personally helped three neighbors in the past week encrypt their routers!

Jan

3

About six weeks ago, I bought a new, high-end Win XP-based workstation, which came with RAID1-configured hard disks. It cost very little considering how cheap hard disks are these days, and it turned out to be a good investment.

If you don’t know what RAID is, it is sufficient to say that RAID 1 is a pair of hard disks with duplicate information. This is handled transparently. When one dies, you get notified, and the bad one is shut down.

Last week, one of the two died, and the remaining drive worked fine. It was plugged in a replacement drive, and the system rebuilt the duplicate information. The beauty of this is that you can continue to work while this rebuilding, which can last over the span of an hour or so, is occurring.

Since 250 GB drives cost < US$100, and most PCs built in the last 3 years support RAID on the motherboard with no other hardware investment required, it’s a no-brainer. If you get a new desktop or a tower PC, you should get RAID.

Here’s a cool SW item that came with this new machine: Diskeeper (diskeeper.com). This defragments your hard disk (transparently) while you’re working. It can also defrag your Master File Table (a bit technical).

It’s a really great product, and if you need performance while your machine is updating many files (say, like tick data), it really speeds things up esp. on a multiprocessor or a multicore PC. It’s cheap and it can range from $30-50 depending on the version.

A nice hardware goodie: Linkstation (Buffalo Technologies). We have a wired network at home/office with 5 PCs and a Mac. Backup is a pain. For about $200 (newegg.com) you can get a 320 GB NAS (Network Attached Storage) drive that sits on your network and appears as a shared drive for everyone. It’s pretty sophisticated for something that cheap: everyone can have their own private area and they provide a simple but adequate backup sw (memeo) that you can install for all your clients. I no longer have to remind my kids to back up, and my spouse loved it after the HDD crash nightmare last Sept: she forgot to back up her Outlook PST and contact files. Microsoft hides them very well.

Cool feature: if you have 2 of them they will auto-backup each other. Also cool: you can plug in any spare USB hard disks you have lying around or you can back up from the linkstation to one of those. I like it!

Dec

13

Is it bullish for online retail that UPS was delivering packages at 10:28 PM last night? In previous years I was used to seeing packages delivered late at night near Christmas time but they must be awfully busy this year.

I know that I did all of my present-shopping online this year. All of it.

13-Dec-2006
Will They Do it Again? from J. C. Tierney

A bunch of years ago the French kicked out NATO. Now it appears they’re prepared to sacrifice the Euro and the EU. On the birght side, the dollar needs all the help it can get.

From France’s current best known poet, de Villepin:

Like Moliere’s doctor, the ECB is killing the patient in order to cure it. Given their obstinant refusal to face up to errors, it is time to prepare for a return to our own national monetary system,

[Read More]

Nov

28

In the office we were talking about the repeated action of the S&P’s move to a certain level, and then it’s falling back from this level, that occurs on a day like today. This repeats until the potential energy of the market is converted to kinetic energy, and the market rises higher. We were looking for analogies for this, such as power lifting where you bounce the weight before extending it to maximum lift, or pole vaulting where you can take up to three tries to get over the bar. In the process of this we were also considering the energy transfer involved in making a child’s swing set go higher with each swing. The following brief explanation was found but I would be interested in any ideas people have on a proper model for the back and forth; the trying to get there but failing, that happens so often in the markets.

Each time the swing moves forward and then returns to its starting position counts as one cycle. Using a stop watch determine the length of time a swing needs to complete say 20 cycles. Divide 20 cycles by the time and you have the swings frequency in cycles per second or Hertz (Hz).

Since a swing is basically a pendulum it’s possible to calculate its resonant or natural frequency using pendulum equations as follows:

Note that the natural frequency of the swing is not influenced by the mass of the person in it. In other words’ it makes no difference whether a swing has a large adult or a small child in it. It will have the about the same natural frequency. Slight differences can be caused by slightly different locations of the person’s center of mass. This is located about two inches below the navel. When people are sitting the center of mass is in about the same place relative to the seat of the swing regardless of whether the person is an adult or a child.

If a forcing function is applied to a swing at the natural frequency of the swing it will resonate. The amplitude of the swing will increase during each back and forth cycle. The forcing function can be provided by a second person pushing on the swing. In this case even a small child can make a large adult swing by pushing in sync with the swing’s back and forth cycle. The forcing function can also be provided by the person in the swing. In this case the person in the swing shifts her center of mass very slightly by changing the position of her legs or torso. This creates a slight pushing force which makes the swing go higher and higher. It takes a very small force but it has to be timed perfectly.

The big question is what keeps the swing from flying apart or spinning over the top of the swing’s frame and subsequently killing its rider? After all, if it is a resonating system then it should be very dangerous to keep applying force in time with the swing’s frequency. The answer is fairly simple. The equation given above is only good for small angles. When the swing goes beyond a certain height it is no longer possible for the person in it to apply the necessary small force in sync with the natural frequency because the natural frequency changes. In other words the motion of the system is naturally limited.

Jim Sogi offers:

The apparent back and forth motion around the round number is a chart artifact, and as with so many chart artifacts is an illusion. The motion is in three dimensions and only appears on the chart in two. The model is a tether ball, like at summer camp. It has circular momentum from whacking it, and tightens, then rebounds off and unwinds. The angle of the wind depends on the angle of the whack. Circular math a’la Newton might work.

The other model is a guitar string. It has harmonics and standing waves along its length as the axis of vibration meet along the string, similar to price action harmonics. The higher harmonics are recreated in the higher and lower price levels.

Gary Rogan comments:

I also view the market gyrations as something similar to a swing, except it’s nothing like a physical, earthly swing because there are two forces involved, and one of them is “unusual” for a physical-world system. In the physical world, there is only gravity (other than a small amount of friction) involved in the dynamics of a swing that results in a simple differential equation describing the motion for small deviations. I see two basic “forces” involved in market motion: “momentum” and “value pricing”. Positive momentum is the force that causes people to buy when the market is moving up (buying interest proportional to market velocity), negative momentum is the force that causes people to sell when the market is moving down. Thus momentum is a force proportional to velocity, sort of like inverse friction that doesn’t exist in the real world. Value pricing is what causes people to buy when prices are “too low” and sell when they are “too high”.

Of course all of this exists in the environment of slow upward drift and real-world-like friction of various trading costs as well as news events and money-supply formations that are not completely dependent on the immediate market dynamics. The relative amplitudes of the two forces also change with time.

Normally the two forces are balanced enough to keep the market gyrating around some sort of a temporary equilibrium that itself is slowly drifting. However, when the momentum force gets too high (as in 2000) it will break the swing.

Jeff Sasmor adds:

Another thing to consider is inertia. There is a nice article on this in Wikipedia and other sources.

The principle of inertia is one of the fundamental laws of classical physics which are used to describe the motion of matter and how it is affected by applied forces. Inertia is the property of an object to resist changes in velocity unless acted upon by an outside force. Inertia is dependent upon the mass and shape of the object. The concept of inertia is today most commonly defined using Sir Isaac Newton’s First Law of Motion, which states:

Every body perseveres in its state of being at rest or of moving uniformly straight ahead, except insofar as it is compelled to change its state by forces impressed. [Cohen & Whitman 1999 translation]

Perhaps this explains the recent upwards moves in stocks in spite of multiple discouraging memes. Humans have a lot of inertia, we’ve probably programmed a lot of it into the machines that do a lot of the trading these days.

It’s odd that this came up today, I was mulling the concept last night before falling asleep. Interesting questions that came up are:

It is a system with a lot of inputs and time-varying coefficients. Maybe it’s a reverb chamber?

David Wren-Hardin mentions:

Swings and oscillations are found throughout nature where systems on different time courses interact with each other. One obvious relationship is the classic predator-prey population dynamic. As prey animals increase in number, predator numbers rise on a lagging basis. A peak in prey animals is followed by a crash as they consume their resources, dragging the numbers of predators with them. One can cast value investors in the role of rabbits, with their steady grazing on low-calorie fare, and the momentum investor in the role of the coyote, waiting for concentrated packets of dense nutrients. Or one could place the casual investor in the role of rabbit, and the average financial professional in the role of coyote, but I’ll refrain from that comparison so not to risk defaming the coyote.

Animals also use oscillations to find out information about their environment, much like the technical analyst or trading-surfer surveying their charts. The weakly electric fish, Eigenmannia, emits an electric signal as a sort of radar to find objects in its surroundings. The problem arises when another Eigenmannia is nearby, sending out a signal at a frequency near the first fish’s signal. This results in a “beat” frequency equal to the difference of the frequency of the two signals, composed of amplitude and phase modulations. Much like the market, when the agendas of different market participants collide, the result is confusion and little information for anyone. The fish responds by moving the frequency of its signal away from the other, a process known as the Jamming Avoidance Response. The fish doesn’t know if it is higher or lower, and has to solve the problem based on how receptors spaced over its body are receiving the phase information of the two signals. In essence, each receptor “votes” on whether it perceives the signal to be leading the other, i.e., it’s at a higher frequency, or lagging, i.e., a lower frequency. Any one neuron may be wrong, but in the aggregate, the animal arrives at the correct conclusion. In classic research, the late Walter Heiligenberg termed this organization a “neuronal democracy”.

As traders, individual neurons awash in the market’s oscillations, we are faced with the same problem. Are we leading? Are we lagging? It may come as little comfort that the market will eventually get it right, even if we are wrong.

GM Nigel Davies offers:

In chess this would be quite a typical scenario. Often when you inflict some kind of permanent damage (structural or material), there is a temporary release of energy from the other side’s pieces. The ‘trick’ is to balance the gains against the likely reaction, and this is also necessary. To improve a position you often have to allow some temporary (hopefully) counter play, kind of like a wrestler letting go of an opponent temporarily so as to get a better grip.

Dr. Michael Cook adds:

Gary comments that market gyrations are “nothing like a physical, earthly swing” because there are two forces involved. How about the case of a damped oscillation, which has physical analogues? Using this analogy, momentum investors are “damped” by the “restoring force” supplied by value investors.

And what happened in the bubble was the disappearance of effective value investors, which led to an un-damped oscillation, which, when driven at the appropriate frequency, leads to wider and wider oscillations which no physical — or financial — system can sustain.

The collapse of the Tacoma Narrow Bridge is the canonical example, and here is an illustration of the math behind the phenomenon.

Rick Foust contributes:

Imagine a ball rolling down a slight incline that has a crown in the middle and rails on the sides, similar to a highway with guard rails. The ball seeks the nearest rail, bounces repeatedly and eventually stays on the rail as it continuous forward.

Now imagine that the roadway has an irregular surface and rough rails. The ball will once again seek a rail. But this time, it will do so in a careening fashion that depends on the roadway surface. As it encounters a rail, it will briefly run down the rail, bouncing as it goes, until it eventually hits a point of roughness large enough to kick it to the other side. The amount of roughness required to cause a change in state depends on the slope of the underlying surface.

In the market, the rails are accumulations of large and small limit orders. Rail roughness is created by variations in order size and position. The roadway surface is formed by underlying market orders that create a natural drift. The roadway surface may undulate in a rhythmic fashion, similar to the Tacoma bridge, if market participant psychology is undecided. Or it may consistently lean in one direction if there is a prevailing sentiment.

At some point, limit orders at one rail or the other are exhausted, pulled or merely absent. At that point, the ball is free to discover the location of other rails. Stops are now run, creating new market orders. New participants are drawn in. If the new rails encountered are small and scattered, the ball will plow through them and may even gain momentum until it eventually encounters a rail large enough to stop it. Until this rail is reached, the underlying roadway slope will likely increase as sentiment is self-reinforced.

Oct

12

I used to be a member of the largest athletic club here in my city. One thing I noticed is that the greatest attendance at the club was unquestionably on Monday. I suspect this was due to the couch potatoes after a long weekend in front of their TV screens watching sports and consuming large quantities of alcohol and trans fat laden foods, venturing out and cramming a weeks workout into an hour and a half. As the week progressed attendance would drop consistently until Friday came when there was but a few diehards left who were working out. If Friday was the last workday before a 3 day weekend forget it the gym looked like a ghost town. Also the peak hours of workout were from 5pm to 7pm. The aerobics classes were completely full and it was elbow to elbow. If you wanted to lift weights you had to share your bench with another. Furthermore, January was the highest attendance month and December the weakest. Naturally the Summer months June to August were thin.

When I was a broker, we did most of our commissions on Monday as much as 60 percent and by Friday noon our work week had effectively ended. Plus most of our commissions were generated in the morning rather than the afternoon.

I see similar phenomenon at work in the U.S. Stock markets. Whereas Monday mornings are the most hectic and Friday afternoon the most benign. 9:30am until 10:45 am are the most active, 12pm to 2:30pm appear to be listless until the lunch bunch returns to balance their books for the day.

I am sure there are fundamental reasons for this. As a speculator and swing trader, I would be very interested in hearing from the list their comments and observations, methods they use to exploit this and perhaps an article or paper that would support this thesis. It would seem to me that timing as to purchases and sales or securities would then be taken into consideration as to when one would consider and consummate them.

One theory in particular is to buy the S&P near the end of the month and hold it for the following 4 trading days. Are there others?

Jeff Sasmor responds:

I use NY Sports club in NY. Trainers there have commented to me that they see a lot of new members in January because of New Year's resolutions. They usually attend for a while then stop coming — they generally have signed up for long-term contracts because they in good faith felt that they would keep going for their own good.

Perhaps daily-ness in the stock market is similarly tied to emotions. Maybe a lot of people sign into their Ameritrade and Schwab accounts on Sunday and place buy and sell orders to execute in a vast swath at 9:30 AM on Monday. This isn't exploitable. Unless you work at one of these brokerages…

But to depend on such patterns could be fallacious as they (in my limited experience) seem to shift, advance, and precess. One doubts that the oft-related scheme of buying near the end of the month and holding a few days is reliable (I am sure someone will tell me I haven't tested this but I think that this has been previously debunked on the spec-list).

There are definitely intra-day patterns, lulls, rushes, and so on but these are of no use to you unless you want to day trade (and Dr. LACK will probably try to talk you out of it).

Getting back to gym-going: at our gym each machine has a little LCD TV hooked up to cable TV. I have found that if I am watching Bloomberg or CNBC (yes, I know) then people will come up to you and ask your opinion of the market. Yep. I have only one answer for them.

Ryan Carlson replies:

A lesson I learned early on at the Merc is that pretty much the only ones trading on Friday afternoons are guys who lost money and are trying to make it back. Anyone that's had a good day is gone by lunch and at either the gym, playing golf or the CME Merc Club drinking. Sure, it applies to most other days as well but especially Fridays.

Perhaps it's easier to gun at other's bad positions on a Friday afternoon but the killer instinct in most is generally gone after 4 1/2 days of trading.

Oct

3

 Why is it that when oil rises from $60 to $75 per barrel, interest rates from 4.5% to 5.5%, and gold from $500 to $700, 99% of the commentary is how bearish and 'Steve Roach like', this is for the stock market and real estate? Also, how come the Fed has 'no choice but to tighten', even though when the reverse happens, (because of the effects pointed out in our review of the bestselling travel book, and most recently regarding the first stop being the best), there is supreme quiet about things being bullish.

Andrew Moe comments:

The authors of these bearish articles have absolutely no idea what the forward direction of the market will be. Instead, they are most interested in getting eyeballs to their pages and this is done via sensationalized stories of imminent demise.

As quants, we are already trying to drive our car by looking in the rear view mirror. Introducing news is like putting a blindfold on and trying to drive by listening to a backseat full of drivers who are each looking in a mirror of their own — many of which do not even point to the road behind.

"Watch out for that grain silo"
"Don't hit the canyon"
"A herd of cows is in the way"
"Wow, I look good today"

GM Nigel Davies adds:

One has to ask: what is the motivation of the bears? In most cases they have no positions in the market, instead deriving their income from their views.

What will they choose to write about? Well, nothing attracts attention quite like disaster (car crash, plane crash, market crash), probably because it is an affirmation for those who never take risk. The market may go up a million percent without them, but they get to delight in a 5% drop, or at least salivate over the thought of it.

J. T. Holley offers:

Those who disregard paths of least resistance, Gresham's Law, the Law of Ever Changing Cycles, etc, and cling to "black and white" fixed trading systems seem to always have a sense of permanency to the direction of markets. The exception to this is when everything is running its natural course and they "think" they will try being a contrarian, just at the wrong time. DailySpeculations, more importantly than anything else, has a spirit of teaching and espousing "seeing things as they are" and utilizing tools to do so. Other authors do not do such, as it is easier for them to attach their feelings and decisions to those things that are in the direction of loss or some voodoo formula.

When oil goes from $20 to $40 to $60 to $80 it is easy to not do any math on supply and demand and project it to $400 a barrel, and then have fiction fill in the lines. With the markets it is so easy to be a bearish contrarian and cherry pick evidence from days of yore, and to do this at the wrong time when the odds just do not have it in the stack of cards, and the game has changed. I have always wanted to ask someone what he would do if he timed a 60-90% downside move and shorted everything "under the sun" (no explosion) and also bought every single available put option while it was happening? "So you won, everyone is broke, the banks cannot pay you because of their own runs at the doors, pestilence, vermin, and gloom is the theme and you are going to tell me you have a smile on your face?"

It is the sense of permanency that they attack, and their disregard for change.

Scott Brooks mentions:

Three things sell best to the masses; envy, greed and fear. Therefore, if you want to sell your writings to publishers, you must employ one of these methods.

As I sit around at holidays listening to my relatives (who have a very blue collar mentality) talking, I have to bite my tongue to keep silent (risk being murdered by my wife if I start another debate with the mentally unarmed) listening to the sky is falling mentality. These people love fear.

I also listen to them talking about greed. Their new get rich quick schemes or poorly thought out business opportunities. Or complaining about all the money that is being made by someone who does not deserve that much money ("no one is worth that much money" … as I sit there and smile and hold my tongue).

So the masses will greedily chase returns from the investments that they wish they had purchased last year (as is probably true of the highly intelligent "accredited investor"). They will over-react to anyone telling them the sky is falling and run away from what they should be embracing, or embrace what the should be running away from. And they will elect politicians that will stick it to those that "have more than they deserve".

That's what the writers like Abelprechursaskyisfallingallthetime are selling too; fear, greed, envy. And it works (well, for them to earn a paycheck, at least!)

Thomas Miller contributes:

When the commentators get particularly bearish, it seems no one mentions the incredible growth and upward trend in corporate earnings, which are still growing nicely. To test this I suppose one would have to count and track the number of bearish articles in numerous publications and "experts" on CNBC and compare that to market actions over time. It would really be another sentiment indicator. Probably time consuming, but my guess is that it would be of value.

Jeff Sasmor adds:

I would submit that stocks are products sold to various types of customers. Like autos, so your stockbroker is actually a new/used car salesman. I am not being flippant.

My attitude is based on being someone having gone through the IPO and road-show process as a company officer and becoming quite friendly with one of the underwriters.

Sushil Kedia comments:

Behavioural Finance is a website with a long list of plausible explanations for the Permabears maintaining their stoic silence now, but mounting the rooftops the moment their original framework appears on the markets' horizons. Some of the ones that caught my attention immediately were:

  1. Cognitive Dissonance
  2. Communal Reinforcement
  3. Illusion of Knowledge
  4. Curse of Knowledge
  5. Selective Thinking
  6. Self Deception
  7. Framing

Ronald Weber adds:

Following Mr Sushil Kedia's comments on behavioral finance, may I mention the Investment Office website which contains (among others) information on behavioral finance on the left side of the navigation, under "market characteristics" (not yet optimized for Apple!).

Sep

18

It is amazing how often the way something works in one area of life is similar to the way something else works in a different area. We often find ourselves thinking that the computer works exactly like the brain, or that the techniques used to win board games are similar to those that are appropriate for winning in markets. Music is one of the fields where the techniques and procedures often seem directly transferable to another field like art or games. Perhaps this is because it is a universal language of its own, and as such is subject to the same general physical and biological regularities as other 'languages.' The similarities between different fields are often so great that I find myself working in one field, then I find that just by changing the nouns, or substituting a market for a physical device such as a machine or magnet or resistor, the meaning is entirely transferable.

Perhaps this is due to the general applicability of physical principles, like the conservation or gravitation laws, or perhaps the similarities occur because of the common principles of life contained in Hoagland's The Way Life Works, which can never be repeated too often.

I have felt for a long time that everything that happens in the world of electronics specifically, how the components and all the circuits work, is an exact analogy to how the markets works. I am going to focus on just one aspect of this today which is the uses of comparators based on op-amps. I am going to use Michael Merchant's chapter on op-amp applications from the book Exploring Electronics, a highly recommended non-mathematical text for trouble shooting in the field, filled with diagrams and simple examples. As a second source, Try here.

I will focus on applications of the op-amp that deal mainly with comparators and skip some of the more involved applications that relate to filters, oscillators ,summers, integrators and differentiators. An op amp is a integrated circuit consisting of a differential amplifier with two inputs ,and a following output. The inverting input sends out a voltage completely opposite in phase to the input, (turns positive to negative, or negative to positive). Depending on whether the net sum of the voltage at the source is positive or negative, the output is magnified about 100,000 times up to the total voltage supplied by the power supplies — usually 16 volts. a good diagrammatic description of it can be found here.

The whole idea of an op-amp is based on negative feedback. The output gets connected back with a wire to the inverting input thru a component like a resistor , a capacitor , or a diode, in order to stabilize the output and reduce the gain from 100,000 to a moderate level. Amazing things can happen with negative feedback in electronics or the markets.

Let us start by looking at the most basic application of an op-amp ,one that does not involve feedback: the comparator. The idea here is to compare the level of the input to a certain specified value, and then take action based on whether it is above or below that value. The procedure is to establish that basic level on the inverting input and then let the positive input vary above and below the basic level to detect the threshold. Such a circuit is often used in real life to sense temperature or wind, light, sound or pressure. Actions are then taken to control a device such as a motor or machine. Indeed, in the my home, such a procedure is used to automatically open and shut a toilet cover.

In the market, such a circuit would be used first to compare the moves in price to zero, or perhaps to the previous high or low. When the signal moves to above the level, action is take to buy or sell.

The next set of applications involves a Schmitt Trigger. The idea here is to let the input swing to two certain levels, called the upper and lower threshold, which trigger a new reference level in the op-amp, which then takes action only when the input goes above or below the new reference level by a certain amount. This is an example of hysteresis, a delay between changed action. The idea here is to reduce the frequency of false detections in the signal due to noise or randomness.

Such a situation arises in markets often. The prices moves near a high or low. But action must be delayed to see if it is a true move, or whether it is caused by merely running or stops, an ephemeral factor relating to news, or perhaps just some random buying or selling by a big player (where the market moves completely out of bounds to accommodate and give bad fills to such a player.)

The next set of comparators is based on bounded comparators, i.e. window comparators, where the configuration is set up to detect whether the signal is within a window — between the upper threshold and the lower threshold. Such a configuration requires feedback in the circuit through diodes. The idea here is to see if the input is within a normal range.

The market situation here is, for example, whether to continue a buy and hold strategy. Such would depend on the stability of another signal that you were watching, say the moves in interest rates or foreign exchange. Or perhaps you have a position in a stock, and you wish to measure its strength relative to the market, triggering investigation or action when it goes outside of the window. All quality control actions where no-action is taken as long as the output is within control bands would seem to be of this nature.

The next set of op-amp applications seeks to find the peak or minimum voltage of the input. Such a circuit usually requires two components , a diode and a capacitor in a negative feedback configuration. and allows for constantly changing levels of the high and low. The usual application would be to see if you are nearing the breakdown level of the input or output you are controlling. Is the noise too loud, or the pressure being applied to the output above the breaking strength of the material?

Applications where the market is constantly monitored require more effort in markets also. When you are going to buy or sell would often be effected by whether the highs or lows keep going in the same direction. or whether a previous level has been broken by the current high or low. Indeed, the entire basis of pivot or swing trading would seem to be subsumed by peak detectors.

Other applications of op-amps relate to the creation of oscillators where an output is created that stays within a cyclical pattern, as long as the input signal is within certain bands. That would lead to the whole subject of cyclical moves in the markets, how individual cumulative changes in the input should be amplified, what frequency of individual time intervals would be considered, and the levels from peak to low that would be allowed to happen?

Another set of op-amp applications is based on the instrumentation amplified, which is used to detect signals that are very attenuated or subjected to noise. This is used to detect and amplify the true signal and eliminate the random component. Such configurations are a bit more involved in electronics, often requiring three or more op-amps before actions would be taken.

The market applications would involve more complicated procedures such as to consider the moves in markets that are not based on ephemeral factors such as economic announcements, or hyping by brokerages. Or perhaps the idea would be to eliminate all moves in an average that are caused by a individual component that goes above or beyond a peak level of 10% or so? The applications here are move involved and sophisticated, limited only by one's imagination, and as in the case of the instrumentation amplifier, require the monitoring of several different inputs.

The extent of op-amp applications is endless. Indeed, many programs have been developed to show the output that can be developed if various components of varying magnitudes, are connected to the input and output. A random simulation of what might happen by starting with some of the usual electronic components such as resistors, inductors, capacitors, diodes, transistors, switches, lasers, etc. might be of interest to the electronics engineer. In turn, the study of the uses of op-amp circuits that have been used by engineers in practice and that cover almost all digital and analogue configuration would be inspiring and fruitful to the market engineer.

These are just preliminary thoughts, but the subject seemed rich enough to put up in order to gain feedback both positive and negative, so that our knowledge can be improved upon.

Jeff Sasmor comments:

The history of op-amps stretches back to the time of vacuum tubes and analog computers. Today's digital computers use the binary number system to represent quantized, discrete-time values; analog computers used voltages and current to represent continuous voltage and time along with math operations (hence 'operational') like addition, subtraction, integration, etc. When I first started in electronics (around the time when Fred Flintstone was still listening to his avian record-player) op-amps were just transitioning from modules a few square inches in size (containing discrete components such as transistors and resistors 'potted' in epoxy) to inexpensive integrated circuits like the infamous uA741 from Fairchild Semi-conductor. It was cheap in price and lousy in performance. Audio ciruits created with 741's were disdained by audio folks as Pieces of $%*&.

It is no stretch for any googler to find interesting and informative articles on analog computers or op-amps.

One informative statement that I found was:

The similarity between linear mechanical components, such as springs and dashpots, and electrical components, such as capacitors, inductors, and resistors is striking in terms of mathematics, or even as it were direct mapping as in simulation. They can be modeled using equations that are of in essence the same form. Other methods include direct observation without the aid of mathematical operations. For example, water pressure can be simulated by voltage and water flow in terms of gallons per minute can be simulated by amperes. [read more]

I agree with what the Chair has said regarding similarities between electrical circuits and markets; I recall this subject has come up before. In June '06 there was a thread about Hysteresis - part of my comment is appended to the end of this post.

One of the interesting differences between op-amps was a parameter called slew-rate. It is the speed at which an op-amp circuit can move from one voltage level to another. Audio designers (such as myself at one point) usually went for the higher slew rate op-amps (when we could convince my boss Richard at Eventide Clockworks to spend the extra pennies) due to their reduction in distortion — they could follow the high-frequency waveforms with greater accuracy.

I have been playing around with the notion of price-change slew rates — how to quantify them and how to interpret them. I have been writing some Tradestation code in this vein, for example, there seems (to me) to be a big difference in how to react to a slow-moving intraday change in price as opposed to a fast-moving one.

Fast-moving price changes tend to overshoot major price points like whole-dollar amounts (also .5 and .25), anecdotally I see more overshoot (or undershoot) for faster-moving price than slower. It seems to create larger retracements (or bounces). Apologies for hand-waving here … but the analogy to electrical circuits is very apt and fits my intuition. Fast slew-rate in op-amps allows the output to more closely follow the input but also adds overshoot and undershoot (distortion) effects that the designer needs to control.

From 6/06:

I suppose you could somehow model the universe of all markets as a very complicated electrical circuit. Certainly the money flow into and out of various securities can be considered to be an alternating current (of money).

There is probably a relation between futures and their underlying; they could probably be modeled as capacitors and inductors. Futures as capacitors because the current (money) leads the voltage (price) in phase (time) and stocks (commodities, etc) as inductors because the price (voltage) leads the current (money) in phase. That may sound weird, just think about it a bit.

The reactance of the overall market is thence a complex function; actually, a time-varying complex function (even worse). Push/pull a lot of current (money) in/out of it and the voltage (price) reacts accordingly. I think that this applies to an individual component of the overall market, like the stock market. Overshoot and undershoot from step functions in price (gaps) help a lot of people make money every day.

Jim Sogi mentions:

Speaking of amplifiers, an electric guitar sounds best through vacuum tube amplifiers. One of the best amps is a 1972 Fender Pro Reverb which is known as a "vintage amp" based on technology that was popular during the 2nd World War. In fact it is hard to get vacuum tubes now except in places like Russia, China and Slovakia where they must still use them for other purposes as well as playing rock and roll music. Another great amp is a new version of the old amps.

Tube amps are an endless topic of discussion among guitarists seeking the perfect tone. What goes on in the amps is not well understood and has a degree of mysticism involved. It is not well understood what is going on inside the vacuum tubes as they glow and hum with an eerie glow as power surges through the ether. Some time in the early 1970s CBS bought out Fender and in an attempt to improve the circuits made modifications which made them sound worse. Now the older pre-modification amps are prized for their tone and amps are routinely returned to the older specs before the "improvements" . I sent my 34 year old amp to Kendrick in Texas who completely rebuilt my amp to the old specs and now its sounds better than ever.

The tone of the amp when playing a guitar is based on the fact that the amps have a clean sound, a distortion/overdrive mode, and a feedback mode. The clean sound is the country sound, Chet Atkins. Distortion over drive is used by Blues guitarists like BB King, Stevie Ray Vaughn to give a warmer tone. Feedback is the sounds of Jimi Hendrix. This article has a good discussion and some quantitative specs on the balance of inputs and tone which might apply well to market input and volatility and tone. The excerpt below discusses the effect of increasing supply on the market dynamics. The vintage tube amps had a balance of dampening and power transformers dual stage amplification that allowed versatile tone, clean sounds, overdrive and feedback all in one amp.

As applied to markets in line with Chair's idea, the Fed model is a power supply idea basically. Other sources of power input might be the bond market, money supply, foreign buying, internal buying, insider buying, payrolls, buybacks, productivity gains, crude price increases, real estate increases, interest declines. The dampening provided by resistors are the market mechanisms and rules, and the market makers themselves. When the resistance is overcome by input a feedback loop generates.

Markets have tones. The clean tone is the average daily range with partial oscillations within the day. The overdrive distortion tone are the days with expanding intraday ranges or swing within the day that are as great as the daily range and rougher sine wave oscillations comparable to those of distorted guitar sounds. Feedback days are the days like last week where the tone outputting circled back to the input and buying began more buying driving the market up into new highs. From a quantitative view point, the market tone set early in the day seems to set the rhythm and tone for the day and the market player seem to play along like a band in a jam session.

Feed back in guitars, when controlled can sound good, but for vocal microphones it is bad. Often the acoustics of the room affect feedback loops and you only hear feedback in certain frequencies, usually the higher frequencies. The same seems to be true in the markets. The acoustics of the market tend to encourage feedback at the high price ranges. A noticeable number of the large traders seek confirmation and momentum, and pile in on new highs in strength. While these are descriptive, prediction is difficult, but as with guitar playing after hours and weeks and years of practice these ephemeral conditions can be harnessed through feel to create good tones and music. There are some digital signal processing algorithms that have been applied to markets in various ways and may provide a good basis for testing.

Kashi Vishwanath comments:

Victor mentions "…the same general …regularities" between seemingly disparate fields. I couldn't resist bringing up Christopher Alexander's wonderful A Pattern Language and Danny Hillis's The Pattern on the Stone. The former is about universal architecture principles followed (at some level of the (un)conscious) by people of disparate cultures around the world and over the eons. The latter is on principles of software and computer engineering by one that has been at the cutting edge of that field. Written well after the former and obviously very influenced by it, Danny comments with fluency and erudition on how patterns and themes in software engineering are alike to those mentioned in Chris Alexander's treatises. Fascinating reads, both.

Gary Rogan adds:

One of the most interesting things about how op-amps are used is that a powerful, yet extremely variable component is converted by relatively simple means into a much less powerful, but much more precise one. Op-amps by their very nature have very high amplification, but the absolute magnitude of it is not well controlled: for a particular type it could vary from, say, 20,000 to 70,000 (and I am not even going to get into their "frequency response" problems). However, if you surround them by two resistors which are easy to make precise, but are obviously not "powerful" in any meaningful sense, you can get a circuit that amplifies by a relatively small factor, like 10, with a degree of precision limited pretty much only by the precision of those resistors, thus .2% is fairly easily achievable given .1% resistors, and with a frequency response so high and relatively more predictable that you often do not have to worry about it. There has got to be a general lesson about taming powerful forces in there.

Interestingly, the triumph of digital technologies over analog techniques (as in digital computers replacing analog ones that used to use op amps) is more of the same. We give up even more of the raw capabilities of the underlying circuits to switch fast to have them switch precisely and between only two levels, 0 and 1.

What is the unifying theme? Predictability. It's worth a very high price.

On another note, the non-intuitive idea that I should magnify my response and gain precision by adding dampening is a key feature of the nervous system. Our brains are full of inhibitory feed-back circuits, and cases of parallel inhibitory circuits to stimulatory ones.

The retina, for example, performs a huge amount of edge-detection by itself before the information even enters the brain. The photo receptors are stimulatory, and synapse on several inter-neurons, one type of which are horizontal cells, which are inhibitory, passing an inhibitory signal to regions nearby. These inter-neuron layers propagate forward to the final output of the retina, the retinal ganglion cell. The response of a cell is a classic center-surround field. where light in the center of a cell's receptive field stimulates the cell, and light off-center inhibits it. If you record from these cells, and throw the stimulus response patterns across the retina up on a screen, you see gross representations of the edges of the image.

Parkinson's in the motor system is a classic case of the inhibitory system being impaired, and throwing off precision.

The implications for trading systems are clear. One can sharpen one's responses to a trading stimulus by looking for ways you should inhibit the response, perhaps using orthogonal information, or looking for cases of negative correlation. I've long thought that that would be a great way to hone a trading system. We spend so much time looking for ways things are correlated with each other, but perhaps we can build a more precise system by adding in non-correlated or negatively correlated information. I'm sure there are very smart people, probably on this list, who are already doing this and are telling me to keep it down.

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