A random number generated price chart would be dismissed by the one who created it due to his knowledge that they are generated by random numbers, even if the conclusion that such a chart is random may or may not be verified by the creator.

A person who does technical analysis could be accused of trying to apply his mind to such a chart, without the knowledge that it was generated using random numbers and not a real price chart.

The creator of a random number generated chart suffers from the illusion of knowledge. The Technical Analyst at worst suffers from the impulse to be curious.

Curiosity however may still lead to making some money, even if the performance can be explained by money management and not by any predictive ability of either the Technical Analyst or the chart. Data does not predict. It is the human enterprise, whether scientific or artistic, that predicts.

The creator of such a random number generated chart will however not make any effort to make money from such a chart, because of the illusion of knowledge.

To completely illustrate the point, the logical construct here is akin to putting the same random number generated chart in real time and beaming it to a pool of traders who may or may not trade on it. Some will, and some will make money. Some will lose money.



Ed Dunne was an endless number of different people for the endless number of different people in this world. Appropriate to each and appropriate for every occasion.

My initial year on the list led me to a feeling that he is a Samurai, ever ready for a battle with a massive sword, on any idea that touches speculation remotely. As I got to eventually know him somewhat closer, I realized he was an even greater Monk ready to give as well.

Full of wisdom, his fatherly advice was encouraging, realistic and purposeful.

I will recount just one anecdote, how he always set examples for one to emulate:

The first and the only time I met him in person was in the summer of 2011. I was packing my bags from a hotel off Wall Street to leave for India and meet with Ed Dunne for an hour before I set out to the airport. I was expecting a man in his 30s with the body of a baseball player.

He walked in to the Hotel Lobby and I found a man with the body of a baseball player at 70 perhaps. Yet, the same energy, the same vibrancy as he always emanated on our Googletalk chats (he used to love offering as gifts free accounts on gmail.com to everyone), phone calls and emails was radiating.

During this meet-up I realized he personally drove down 200 miles as his scheduled car pick up failed on him. He didn't want me to go back disappointed without meeting with him and kept his word.

While he appeared to have very strong views against any specific persons, it was to my mind his penchant for just skimming the truth. He always loved you. Even during the days that it seemed you and he are at odds, he would be ready to gnaw the flesh out of any face that may even begin to utter anything unseemly. Yes, I knew it from the very moment he has immense love and respect for you. When he one day asked me about you, I hesitated at first and then eventually told him, "When two big boys appear to be at odds on the school soccer field, stay apart has been my mantra since eventually the two big boys are the two big boys." He fumed back, " you are too smart" and then after a pause recounted endless stories of your and his camaradries and how you both went out of your ways to care for each other over a long time.

How will I ever find anyone who can take his place?

- Sushil



 Bio-feedback is a science that is around for sometime already. A computer game where no inputs are possible from the keyboard, mouse or any such human input device, but where a set of sensors measure the galvanic current on the skin of your fingers to estimate your mind-state is what Wild Divine offers.

I had bought this close to five years ago and gave to my daughters. They did play it sometimes. Discovered it in recent months again from their closet of abandon toys from "junior years" & began fiddling with it. Results are amazing.

I find this a constructive use of time, unlike the broad spectrum of other computer games. The only situation in which I could really observe my own emotions and had to practise rousing specific emotions to solve specific situations to meet game requirements.

If life too is a game and where deploying my emotions rather than succumbing to them is key, this package is a good beginning for taking such an approach to life.

Try it. There are delights to savour even purely from the perspective of refining one's cognitive skills.

DISCLAIMER: I otherwise do not like the soup of big words that one of the pop-philosophy Gurus behind this project, Deepak Chopra, spews. Yet a decent working invention of bio-feedback relevant for a trader who is nothing but a pure mind-worker.



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

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

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

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

Jeff Sasmor writes: 

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

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

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



The total risk in a trade can be deconstructed as the sum of market risk, process risk and idiosyncratic risk wherein each risk element originates respectively from the trade, the process of trading, and from the trader. This is akin to the idea that any observation has only a partial perspective if the focus is only on the observed. A complete perspective will incorporate the observation process as well as the observer.

The same trade of entry in to an X quantity at a Y Price with an exit at Z price when undertaken by any two different traders or by the same trader through any two different trading infrastructure has different risks.

Given, estimations of probability distributions for process risk are similar to those used in operational risk and are less easily believable and the distribution for idiosyncratic risk close to being conjectural / randomness, most of the time any discourse on risk amongst traders ends up focusing only on price or market risk.

Is systematic trading the answer to eliminating idiosyncratic risks borne out of the trader? Can the total amount of risk be reduced for the same expected return level or one is only modifying the type of risk from idiosyncratic to a larger process risk? Or is it that systematic trading trims down both the left as well as the right tails of returns distributions?

This thinking can be tautomerised to ask a deeper question: Is there ever a reduction in risk feasible or it is always a modification of the type of risk? If a money management overlay, whether self-monitored by a stand-alone trader or by an elaborate risk-management department, is eliminating the idiosyncratic risk borne out of a trader in discretionary trading approaches, is there an advantage that while the left tail is aimed to be trimmed the right tail is left intact? If total risk never changes, is there an unaccounted for expansion of process risk that the risk management systems will end up following the Peter Principle?

While good risk taking is what analysts, strategists and commentators also do as traders do, it is the skill at avoiding bad risk taking or winding up a risk-exposure that is going bad that separates traders from all other market-citizens.

While all bad risk taking can be avoided by actually doing nothing and holding on to the theoretical cash, the moment one begins to even trying good risk taking, the skills at avoiding bad risk taking must come along.

Finally for now, if the value of risk at a moment is unique to each individual, firm, system, approach yet its historical value (focusing only on the market risk as explained earlier) common for all does it all boil down to "to each his own"? The right combination of good risk taking skills and avoiding bad risk taking skills is then as idiosyncratic as each trader is?



 Dear Muskaan,

Daddy is proud, despite his strong belief in the value of humility, at your fantabulous accomplishment.

At this school leaving examination, which also happens to be the first public examination you have taken in your life & conducted by the Indian Council of Secondary Education, you have accomplished what none so far have in your gerontocracy. Your score on each of the subjects is higher, into the high 90s, than your father could achieve or his forefathers could. Well surely you indeed have also scored higher than any other student in your school.

Soon as the results sprung out on the internet, all over the country there was a frenzy of several million test-takers discussing their accomplishments with their peers. Yet within such a busy patch of time, even as a budding teenager, you have been resplendent in speaking to me for such a length of time, even if in five pieces of conversations. This assures me, your values are deeply family driven. The simplicity with which you can internalize a big moment deserving a big celebration as this was proven yet again, when you chose to order Pizza from Dominos and savour your victory just with your family. This is touching.

Yet, as you step forward further to be much more on your own, the value of networking and connecting can hardly ever be over-emphasized. Education and performance at exams are often solitary sojourns, wherein a good student puts in endlessly long hours working on her own abilities. Wisdom however, will be in being able to apply it. The more adept you hereon become in connecting and building on your rapport with everyone, the more you will be able to utilize your learnings.

Your leanings towards numbers is apparent right from your early schooling days wherein you scored a perfect 100 in maths and high 90s in science subjects many times through years. Yet, at this key public examination, I am gratified to note, that you have done equally well in languages. The power to express is definitely as important as the power to ideate, visualize, observe, calculate, infer and deduce. The big difference between those who end up spending their entire life-times in laboratories and those who create products that fill up stores worldwide with customers is their ability to take their work to masses. I urge you to keep growing your repertoire of expressions, vocabularies, diction etc. throughout your life. Not only for enriching your ability at communications, but also for the fact that literature is the mirror of society, do invent some time to read some of the finer classics. I also urge you to begin reading Ayn Rand with a goal of triggering your own thoughts around her ideas. Yes, you got it right that while you have been progressing well on Java, C++ etc. etc. you must not lose out to any other on your ability at the old world languages as English and Hindi.

Since you do have a clear focus to put in your entire might into seeking an admission to the top Engineering Colleges in the country couple of years down the line, I will share a few recommendations of some of the finest books from an era gone by long ago and yet these are still likely the best.

To master Differential & Integral Calculus, hunt down the two volume compendium by N. Piskunov that was originally published by Mir Publishers but now out of print. An amble around the old and used book-stores markets to ferret out such jewels is yet another indulgence an erudite person must begin to savour. Over the years, the nourishment your soul may find in the company of old and difficult to find books, will surely drive your passions to be not just a good but a great learner.

To get an in-depth grip on High School and beyond Physics locate the book by Resnick & Heliday. It may subsume your mind, but it surely is worth it to create a solid foundation that will last with you.

Yet another out of print book, but surely a master-piece on Organic Chemistry was written by I M Finar. Locate it.

While you delve deep into grasping concepts, you must recognize that it is practice and practice alone that makes not just men but women as well perfect. Solve as many computations as you can each day. Go down to the steps where you went wrong and it at these steps you will iron out the wrinkles in the crevices of your sub-conscious mind so that your thinking processes are evolved through this humbling process of knowing where do you err, in advance.

An old world saying, that a good mind lives in a good body. So, I am sure you will be keeping an even focus on keeping building a good health. Yet, with the evolution through my and your generation, it may be apt to believe that a good mind and a good body are held together by a great personality. So, somehow do find the time to indulge in competitive activity on the stage (in college) and surely at the sports-field.

Lastly, yet most importantly, I gave you the name Muskaan. Your name derives from the Urdu word that means a beautiful smile. Over these years, trust me, not just because your are my daughter, I have and others have felt you have been gifted with a smile that is rare. Yet, in the recent several months in the run up to your exams perhaps, there is a recurring frown on your forehead way more than your magnetic smile. Please learn right away, early enough in life, that consistent and sustained achievement is seldom feasible while existing at extremes. The concept of optimality applies to every human endeavour. In any case, the goal of life is the pursuit of happiness and to lose your miraculous smile for sub-goals of life is something I will want you to avoid. The same way that you balanced your achievements across languages and numerical subjects, I wish for you, that you achieve a life where work and play are so finely inter-woven that each journey of achievement is as much a joy for you as each milestone will bring.

While your immediate goal and focus for the next two years is the Engineering College Entrance test in India, which without an argument is the most competed for exam in the world, since God made too many of us in this part of the world, I need you to study Statistics and at least one human science at an appropriate time. Even while the study of natural sciences is so much complete in itself, each of us will use our abilities within the human dilemmas. What can be cognized by man is what truth is. Everything else is within the domain of postulates. So the approximations and the imperfections, that create all the opportunities, must be studied well too.

The first time ever someone's eldest child writes a public examination and beats daddy in each and every subject is a joy that comes to only some. What a bliss you have brought me. Hereon, while you keep beating me in every next exam you write, I need you to know, you will create a happiness multiplier function, should you achieve with elan, grace, happiness and health.

Here's to my rock-star, a big congratulations! Keep moving forward, with your focus, zeal and hard work and yet do it with happiness, health and a continuously growing personage.

An amazed father!



If Round Numbers, perhaps because they are the easiest multiples of other numbers, attract attention and thereby either a struggle or a release of pent up tension occurs around them, then the antithesis of a round number may likely be a prime number.

Do markets move past prime numbers with least activity/least resistance? If that is so, there should be evidence that the often talked about supports or resistances are observed to occur much less frequently around such numbers than may be in a consistent with randomness world.

If the numbers are a human invention (the choice of the base that all of us stick to is surely a convention, since the mathematics of the universe still remain the same whichever base of numbers any may choose), due to which variable behaviour around different types of numbers observed in prices may only be explainable, then such behaviour may be observable in time too and not just prices.

Perhaps the Senator has studied behaviour of markets through prime numbered years? Perhaps Kora may quickly run through his numbers cannons a study on prime numbered trading days from the lowest low in the last century?

Do markets move more than consistent with randomness or less around prime numbered prices? Similarly do markets move or less than consistent with randomness in prime numbered price bars?



 Risk facilitates exchange and all prospects of any gains arise from change. If there was no room for any uncertainty or risk, then no exchange would ever occur. In a risk-free world if a decline is guaranteed no one will buy and if a rise is guaranteed to happen no one will sell. Thus no one will be able to gain even if it was guaranteed that a fall or a rise is going to come, due to absence of any exchange.

Therefore, those who are ready to lose only have a prospect of winning.

How much is one entitled to lose is something each must assess, on a single trade, in a single period of time, in a single window of measurement etc.

Yet most end up focusing on forecasting. Now forecasting to my mind is nothing but studied imagination of the future refined with the help of analysing the past. It is this nature of forecasting, that there is imagination involved not foreknowledge prepares one to accept existence of risk and the need to manage it.

Whether one uses tea-leaves or frequency-leaf-diagrams, it therefore is critical to practice your chosen form of art or science with humility.

If anyone believes humility is the most powerful currency to prevent the market-mistress from collecting a toll larger than you should pay, then there is respect for risk. If there is any other who refuses to respect risk, the mistress then clearly finds a gaping hole in such personae to serve humiliation.



I surmise, for the New Year, that this year shall be:

1. much more kind to the permabears in equities,
2. much more kind to the wounded Gold Bugs
3. more kind to the Greenback
4. an affirmation of Labogalas, almost everywhere
5. definitive in affirming the permanent value of humility & establishing the evidence that complacence suffers.

What are the surmises of Daily Spec readers?



 Driving on my way back from work, at a traffic signal just at the boundary of the business district in Mumbai, it struck me that each and every advertisement is for swank, upmarket housing. The only other billboard was from a bank offering housing loans at "attractive" rates.

With realty stocks at all time lows in India, one wonders if such advertising is a sign of the coming crash in realty prices or the bankruptcies in the debt-laden realty sector companies or both?

What kind of signs have investors noticed in other economies in the world before realty bottomed out or the realty stocks bottomed out?



 I got a call today, wherein a large bull in India was quoted saying, "Victor Niederhoffer has written in his book, the best time to buy stocks is when brokerages are shutting down."

I tried recalling where the chair wrote that.

I assumed he has been quoted correctly, my conundrum is:

Indian equity indices are whiskers away from all time highs, that were seen five years ago. In between in 2011 too a re-test of the all time high had happened and marked dived 30% from there.

While retail brokerages are shutting down en-masse near the highs, domestic mutual fund AUMs have shrunk a tad with hardly any new net in-flows, Foreign Institutional Investors are net buyers.

A further divide on the conundrum:

Individual local investors are in despondency, on one hand. Institutional Global Investors are described in every segment of the market food chain as being complacent at the near high levels with such global & local macro concerns.

Descriptive sentiments are thus split wide open vertically between Individual / Retail/ Local despondency & institutional complacency.

Which way to tip the hat?



 This chart is interesting. It comes from a passionate market historian, Robert Prechter and his Elliott Wave group.

However, I disagree with it. A local maximum in interest rates is established only after they peak out somewhere and start declining again. So this illustrious list of busts and crises is not happening during the spike, but at its end.

A classical cart and horse problem. Framing Bias will make it appear that each time a spike in interest rates happened a crisis happened. The reality is likelier that each time a crisis could no longer be shoved under the carpet, when the economy could not sustain playing on the house money, when the illusory money effect succumbed to gravitational pull of reality, when the epidemic effect of the meme played out the asymptotic end of the S-curve, no one was willing to pay more for using Other People's Money (OPM). Interest rates are a willingness of people to undertake risk. Yet when this willingness becomes a larger risk than the aboriginal risk, a crisis comes.

Also, in the customs I learned on this list, there is always a chance that endless other financial crises have come along the curve too. Not sure, just checking with the specs which other key crises have happened at the troughs of interest rate cycles? Have there been any or as many?

Steve Ellison writes:

Yes, there is always bad news around, and any number of events could have been annotated at the low points on the chart, too.

Here is an example
I posted on the site in 2005.

One of my prized possessions is a chart of stock market returns in Venita Van Caspel's book "The Power of Money Dynamics." Each year is annotated with a reason to have been bearish that year:

1934: Depression
1935: Civil war in Spain
1936: Economy still struggling
1937: Recession
1938: War clouds gather
1939: War in Europe
1940: France falls
1941: Pearl Harbor
1942: Wartime price controls
1943: Industry mobilizes
1944: Consumer goods shortages
1945: Post-war recession predicted
1946: Dow tops 200 - market "too high"
1947: Cold war begins
1948: Berlin blockade
1949: Russia explodes A-bomb
1950: Korean war
1951: Excess profits tax
1952: U.S. seizes steel mills
1953: Russia explodes H-bomb
1954: Dow tops 300 - market "too high"
1955: Eisenhower illness
1956: Suez crisis
1957: Russia launches Sputnik
1958: Recession
1959: Castro seizes power in Cuba
1960: Russians down U-2 plane
1961: Berlin Wall erected
1962: Cuban missile crisis
1963: Kennedy assassinated
1964: Gulf of Tonkin
1965: Civil rights marches
1966: Vietnam war escalates
1967: Newark race riots
1968: USS Pueblo seized
1969: Money tightens; market falls
1970: Cambodia invaded; war spreads
1971: Wage-price freeze
1972: Largest U.S. trade deficit in history
1973: Energy crisis
1974: Steepest market drop in four decades
1975: Clouded economic prospects
1976: Economic recover slows
1977: Market slumps
1978: Interest rates rise
1979: Oil prices skyrocket
1980: Interest rates at all-time highs
1981: Steep recession begins

(Van Caspel, 1983, pp. 124-125)

Unfortunately, I have the 1983 edition, so the chart ends there.

A modest attempt to bring the record up to date:

1982: Double-digit unemployment
1983: Record budget deficit
1984: Technology new issues bubble bursts
1985: Dollar too strong
1986: Dow at 1800 - "too high"
1987: Stock market crash
1988: Worst drought in 50 years
1989: Savings & loan scandal
1990: Iraq invades Kuwait
1991: Recession
1992: Record budget deficit
1993: Clinton health care plan
1994: Rising interest rates
1995: Dollar at historic lows
1996: Greenspan "irrational exuberance" speech
1997: Asian markets collapse
1998: Long Term Capital collapses
1999: Y2K problem
2000: Dot-com stocks plunge
2001: Terrorist attacks
2002: Corporate scandals
2003: Gulf War II
2004: High oil prices
2005: Trade deficit



Is this the next credit crisis? An interesting picture by Zerohedge.

He has picked it off a Goldman report, which collected data from world bank.

Is it quantifiable?



Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).



To add to an already long list of differences between broadly who a speculator may be and who a gambler may be: the successful speculator generally leans onto the side of chance but an unsuccessful gambler is seeking chance to lean on his side.

Countless differences may exist and can be cited between who a speculator is and who a gambler is. When we cut it slightly finer, there are enough similarities between an amateur speculator and an amateur gambler. Same way, there are enough similarities between a professional speculator and a professional gambler.

To seek a generally acceptable set of common characteristics between successful gamblers and successful speculators, I often listen to "The Gambler " by Kenny Rogers [Youtube link].



 There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.



 Pain is a subject with which traders are probably familiar. There is psychic pain and physical pain. The amount or intensity of both kinds of pain is not commensurate with the amount of the loss in all cases. There is not a direct correlation between the increasing amount of loss and the increase in the amount of pain. For example, the pain of losing 100,000 is not a hundred times the pain of losing $1000, and the pain does not increase in a linear fashion. The pain of losing a loved one is not 1000 times more painful than losing say $100,000. (multiply amounts for wealthy readers). The pain of a small burn can be as painful as a major illness.

The other curious thing about pain is that it ends and its hard to remember after its gone. Experiments have shown that in time people tend to revert to their mean disposition even after horrific personal losses. Some people can handle pain better than others or recover at different speeds. When one is tired, small things can feel more painful. Pain and sadness are closely related to anger. There are mental techniques to handle psychic pain and effective drugs to deaden physical pain. I suppose one could write a book on the subject.

Sushil Kedia adds: 

Pain is a signal to consciousness or to the mind to search for changing the situation. Those traders who are not experiencing pain up to a level of loss are "willing" to lose that much and will thus have lost that much.

Like all of our perceptions, pain too is relative and there is no absolute measure feasible such as the measurement of temperature. Varying wealth levels or varying risk perceptions will, for one example for traders, bring varying intensity, length or sensitivity to pain.

For another example, in a simple surge-protector the fuse is expected to blow up before "paining" the computer to a point that the computer blows up. Some traders believe their stop loss strategies akin to this surge protector. Others believe their computers can withstand any power-surge, by placing some probabilistic calculations that having a surge protector will increase the probability of a power surge. Different hourses, different courses.

Jeff Watson adds:

The real sad thing is that you can be 100% right and the mistress of the market won't stop flogging you. Need to have my head examined. 



 Tops happen on good news and when there are not many more fools left to buy. Likewise, bottoms happen on bad news and when there are not many fools left to sell. Old saying.

With a slew of goody goody numbers in the US also not pushing the "S&P 500 momentum" higher, if one tiny-in-comparison bit of bad news from Cyprus whose GDP is a fraction of the total global market capitalization causes concern, then I am inclined to tilt my hat to search for evidence that not many more fools are left to buy.

Short Interest in the US is at multiple year lows. Idiosyncratic demand would be low on declines. Is there a larger mess brewing pricewise?



Google+ is increasingly leaving one with a feeling that Late Mover Advantage can be as significant as the Early Mover Advantage. A lot of thoughtful work seems going into Google+ avoiding so many of the aches that a stand alone twitter or a stand alone Facebook may be giving. This one seems way more integrable into many things in the future, what with the android keeping growing.

I had been bearish on Google as a business earlier, based purely on my nationalistic sentiments of their display of different maps of India when viewed from different locations in the world. I need to look beyond my own sentiments and of course on a longer term business basis, this giant continues to display clairvoyance.

Yet, for a speculative mind, if indeed Late Mover Advantage can be significant, how does one profit systematically from ideas such as if a market takes much more time than other related markets to achieve a movement, is the adage delay is not denial become ever-more profitable? Is there a good way to identify how much bunching of a volatility or delay is a good trigger for firing in a trade?

David Lilienfeld writes: 

Microsoft has built a company around Late Movers Advantage–it's their business model. Google has not. The question that needs to be asked, I think, is how and when Google+ can be monetized. As I think most on this list serve know, I'm a skeptic about FB's ability to monetize the 900 million accounts it has. I am equally skeptical about Google+. So far as I can see, the only social media company which has successfully monetized its accounts is LinkedIn. Otherwise (and I know many will disagree), I think social media is the fad-du-jour, much as twitter was the fad-du-jour from a few years back .(Tim Melvin and I had a great correspondence about this when twitter first came in–we followed one another, and neither of us had any idea what it meant to do so!) Or Flickr. Or email (remember when Microsoft bought Hotmail for $400 million? Can someone explain to me how Microsoft has earned any sort of return on that $400 million? I don't think I would change one iota what I think of Google as an investment because of Google+ or anything else it does until it shows it can obtain some revenue from doing so. Otherwise, it's just a freebie, and it doesn't take much to get lots of people using a freebie. Especially since I think Congress is going to shut down the marketing data collection that FB and Acxiom are marketing. And if Congress doesn't act soon (and it's already moving in a bipartisan way to address such data collection), the EU will likely do so.

Bottom line: Where's the revenue? Show me the revenue. Otherwise, it's Larry and Sergei's excellent adventure.



 Is Profit an Event or a Process?

Is Loss an Event or a Process?

Is a Trade an Event or a Process?

Is Price an Event or a Process?

Is Chance an Event or a Process?

This list may become never ending. So let me begin with these only and seek answers to some equally important questions.

If these are processes then, what events are we experiencing ever?

If these are events, then seperatedness of any one type, with another event of the same type being time, is time a process?

So then observation being central to identifying an event, is time a process or is time an event?

If time is neither a process, nor an event, then what is time?



Keep it simple.
The Ideal seldom,
Presents itself,
All at once.

Sushil Kedia writes: 

My 2 cents:

1. A reward can only come from change.
2. Change, though is the only constant, its expectations are never across people or time.
3. Hence, uncertainty of change only allows for trade to occur. If all are certain ever of the amount and time required for change, prices will only jump and no trade will happen and hence no profits possible.
4. Risk thus is a twin-sister of rewards.
5. No Risk = No Reward.



 When, an expected reimbursement for profligate financial behavior to those going bankrupt is causing, a relief from tensions. Can this create wealth? Does it justify the dignity of human enterprise or perilously puts to a sad joke that every media outlet in the universe is singing of the dropping Manna from the skies. Why should the public be right in hoping that the loot will percolate down to it?

The most desperate bullish theses that one ever came across is that the bankrupts will not be allowed to go bankrupt and this somehow is good for everyone. Postponement of a reality check somehow will become a handle for tele-porting the world to well being and such other circuitous arguments are the mark of our times.

If today too, the last available losable dollar from the public's pocket that could take a bet does not, then when it will?



 Real interest rates are back near their recent record lows (5 year TIP= negative 1.2%; 10 Year TIP= negative 0.15%); and gold's recent behavior is once again consistent with these facts. Riddle me this, Batman:

If I buy a 5-year TIP at a negative 1.2% real yield, and hold it to maturity, that means I am certain to lose 1.2% of purchasing power over the next five years. BUT: Were I instead to short a 5-year TIP at a negative 1.2% yield, and hold the short to maturity, does that mean I am certain to make 1.2% of purchasing power over the next five years? And, how can BOTH of these statements be false?

Private riddle for The Chair:

What do Galton, Batman, and Robin have in common?

The Riddler's False Notion:

Robin: Holy molars! Am I ever glad I take good care of my teeth!

Batman: True. You owe your life to dental hygiene.

Sushil Kedia writes: 

Logic Riddle is a misnomer for what is truly a contradiction. The presentation has a contradiction. In life, in markets there are no contradictions. Allow me to quote Ayn Rand from the Atlas Shrugged, "If there is a contradiction, check your premise".

Rocky, your logic is based on inflation remaining what it is right now the same also during the maturity and at the point of maturity of the 5 year TIPS! Market is not pricing that! Market is pricing inflation will come down! That's all. Check the premise, there are no contradictions.

Purchasing Power is a good term to help create this contradiction. Purchasing power will be Cash in your hand on day of maturity Divided by (1+inflation)^5 if I take the Annualized realized inflation readings. Realized Inflation readings five years from now will be known only then.

Rocky Humbert responds: 

Dear MisterMeanor:

1. You should check your bloomberg before you check your premise. These bonds are trading above 105 in price (even forgetting about the inflation adjustment).

2. That means it's possible to have not only a negative REAL YIELD but it's also possible to have a negative NOMINAL RETURN! (So much for the risk-less treasury market.

3. Your definition of purchasing power is unusual. Purchasing power has absolutely nothing to do with the cash in your hand. It's WHAT YOU CAN BUY with the cash in your hand. (Stefan — please elucidate this point).

4. Your statement "Market is pricing inflation will come down! That's all. Check the premise, there are no contradictions" is 100% UPSIDE DOWN. There is little justification for locking in a negative 1.2% compounded real yield UNLESS you have no alternative investment that does better. You need an inflation assumption of RISING INFLATION not falling inflation due to the way these seasoned bonds behave.

I reckon, back of the envelope, north of 3.8% compounded CPI…. is required to have these TIPS beat the bullet 5 year … and even then you still lose 1.2% of purchasing power (compounded) per year. If you want to bet on disinflation/deflation, you would short these bonds at 105 with an inflation factor of 226/220 with abandon, and buy 5 year bullet bonds to term.

Batman just ended. The Flintstones are on now.

Charles Pennington writes: 

That's a very nice riddle.

These bonds trade dearly I think because there aren't many other competing foolproof CPI inflation hedges.

Obviously if you short the bonds AND hold the short sale proceeds in cash, you are at risk of losing money. You short $1 million in bonds and hold the $1 million proceeds in cash. The bonds could go up in nominal terms by a factor of ten to $10 million. Meanwhile your short sale proceeds sit there in cash, still just $1 million, and when you cover, you lose $9 million. That's a loss in any terms.

Of course, if you could use your short sale proceeds to buy something that tracks the CPI without the built-in "negative carry" that the TIPS have, then you'd have a perfect arbitrage. But such a thing doesn't exist.

(Does it?)

Tyler Mcclellan comments:

A 1 year bond is four three month bonds.

A three month bond is a treasury bill financeable for cash as legally defined by the government at the rate set by the federal reserve.

If ex ante you knew that rate, let's say it would be zero for the next year, then if the one year note traded at 1 percent, there would be risk free arbitrage in buying the note (because the note is defined as acceptable collateral to get cash without exception at the overnight rate, it is perpetually fungible).

But all of this is true because arbitrage needs a unit that you're left with at the end, say for example cash, to make the calc.

I will not solve the last part of your riddle yet Rocky.

Let me ask, can the fair value of cash, the unit of account in arbitrage, which is merely the desire to lend known resources today for unknown future wants x years from now, change?

I don't want to lend at these rates.

I'd rather just have the money in the bank.

But if you know the money in the bank is guaranteed to earn zero shouldn't you buy the bonds and finance them at zero?

And if you know that the nominal bond is priced on the arbitrage condition above, and you believe that inflation will be three percent,t hen if you short the bond and earn the overnight rate risk free, and buy the tip and pay the over night rate risk free,and you hold these positions to maturity, since they are both fungible for cash, then you are guaranteed to earn the difference between future CPI and the ex ante break-even, which is an unknown variable free to take any value.

If you had an opinion on the future rate of inflation you could express that view only because of the other variable being priced to remove arb.And the riddle you speak of which seems to be, why would you commit ex ante to a negative real return can be answered by saying arbitrage of the other instruments demands that only the break-even and not the real rate is solved for by the buyers and sellers in the tips market.

Then What is the real rate set by? That is a very tricky question. The answer is in the above, but not obviously.

Duncan Coker writes:

I believe selling the 5 year Tip and buying the 5 year bond would do better than 1.2% (anti negative real rate) and would actually capture the inflation rate of around 2%. Empirically if you convert them to zero coupon for calculations then sell the 5 year tip around 105, buy the 5 year bond at 95, this makes for a compounded return of around 2%, 10 profit, holding to maturing. But then again there is a reason I don't trade bonds much.

Michael Cohn comments:

 I think of tips only in term of the real yield. It would take a very unusual set of circumstances to get me excited about investing in a situation where I can earn a negative real return. These bonds, if I recall all have CPI floors built into them so persistent deflation while sapping a bond of its built in inflation accretion can't turn the redemption figure below par. Each bond has a different sensitivity to the built up inflation component depending upon when issued. This is because the bond pays the same real coupon and the principal balance is adjusted by prior CPI (riding on a train so can't look up)

Certainly these bonds are one of the only high quality ways to hedge inflation. There are a number of global ways to do this but France, etc. Have bigger issues.

So what can happen when you short one of these. I wonder for those who can obtain info what the cost to borrow for the short is here. Obviously the overnight reinvestment is not a plus here.

Seems like I should expect to earn the real yield in this case which is a depreciation toward par but what is my short cost?

Tyler McClellan responds:

 I set up my example clearly.

The reason the thirty year bond cannot be arbitraged to short term rates is very simple. There is no way to credibly make the claim that short term rates will be X for thirty years. There is no institution that can impose the stick. I put very little weight on all the other things. Its the fact that short terms rates could be radically different in the future that generates the volatility not the other way around. Long bonds are very convex and thus this is a major reason they should have a lower yield, offsetting the term premium.

Your examples about LTCM and MF Global are meaningless. Their assets were never fungible at 100 percent leverage for the overnight rate. The Fed conducts monetary policy by making cash and bonds of certain maturities exchangeable for each other at certain overnight rates. To compare this to MF global where the bonds are explicitly not instantaneously fungible with cash (euros) is very odd.

Your example about RV strategies in fixed income is a good counterpoint to the limits of arbitrage. I agree that a one year rate 29 years forward is not subject to the same laws of arbitrage as other instruments. This is for a simple reason. The one year rate 29 years forward is not something that is dynamically set in the market by participants trading until equilibrium. It is an artifice of other things that are traded in this manner and thus it "falls out" of other asset prices.

In general arbitrage is the mechanism by which the sum of views in the market derive their equilibrium condition. You have to have a variable that reflects some view for arbitrage to do heavy lifting. I cannot arbitrage a one day interest rate 17.75 years forward for the simple fact that there are no views on that variable and thus it is merely an artifice that arises from the ecology of the market.

As for mingling "real and nominal". You do not understand your own analysis. The market already believes that we will have about 2% inflation and is nonetheless holding cash at 0%. So the accepting of negative real returns ex ante exists in many markets as a necessary fall out of accepting other variable. To say that this comes from the TIPS market is strange. All the tips market does is allow people to have differing views on the future rate of inflation. Everything else is determined by much more liquid (and therefore likely to be subject to arbitrage pricing) markets.

You will get negative real returns (your vaunted guaranteed decline in real wealth (a phrase that I dont understand)) ex ante in either the nominal or the TIPS market. If you reread what you wrote, you will understand this has nothing to do with TIPS.

As for your last question. You already understand the answer rocky. You get more than PAR day one for being short the TIP.

If you

1) take all those proceeds and reinvest them at the fed fund rate at the future path

2) and if inflation is equal to the breakeven-rate

3) then you will lose the real value of the capital lent to you at exactly the same rate that the market says the real value of the capital lent to you must go down ex ante.

Put another way,


1) you must earn the nominal return priced in the market,
2) experience the inflation rate priced into the market,
3) and deposit your funds at the monopoly price set by the FED,

then you are indifferent between the two outcomes and are guaranteed to earn the same negative return. Which is of course why there is a market. All of which i wrote a long time ago as a explanation for why it might make sense to be short tips but if an only if you could tell me why based on your estimate of the above three variables. Any speculation on the real rate is meaningless, it is not a variable one can have a view on outside of the above (if and this is a key assumption, cash money from the fed reserve is the unit of account you wish to sum all the steps across. Its very possible the real term structure of other commodities is different)

Rocky Humbert responds:

I will address your many points more specifically when I have some time. But I will make a very simple observation (which you ignored)….which has to do with the interactions between inflation and tax policy and the zero interest rate boundary problem.

Let's assume a simple Taylor rule and that the fed sets overnight funds at inflation+100 basis points. Let's further assume a marginal tax rate of 30%.

Case I) Let's assume that inflation is running at 5%. Then fed funds is 6%. Then my after-tax nominal return = 0.7x 6% = 4.2% and my after-tax real return is negative 0.8%.

Case II) Let's assume that inflation is 2%. Then fed funds is 3%…and my after-tax nominal return = 0.7×3%= 2.1% and my after-tax real return is positive 0.1%.

Case III) Let's assume that inflation is NEGATIVE 2%. Then fed funds is 0% … and my after-tax nominal return = 0%, but my after-tax real return is positive 2%.

This is a clear example where real after tax returns behave in counter-intuitive ways…. and so the apparent negative return on TIPS might have less to do with inflation expectations per se, and more to do with the tax effects…. (or more succinctly, an investor in Case III above would be willing to buy a tip that has a negative 2% real yield and would be indifferent to case II, where the same TIP has a +100 real yield.) Just a thought

Tyler McClellan writes:

Very true. I once worked with Paul McCulley on the tax implications of same. As you never posed that as a question I didn't address it.

I agree with your points and thing it is a modest contributor the the current equilibrium pricing.

 Philip J. McDonnell writes:

I think one point that has not really been made in this discussion is that TIPS are paid back at the greater of inflation adjusted value or par. This means that they have an implied deflation protector built in.

It is like a deflation put which has intrinsic value in and of itself. In many ways we are in a deflationary environment caused by the great credit bubble unwinding throughout the world economy.

Gary Rogan comments:

I just scanned the riddle discussion. It seems to me that the reason you can't make money shorting TIPS is like the obviously idiotic action of shorting dollars in dollars. Let's say you decide to short a million dollars, and sell it to someone for a million. That's what shorting is, and yet you are in exactly the same situation as you once were.

If TIPs are losing purchasing power against a basket of commodities, but dollars are losing it faster, if you short TIPS you get something that loses purchasing power even faster than TIPS, hence no gain. If you could find a way to get paid for your shorted TIPS with a basket of commodities, and there is high inflation, you can buy them back with fewer commodities, so you make a profit.



One is never better off talking their book.

True in so many ways:

If you speak of a position you hold, not only peers smirk you are talkin' your book, a pressure builds up that starts seeking what you spoke must happen. Rabbit holes of all sorts get clogged and only one remaining open is your forecast. Bad trading.

If you speak of a position you could have taken then too much pressure comes from peers that you may be talking your own book while its not true. Pressure gets released that you are not going wrong if forecast is wrong and then the pressure also becomes immense if you are really right but don't have the position.

Trading or talking well are both rare abilities on a stand-alone basis and definitely a feat when done together well.



The stock market today [Thursday 2011/10/06] is gunning it into the close ahead of a good jobs number tomorrow?

James Lackey responds:

I dunno Mr Ken, and I don't care about such things. The number will be produced by the random news generator at best or rigged by The Man at worst… but it's not a meal for a lifetime… Please do not send such comments! Thank you.

 Anatoly Veltman writes:

Lack, this is not about the number. It's about expectation, based on market moves ahead of the number. The lesson to me is calendar-based trading - where money is made because the number is scheduled. Not because you know the number. Is there lesson in that?

Rocky Humbert issues a challenge:

You guys want a meal for a lifetime? How about this meal for the day:

Here are the most likely NFP numbers:

A) between -100k and -50k
B) between -50k and 0
C) between 0 and +50k
D) between 50k and 100k

The person who best assigns a 4pm SPX closing price to each of these 4 choices — and gets the answer right within 10 spx points — will receive a dinner voucher for 2 at my favorite restaurant. (That is, an acceptable submission would look like A=1102, B=1120, C=1160, D=1190.)

The purpose of this challenge is to demonstrate that EVEN IF you knew the NFP, you still won't be able to accurately predict the market's reaction (unless it's a complete outlier).

The judge's decision is final.

 Sushil Kedia responds:

Without any intent to contest the judges decision, my two humble cents:

A reflexivist, who often is a winner in the markets, may need to put up an answer most of the time, as E = 1155, irrespective of where the NFP numbers come.

If the judge so wishes that it may be proper for a complete illustration on the futility of information being beyond markets, may consider providing such a fifth choice. Up to the judge.

The unemployment number is released at 8:30am Eastern Time on Friday. Rocky Humbert responds:

Mr. Collins: One notes that the NFP headline number was 103k — which was above the choice D range (+50k to +100k). The judges are conferring as to whether this constitutes a scratch. They will announce their decision forthwith.

Nonetheless, and for good order, here were the entries in the contest:

Anatoly: SP will drop 90 points

Jonathan Bower: 1125 1125 1125 1125

Mr. Rogan: 1130 1140 1150 1170

Tim Collins: 1099.22 1119.66 1131.24 1149.86

Sushil Kedia: An "unlawful entry" of 1155 in all cases. (Because of his "unlawful entry," from this day forward, Sushil shall be known as Mister Meanor.).

Alex Forshaw: 1155 - 25= 1130; 1155 - 35= 1120 ; 1155 - 45 = 1110; 1155- 55 = 1100

Rocky Humbert writes further: 

I am penning this at 3:43pm — and due to the impending holiday, I need to leave early and hence will not know the final challenge result for about 30 hours. The point of this challenge was to convincingly demonstrate that EVEN IF one knows a macro data point in advance, it's frequently impossible to know Mr. Market's reaction. The signal-to-noise ratio is simply too low. Whether or not my primary point is accepted, (as of this moment) it looks like I've also convincingly demonstrated an equally important truth: "Even a blind squirrel finds a nut." (Or more accurately, it looks like Mr. Rogan has won the challenge.) But I cannot depart for my day of atonement on that note. Tomorrow (Yom Kippur) ends the Ten Days of Repentance (Aseret Y'mai Teshuvah).

 It is a requirement that during this period, one must make amends to those whom we may have hurt in the past; and to ask for and to grant forgiveness to those who ask for it. It is not sufficient to ask God for his forgiveness. One must ask for the forgiveness from one's fellow man. Mindful of the fact that I've dished out some harsh words over the past year to some of you — and I apologize for that — and I hope that you forgive me. It's especially poignant that Mr. Rogan appears to be the winner of the challenge, as he has been the target of some of my more vituperative slings — I apologize to you Mr. Rogan — and I'll try to do better in the year, 5772.

 Gary Rogan responds:

 Hey Rocky, it appears that I may not have won after all, but I appreciate your apology although no offense had been taken. You made me realize how important it is to take the Prozac regularly instead of at random intervals and varying amounts so it's all good. Happy atonement!

 Rocky Humbert responds:

I have re-emerged from atonement and post-atonement eating to find an envelope with the judge's FINAL decision. The winner is: Mr. Tim Collins who was within 6 points. The biggest loser is Sushil (aka Mister Meanor), who almost perfectly nailed the closing price, but because he was more interested in sounding smart than being right, he is guilty of a misdemeanor charge of "unlawful entry" s and walks away empty-handed. There is a meal for a lifetime here too. If Mr. Tim will mail me his US Mail address (off-site), his dinner voucher for 2 at my favorite restaurant will be posted forthwith. Thank you to all for participating and demonstrating many useful points. 



 If time is defined as a measure of seperated-ness of events then,

i) Does time not exist in vacuum, where there are no events?

ii) Does time not exist in black holes, where there are no events?

Analogously to someone watching the tape tick by tick (HFT guys you are doing that, only, albeit with faster machines than most others) market-time does not exist in a price jump / gap? Market-time does not exist when at a single tick very large volume occurs?

How can such a perspective alter any enterprises modelling markets on (dis)continuous time, in any more profitable ways than the traditional ones?



 Funny thing, did you know Domino Pizza's subsidiary in India is called Jubilant Foodworks. It's listed. It does about 1/6th the revenues and profits of the original US based Dominos. Yet the market cap of Indian Dominos is more than the US Dominos!

What does this say? Scarcity of stock? Cornered position in a few strong hands? Does the many times larger P/E of Indian Dominos than the parent imply in any way that Indians will provide greater growth to Dominos than Americans?

I would say, the story unfolds as the price does, and all logical/fundamental explanations are determined by the colour of the pit.



 Greetings to the Specs gathering at the Speculators Party 2011.

I would have loved to meet all at this looked forward to event, but able to travel into New York only in early September.

So here is my question, does the parabolic zoom in gold recently qualify to be a candidate for inspecting if a Lobogalaesque thud will come now?

What are the good ways to be on the lookout for a parabolic move to be turning into a Lobogalaesque detour, in general?





 A Currency Note is akin to a Time Insensitive Zero Coupon Bond with zero regard to the idea of Inflation. Whether you present it now or a year later the Promissory Note that a Currency Note is will provide you with goods or whatever you have agreed to obtain against it at the face value that day.

Over simplification being a standard problem of modelling, the diversification with cash idea propounded by Markowitz is a numerical illusion. Since the face value of cash does not change it dampens volatility. We understand high school level Mathematica. Thank you very much Mr. Markowitz for showing us how by doing nothing one can reduce risk. I as a student of markets am interested in figuring out how can I reduce my risk while I am still doing something.

Yet, things could have been still tolerable had the negative rate of return on cash implicit due to unavoidable inflation would have been plugged in somewhere in the diversification model.

Holding cash for dampening volatility for a very short period of time is fine. But then Portfolio Management is such an aggrandized term that traders cannot even come remotely close to it and has to be a long term religion. How does anyone ever reduce risk by holding onto a guaranteed to lose investment in their portfolios?

Using even my high School standards only Maths I cannot accept to believe ever that cash that keeps getting trashed over time in value will ever add anything but negative returns in my portfolio and even if a theoretically flawed calculation of a dampened volatility is accepted as still correct then too bring me to a higher utility curve.

The higher investment utility curves built using cash to me appear similar to claims of reaching higher states of consciousness by starving. All I have known people reaching is altered states of consciousness by starving.

Hold cash and starve. Simple. Why do I need a celebrated model and an entire marketplace revolving around such a flawed reasoning. Well I need this since without such mass hysteria, where is the money to be made?

Mr. Krisrock writes: 

Cash is a proxy for the currency… that's why the Japanese bond market can be among the best performers despite near zero rates. Smart bond men are willing to accept zero if the total return is simply the currency appreciation. Ask John Taylor he called all this…

Sushil Kedia replies: 

I cannot agree more with your point here. Accepting zero interest is fine if the interest rates on other currencies are higher and thus the currency in which the zero interest rate bond is denominated will appreciate.

Yet that is a different point.

I am only crying over the years consumed in living with Portfolio Theory that was drilled down my brains in the MBA days.



 Between any two occurrences what changes is time. This is true in life other than in markets. For a life in the markets, between penury and wealth what changes is price. Between a well funded account and a margin call, what changes is price. A mere change of time as known in the world will not bring by these changes in a life in the markets. But a change in price will bring these by. So, an equivalent notion of time in markets is then price. It is the connecting thread on which all change propagates.

In this frame of thinking then, measuring progress or regress of one's affair with the markets then against only time is at best half the story or likely less than half. The real story is in measuring things against price. Two stocks both move the same dollar amount over the same time period but one was priced at 100 and the other 200, for example, when you opened the long position. Obviously your capital and you succeeded more with the stock priced at 100.

Now measuring things against price may be more than half the story. Yet, life in the markets has more and immediate refinements. The stock at 100 may move the same amount as the stock at 200 and yet the stock at 100 may waver around a lot more. So not only do we need to measure our enterprise against price but also the likely distribution of prices or the risk undertaken and risk realized.

Time, continues to stick in our brains, being the primordial human instinct. Life in the markets is contested against the primordial instincts of avoiding risk. Market is a place where human beings contest their abilities at claiming better understanding of uncertainty (risk).

Compared to all other forms of human enterprises from the arts, sports, sciences, war, love, cooking, eating, family matters to any thing, the market is a place that requires one to be past one's most basic instinct of time. Of course, who does not time the markets, with some acknowledging it and some not acknowledging the act of timing. Yet, neither the timers nor the self-advertised non-timers are both playing a game that at best is only half as good.

The beauty of the beast called the market then expands to another dimension. You cannot even debate creating time or reversing time. But prices reverse all the time and it is still an ongoing debate if prices can be created. Well some do it most of the time.

With this humble thread of thought, do I get any clues from anyone if the Einsteinian equivalence of time and distance can be modified to include not just the price as holding some equivalence relationship with time, but the distribution of price along with it may fit into some sort of equivalence with price?



With the President being so concerned with the markets on Monday in the absence of a debt deal, is this not a test of who is calling the tune? Bernanke points to the Russell 2000 to judge QE2 a success. Does the market have to come down Monday to keep the theme alive? I would think if non-Governmental market participants had their say, they would rally stocks as a giant middle finger to the President. Who is he to invoke markets?

Gary Rogan writes:

It's a test whether the truth can triumph in spite of all the propaganda

Media Blackout: Nets Ignored Popular Cut, Cap, Balance Bill

Sushil Kedia adds:

The Zimbabwean markets went up like something….. with their QE ad infinitum. Eventually the only thing everyone needed to buy was chastity locks…



 A village wrestler in the rustic state of Haryana in India, so goes the story, used to be the only one to keep huge moustaches. Tipped nicely and pointing to the sky it stood clear to all the moustaches were a mark of his power over the villagers.

One day, the village grocer decided its time for him to sport similar moustaches. He grew his. Tipped nicely and pointing to the sky his moustaches matched the apparent mojo the wrestler’s displayed.

Now, in a village only one could be the supreme. The wrestler presented himself promptly at the grocer’s on hearing about the other big moustache. He challenged the grocer into a duel. The one who wins should be the one entitled to keep his mouche.

The grocer scratched his head. He proffered, why create a fight and enmity that will go on forever. Whoever loses will leave his kin come forward and challenge another duel and so on and so forth. So, instead he proposed that they should fix up a date for a full fledged fight between the two clans – the grocer’s vs the wrestler’s and a time and day three months from then was finalized. Both agreed to assemble all there relatives, friends and well wishers to partake from their sides.

The wrestler sent over message to all the nearby villages calling for all his kind to assemble and build bodies and prepare for the coming fight in 90 days. The grocer continued to sell goods at his grocery. The wrestlers bought milk, butter, cheese, fruits, meats and nuts day in and day out. The big wrestler with the mouche was of course financing the preparation of bodies for the big fight. Scores of wrestlers were keeping gobbling the goodies, pushing iron, pressing benches and raising the village dust for 90 days.

On the day of the appointed fight the wrestler roared outside the grocer’s establishment with his well built battalion of four scores of other wrestlers, all well fed and well prepared.

The grocer came out of his shop. Surveyed the well built bodies, folded both his hands in obeisance and twirled his own moustache down and offered to shave it off conceding defeat. The wrestlers laughed at his cowardice. The grocer still said he was sorry and went back to his shop, took a razor and shaved off the moustache immediately before all.

The wrestlers went back to their respective villages The big wrestler was left with his huge moustache all alone again in the village. He was also left now with a pawned house, sold off oxens and a pile of debt on his head.

Moral of the story:

1) There is no money in ego.

2) Money is power. Power may not be money.

3) Humility, at the right time, pays.

Now, in the global village one worries if China is the village wrestler or the village grocer.

On one hand West has kept on funding one bubble after another. Bubble not in the traditional financial markets’ context, but a more simplistic one, funding consumption beyond the means of the consumers. Yet on the other hand China has been supplying to global consumers at prices below which no sensible producer of any goods should be selling.

China too has gone ahead funding its asset financing spirals. Company A listed on the stock market in Shanghai holds 30% of Company B listed there which holds 30% in company C and so on and so forth. Talking about the opacity of Chinese numbers, whether at the Corporate level or at the level of aggregate Government released data is as good as passe’. No one bothers to even talk about it now.

One wonders if after a 100 years a bestseller would be written with the title, “Extraordinary delusions of Economists and Madness of Central Bankers” based on what this world is right now doing and pushing itself to.

Every Government, every Central Banker and every Treasury Chancellor in today’s world has is mouche twirled up and pointing to the sky. Lets see who will turn out to be humble, wise grocer shaving the mouche off, in time. Any thoughts?



 Wall Street Raider is a computer software game. Costs less than 20 Dollars. Fairly imaginative in including short sales, options, commodities, running ticker tape, ability spread rumors, inflict and defend lawsuits, mergers, greenmailers, LBOs. Changing economic scenarios, FED policies, ability to maneuver earnings of companies you control, multiple players possible, stock splits, changing banks, tax free liquidations, taxable liquidations, buying tax assessed loss making companies for reducing taxes, synthetic database of 1500 unique companies created each time you start the game with corporation names as colorful as JPM Wall Street et al make this a fairly educative widget to have.

Young minds at home curious enough to know what pa is doing but running out of questions will find this a good resource to cut their teeth on, acquire newer curiosities and one never knows if playing with hypothetical dollars a few beer and pizza challenges real life traders can achieve greater conceptual clarities of their own response mechanisms to various market stimuli.

Researching companies with certain attributes such as ROI > X or P/E <Y is possible too. Share buybacks, bond call-ins etc etc. much stuff loaded here.

You can download a trial version before purchasing.

I would recommend a good explore rating to this one, over any action thriller games or any other mumbo jumbo that our kids get exposed to on computers easily these days. Time for my 12 year old to inquire why should bonds go up if FED moves from a neutral to easy money policy.




The Winners of the least effort contest were jointly in a tie. Mr. Gary Rogan and Mr. Steve Ellison. I will split the prize between them. The creative and physical ideas of Mr. Rogan were very excellent and best of all, but there was no testing. Mr. Ellison gave a great test, and a complete answer, but Rogan can't be denied his place either. vic

I'll give a prize of 1000 to the person or locus of his choice that comes up with the best way to test the principle of least action or a related principle of least effort.

It's in honor of my grandfather. Whenever I'd ask him which way he thought the market would go he'd say, "I think the path of least resistance is down" starting with Dow 200 in 1950. We need some more quantification around here.

You might consider max to min or a path through a second market back to home. Or round to round? Or amount of volume above or blow. Or angle of ascent versus angle of descent. Or time to a past goal versus the future? Or some mirror image or least absolute deviation stuff?

Sushil Kedia writes:

With utmost humility and clearly no cultivated sense of any derision for the Fourth Estate, I would submit that since it is the public that is always flogged and moves last, the opinions of all media writers, tv anchors are the catalysts, the penultimate leg of the opinion curve. A test of the opinions of the fourth estate on the markets would provide the most ineffective wall of support or so called resistances. Fading the statistically calculated opinion meter (if one can devise one such a 'la an IBES earnings estimate a media estimate of market opinion) and go against it consistently over a number of trades, one is bound to come out a winner. Can I test it? Yes its a testable proposition, subject to accumulation of data.

Alston Mabry writes:

The following graph (attached and linked) is not an answer but an exploration of the "least effort" idea. It shows, for SPY daily since August last year, the graph of two quantities:

1. The point change for the SPY over the previous ten trading days.

2. The rolling 10-day sum of the High-Low-previous-Close spread, i.e., "max(previous Close, High) minus min(previous Close, Low)". This spread is a convenient measure of volatility.

Notice how these quantities move in tight ranges for extended periods. These tight ranges are some measure of "least effort", i.e., the market getting from point A to point B in an efficient fashion. As one would expect, the series gyrate when the market takes a temporary downturn. Also note how when one of the quantities swings above or below it's mean or "axis", it seems to need to swing back the other way to rebalance the system.

Bill Rafter writes:

 This nicely illustrates how relative high volatility is bearish on future price action.

Jim Sogi writes:

The path of least resistance would be the night session. Low liquidity allows market mover to move market. Every one is asleep. Dr. S did a study some years ago. Updating shows total day sessions yielding 94 pt, but night session yielding 232 points. Don't sleep…stay up all night or move to Singapore. Recent action is in line with hypothesis.

Bill Rafter writes:

Haugen's "The Beast on Wall Street" (i.e. volatility) came to the conclusion that if you want less volatility in the markets, keep them closed more, to essentially force the liquidity into specified periods. That is, 24 hour markets promote volatility. Or a corollary was that a market is never volatile when it is closed. [this is from memory and I may also be regurgitating from a personal conversation with him]. An oft cited example is the period in the summer of 1968 when equities were closed on Wednesdays to enable the back offices to get up to date with their paperwork and deliveries. During that time the Tuesday close to Thursday opening was less volatile than expected (twice the daily overnight vol).

One could take this thought and stretch it to say that the periods of least resistance would be those without heavy participation. One could easily compare the normalized range (High/Low) of those periods versus the same of the well-participated periods.

Craig Mee writes: 

Hi Bill,

You would have to think that in 68 there was sufficient control of price and news dissemination. In these times of high speed everything, that this could create bottlenecks and add to the volatility. No doubt a bit of time to cool the heels i.e limit down and up for the day restrictions, is a reasonable action, even if it goes against "fair open and transparent markets" but unfortunate it seems little is these days.

Bill Rafter replies:

I should have been more specific about the research: take the current normalized range for those periods of high liquidity (when the NY markets are open) and compare that to the normalized range of the premarket and postmarket periods. Do it for disjoint periods (but all in recent history) so you don't have any autocorrelation. My belief is that you will find there is less volatility intra-period during the high liquidity times. While you are at that you can also check to see during which period you get greater mean-reversion versus new direction.

If that research were to show that (for example) you had greater intra-period volatility during the premarket and postmarket times, and that those times also evidenced greater mean-reversion, you could then conclude that those were the times of least resistance. That would answer Vic's question. Okay, now what? Well you could then support an argument that with high volatility and mean reversion you should run (or mimic running) a specialist book during those times. That's not something I myself am interested in doing as it would require additional staff, but those of you with that capacity should consider it, if you are not yet doing so.

Historical sidebar: '68 was a bubble period caused in part by strange margin rules that enabled those in the industry to carry large positions for no money. The activity created paper problems as the back offices were still making/requiring physical delivery of stock certificates. The exchanges closed trading on Wednesday to enable the back offices to have another workday to clear the backlog. The "shenanigan index" was high during that time.

Phil McDonnell writes:

Bill, you said "During that time the Tuesday close to Thursday opening was less volatile than expected (twice the daily overnight vol)."

For a two day period and standard deviation s then the two day standard deviation should be sqrt(2)s or 1.4 s. So the figure of twice the volatility would seem higher than expected.

Or am I missing something? 

Steve Ellison submits this study:

The traditional definition of resistance is a price level at which it is expected there will be a relatively large amount of stock for sale. 
Starting from this point, my idea was that liquidity providers create resistance to price movements. If a stock price moved up a dollar on volume of 10,000 shares, it would suggest more resistance than if the price moved up a dollar on volume of 5,000 shares.

To test this idea, I used 5-minute bars of one of my favorite stocks, CHSI. To better separate up movement from down movement, for each bar I calculated the 75th and 25th percentiles of 5-minute net changes during the past week. If the current bar was in the 75th percentile or above, I added the price change and volume to the up category. If the current bar was in the 25th percentile or below, I added the price change and volume to the down category.

Looking back 200 bars, I divided the total up volume by the total up price change to calculate resistance to upward movement. I divided total down volume by the total down price change to calculate resistance to downward movement. I divided the upward resistance by the downward resistance to identify the path of least resistance. If the quotient was greater than 1, the past of least resistance was presumed to be downward; if the quotient was less than 1, the path of least resistance was upward.

For example:

                           Previous 200 bars
   Date     Time     Up Points Volume  Down Points Volume Resistance

3/25/2011   15:50   53   6.49  99431    61  -7.38  149867     15311

   Down       Resistance     Actual
Resistance      Ratio      net change
     20310       0.754       -0.03

Unfortunately, the correlation of the resistance ratio to the actual
price change of the next bar was consistent with randomness.



It's interesting to see the big gaps, active overnight sessions, and sleepy daytime session in SP. Seems overseas traders are starting to wag the dog.

Sushil Kedia writes:

The Senator taught me a trick when he was in Mumbai almost five years ago to treat the overnight gaps as the cost the public is paying and the intraday range as the action of the pros.

Overseas or local, the battle is fought in that same pit. Senator's attitude to gaps left a few meals for a lifetime.



What would be the correct way of running a multiple correlation to check this theses that a major part of the Rsquared comes from the DXY? Run one with it and one without it and see the R squared. Perhaps not enough. How much of the variation is explained by DXY amongst a bouquet of "relevant" variables.

Perhaps I am trying asking too many questions in a single one. Quants on the list will perhaps not mind tossing me out of the kitchen table with just a few strokes of their insightful knives.

Bill Rafter writes:

What would be the correct way of running a multiple correlation to check this theses that a major part of the Rsquared comes from the DXY? Run one with it and one without it and see the R squared. Perhaps not enough. How much of the variation is explained by DXY amongst a bouquet of "relevant" variables.

Perhaps I am trying asking too many questions in a single one. Quants on the list will perhaps not mind tossing me out of the kitchen table with just a few strokes of their insightful knives.



While India is a place today with intensifying struggle against corruption, here is an effort from the establishment to create divergence in the objectives of the bribe giver and the bribe taker by proposing that giving bribes should be no longer considered illegal such as the bribe giver can co-operate in the investigastions. Well it has its own bundle of issues for sure since the creative abound.

A Paper by the Chief Economic Advisor the Finance Ministry, Government of India argues this & is available here.



 Cricket is played at all places where the English language has been, from across the Indian Sub-continent, South Africa, Australia, West Indies and even in Canada. America doesn't play this game. What could be the significance of this? America innovates its own games? Soccer played the American way is very distinct from how its played elsewhere, for an example.What do the sports historians trace this to?

Does this reflect a certain way in which America has come to be what it is and can it provide any insights on how markets and business in general may have been structured differently for, social innovation factors, if any that may have brought a different way of team sports and games in America?

Stefan Jovanovich comments: 

Baseball is a direct descendant of another British game - rounders, which was played by the Scots and the Irish. Cricket was the "polite" game played by the English; rounders was the "rowdy" one played by the people whose allegiance to the Crown was dodgy at best. As the Brittanica entry illustrates, "rounders" has had to be banished from the official record on both sides of the Atlantic: in Britain because it is a reminder of the awful days of real disunion and in the U.S. because we all know baseball was invented by Abner Doubleday.




 There was an interesting story recently about how actress Anne Hathaway impacts the share price of the Sage's firm. I wonder if someone created a fund called the B3rks#ire Black Swan fund and hired a capable Search Engine Optimisation specialist then what would happen?

The stock price of the firm will be in permanent declines or robotic trading firms will get shocked again and again?



JPY/USD is at a 40 year high!

So is USD/CHF !!

But then Gold/USD is also at a forty year highs!!! Yet neither of the AUD, the CAD nor the ZAR are at 40 year highs!!

And then the so called Big Growth stories of the world India and China have their INR/USD and CNY/USD about 1/7th and 1/4ths of their 40 year highs currently.

Long live the Long Term Funnymentals!!

Whoever said that markets can be irrational in the short term and hence go for those long term bets!!

Ahh… Keynes did say markets can be irrational for longer than you can be solvent. But I doubt if he too had been able to visualize that markets can be so incoherent for such long stretches of time.

So many different kinds of monies and so many different ways in which they are incoherent with each other.

The arithmetic of money is neither additive nor multiplicative. What sort of arithmetic is the world of money following in this world, in the last forty years? Where is the key to Rebecca?



 The Occam's Razor Principle roughly paraphrased would mean that when there are several explanations possible for any phenomenon usually the simplest is the best.

All fundamental logic would point to a weaker yen and all weak hands were tipping their hats to that side.

The smart, if someone will not call them the crooked, have a reason thus, that since there is only so much money in the pot at any point in time, to tip theirs the other way round.

Stops and risk management ideologies and what have you created a lobogola compressed in time.

Sherlock Holmes or not, it's elementary my dear.

Anatoly Veltman writes: 

I'll add, and believe me not– I knew it all along Wed/Thu– the reversal was imminent. The only question was: were there inside parties, with ability to skim off the top. My guess was: yes, in modern virtual finance those parties are ever-present and almost infallible. So here you go: push the thin ice when no one is looking - and all they will see is a geyser!

I'm sure that bottom-feeders were put out of their misery on a split-second 76.50/77.50 quote between the US and Japan sessions: bought back their Yen, closed out at 76.50; end of their account…



 "Progress is cumulative in science and engineering but cyclical in finance"
-James Grant

Which part of this claim is more likely to be untrue?

JAB says it most briefly, "when you progress far enough, you arrive at the beginning". Very long term cycle he has in mind when he says this. Is progress in Science and Engineering really cylical? Does a new discovery or a new principle come by only after leading to unbearable frustrations as in expressed by "necessity is the mother of all invention?"

Perhaps we will all agree the cycles of finance are far shorter in span than those of Science and Engineering. Why?

Steve Ellison writes:

The scientific method leads to cumulative progress. To be tested scientifically, a proposition must be falsifiable. Are the Black Eyed Peas superior to Beethoven? There is no objective way to answer that question.

Much science is governed by unchanging physical properties, unlike finance. Once it is established that one can construct a heavier than air flying machine, later innovators can be confident that will continue to be true and move on to improving designs, for example increasing speed. There are no flexions able to change the characteristics of the atmosphere to prevent planes from flying.



An update on the results:

4.58	32.7	J***** Albert

0.86	8.21	Jack Tierny

0.69	7.06	Pitt Maner

0.58	6.34	Chris Tucker

0.57	6.33	William Weaver

0.49	5.78	Jan-Peter Janssen

0.39	5.1	Marlowe Cassetti

0.37	4.96	Bill Rafter

0.24	4.15	Sam Eisenstadt

0.24	4.14	Vince Fulco

0.24	4.1	Steve Ellisson

0.19	3.77	Anton Johnson

0.13	3.4	Laurel Kenner

0.11	3.24	Sushil Kedia

0.04	2.84	Scott Brooks

0.02	2.71	Gary Rogan

0.01	2.62	Pete Earle

-0.05	2.22	Kim Zussman

-0.07	2.07	Russ Sears

-0.1	1.9	Yanki Onen

-0.16	1.48	Michael Bonderer

-0.28	0.73	George Parkanyi

-0.28	0.73	Tim Melvin

-0.62	-1.5	Gordon Haave

-0.64	-1.66	Victor Niderhoffer

-0.65	-1.72	Dan Grossman

-0.87	-3.19	Paolo Pezzutti

-0.88	-3.26	Ken Drees

-0.89	-3.29	Mr. Krisrock

-0.94	-3.64	J. T. Holley

-0.98	-3.93	John Floyd

-1.02	-4.15	Jay Pasch

-1.32	-6.1	Matthew 

-14.93	-95.7	Phil McDonnell

Suppose each of these performances are the prior information of performance at end of 1 month (say one month), the underlying strategies are known to all participants.

With the respective performances so far, assuming each participant was given X amount of house money to begin the bets, what would with these priors now:

1) Each participant do further if one more X was given to them, if a) They could choose between betting any incremental amounts only on the existing strategy or holding the existing strategy. A wage earner faces this choice at each month end. Why? b) they are allowed to bet on any of the others' strategy including reducing exposure to the current strategy. Why?

2) What would the public do if these were say a closed set of the only bets available ? Why?

Note: this is not part of any process of the Investment Contest. Just the curiosities of one of the hungry minds. No comments is as fine as any detailed or brief comments. Please do not treat this as an opportunity to bet more as its not authorised by the Contest Sponsor and List owner.



With garagantuan formulaic trading bots manned with thousands of smart processors and up to 100 billions in management etc. in multitudes, are there advance warning signals (predictive signals) of moves emanating from different markets of similar nature with lags of few hours to few days?

This struck me hard again as a thought, when on Saturday I was discussing with a trader with large exposure to Kospi2 Futures that unless this contract hit a territory below a certain number on Monday I would urge that shorts be closed there. He fumed asking why should they not continue to slide, what with the massive down-day in Americas on Friday. I maintained that I would ignore all other things at this time like one should at all points in time and focus only on the price action in that pit.

It turned out, both of us were wrong.

He related an action in America as the cause while Korea was giving indications of a rise ahead. Driving by looking at the rear view mirror?

My mistakes are two-fold:

1) Not only I should have been conscious that potentially all markets are generating signals with leads or lags and focusing only on that price pit that is opening earliest is not correct.
2) America rose and Korea did not. Ha ha. Ever changing cycles!

Now to the main business of this post, for the list that is focused on finding testable ideas and testing them:

Can one not look at assembling series of hourly or some such appropriate intra-day price data for many markets from across the globe and arrange to see as the Sun moves from the East to the West if by varying the weightages of each market with the movement of the heavens if a combined global market price equation will provide some kind of logit / probit models that can explain intertwined market behaviours ?



Volume, to me from the back-benches of the Market Microstructure class, is a struggle for the discovery of price. Increase in struggle is a reduction in the polarity of the prevailing meme.

Open Interest, to me from the similar back-benches of the Market Microstructure class, is variation in the participation of the struggle of price discovery. This could be number of trading strategies at work, number of trading minds at work. To this simpleton mind larger open interest implies increasing complexity of bets and reduced open interest means increasing simplicity of bets for a straighter payoff.

So, reduction in open interest if coming more from larger specs than smaller ones would imply the struggle for price discovery is shifting within the minnows and if the small specs are reducing the open interest it means the bigger boys are struggling harder against each other.

The first scenario would likely lead to a change in meme (a.k.a. a change in trend) and the second scenario would likely mean a large jump in prices due to the smaller fish being reduced in numbers in the food chain.

Experts on COT Analysis, your stab please?

Kurt Specht writes:

My guess, and it's purely a guess, is that large companies are getting spooked by the recent run up and are more aggressively hedging through their intermediaries to protect against additional upside during the year. I'm speaking of large manufacturing companies that would see escalation in their production costs and could have their bottom lines impacted negatively for this year if they don't lock in their energy costs now.



 A card game I played a lot in my school days we called "who is bluffing?". It was based on the bids each of the four players would make on the total points they were going to score and where the Queen of Spades, a full thirteen points, would be. The winner would be the one making the least points.

On an uncommon day such as today when equities, most of the commodities, and the Dollar are all up together, one can't help but reminisce about the simpler days of "Who is bluffing?".

Headlines like these make one ask "who is bluffing?"

J.T Holley asks:

I haven't done this one in awhile but historically thinkin' about the asset classes stocks, bonds, commodities, real estate, and art/collectibles, I would be inclined to say that off the cuff (countin' faux pax) that the two classes that start with S and C are correlated more than the ones that start with B, R, and A.

Dare I mention that Mr. Total Return has been on record that Ibbotson's SSBI and Triumph of the Optimists are two coffee table books he has out in his home. Wonder what he thinks of this and game of Spades?

Remembering the SBBI text that Morningstar own's now, Somehow magically everyone forgets that in one of the most highest inflationary times in the last 50 years equities did quite well to keep up and crank out above historical returns.

The above is obviously a broad, non-tested statement utilizing memory from texts read. please take and do your own countin' before making your bets or how many tricks you can take.

I just pulled a rudimentary spreadsheet that had the following from Jan' 70 to Dec '05 that I did, wow six years ago? Both returns are CAGR.

 S&P 500       GS Commodity

Avg       -      11.13            12.45
STD      -      17.06            21.35

Tons of stuff to poke holes in these numbers 1) Fiat currency infancy with dollar 2) trendfollowers early dream come true in '70's 3) weighting of GSCI 4) only 7 NBER recessions in that period Dec '69 - Nov '70 was a short one to begin the study 5) historically it includes peak inflation apex points of '75 and '80 6) many many more things that I don't know and am ignorant of.

Speaking of strategy in Spades, I'd much rather be holdin' the Queen on the deal than to have it amongst the other three at the table. Especially if I have at least 3 more Spades in my hand and only two other cards of another suit.

Sushil, I've played Spades, thousands of hands (Navy game onboard ships), and also Hearts. Isn't Spades the objective to get the lowest points to be the winner, but Hearts the one where you bet tricks or hands taken being 13 total a la "Boston"? It seems to me the game you mentioned "who is bluffing" is a joint venture of both combined? I'd like to know the game as I'm a card playing fanatic and love to learn new games?



UPDATE 1/31/2011:

Contestants Summary:

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

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

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

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

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

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

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

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

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

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

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

Contracts Summary:

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

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

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

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

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

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

Victor Niederhoffer wrote:

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

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

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

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

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

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

David Hillman writes: 

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

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

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

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

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

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

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

Market direction picks are wanted:

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

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

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

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

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

Bill Rafter adds: 

Suggestion for contest:

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

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

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

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

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

Ralph Vince writes:

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

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

I'm going to sit and do nothing.

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

Gordon Haave writes: 

 My three predictions:

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

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

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

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

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

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

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

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

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

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

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

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

Jan-Petter Janssen writes: 

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

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

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

Vince Fulco predicts:

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

Additional points/guesstimates are:

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

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

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

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

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

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

Potential negatives:

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

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

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

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

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

Mr. Albert enters: 

 Single pick stock ticker is REFR

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

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

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

Dan Grossman writes:

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

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

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

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

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

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

Best to all for the New Year,


Gary Rogan writes:

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

Wildcard: Short Netflix.

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

Equal Amounts in:

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

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

12/30 closing prices (in order):


Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

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

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



Ken Drees writes:

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

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

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

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

wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.

Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

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

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

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

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

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

Scott Brooks picks: 


Evenly between the 4 (25% each)

Sushil Kedia predicts:


1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

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

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

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

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

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

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

Tim Melvin writes:

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

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

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

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

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

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

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

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

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

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

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

Other than that I am clueless.

Kim Zussman comments: 

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

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

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

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

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

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

Alan Millhone writes:

 Hello everyone,

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

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

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

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

Happy New Year and good health,



Jay Pasch predicts: 

2010 will close below SP futures 1255.

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

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

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

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

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

Chris Tucker enters: 

Buy and Hold


Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

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

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

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.



John Floyd writes:

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

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

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

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

A Mr. Krisrock predicts: 

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

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

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

4…commodities are peaking ….

Laurel Kenner predicts: 

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

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

Pete Earle writes:

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

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

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

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

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

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

J.T Holley contributes: 


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

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

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


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

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


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

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

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


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

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

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

Sex and Speculation:

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


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


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

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

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

Long - Common Sense.

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

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

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

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

I had to end on a Long note.

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

Russ Sears writes:

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

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

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

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

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

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

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

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

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

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

Yanki Onen writes:

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

Now the ideas;

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

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

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

-Sell contango Buy backwardation

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

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

- Leveraged ETFs suckers play!

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

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

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


Yanki Onen

Phil McDonnell writes: 

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

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

SLV closed at 30.18 on Friday.

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

Net debit is .50.

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

George Parkanyi entered:

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

BUY SILVER at open

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

SELL and then SHORT SILVER at open

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

COVER and then BUY SILVER at open

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

3 JAN BUY PLATINUM and hold to end of year.


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

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

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

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

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

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

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

Marlowe Cassetti enters:

FXE - Currency Shares Euro Trust

XLE - Energy Select

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

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:


VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

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



From The Mathematics of Money Management: Risk Analysis Techniques for Traders by Ralph Vince, pp xv:

Cutting the fat out of the market requires more than an understanding of

money management concepts. It requires discipline to tolerate and endure

emotional pain to a level that 19 out of 20 people cannot bear. This you will

not learn in this book or any other. Anyone who claims to be intrigued by

the "intellectual challenge of the markets" is not a trader. The markets are

as intellectually challenging as a fistfight. In that light, the best advice I

know of is to always cover your chin and jab on the run. Whether you win or

lose, there are significant beatings along the way. But there is really very little

to the markets in the way of an intellectual challenge. Ultimately, trading

is an exercise in self-mastery and endurance.



 One has been reading a book on speed mathematics by Bill Handley. Most kids who take the course can do all arithmetic operations much faster in their head then with a calculator, a very useful thing I've found. To multiply 98 by 97 take 2 from 97. That becomes 9500. Then add 2×3 for 9506. To multiply 11 by any 2 digit number, like, 11 x 32, the answer has a 3 and a 2 in it at the ends, and the sum of digits 4 in between 3 4 2. I'm not that good at it yet as there are as many rules as memorizing the tables almost.

But… one wonders whether there are any speed rules for making a profit that apply to all markets.

Alan Millhone writes:

Tom says. Move in haste - repent in leisure.

Does that fall under the "speed rule" for the Market?

Jeff Watson writes:

Most successful pit traders had a mastery of "quick arithmetic" out of necessity. In fact, I never ran across one that wasn't an arithmetic whiz.

Steve Ellison writes:

Arthur Benjamin's Secrets of Mental Math has many similar techniques. For example, the square of any 2-digit number ending in 5, let's call the number n5, always ends in 25. The product of n and n+1 goes before the 25. For example, 75 squared is 5625 (7×8 with a 25 tacked on).

Professor Benjamin recommends solving math problems left to right, contrary to the standard method of solving right to left and carrying digits. An advantage of solving left to right is that if one wants to instantly answer a problem called out by the audience, as Professor Benjamin does at his public appearances, one can start speaking the first part of the answer while still working out the final digits.

My daughter and I were watching a video of Professor Benjamin in which he showed a standard multiplication table from 1 to 10 and asked what the sum of all the results was. In 2 seconds, my daughter called out a formula, which was easily solvable using one of the mental shortcuts.

There are some mental shortcuts for the stock market that have become part of Wall Street lore and seem to have some validity, although they are far from 100% accurate:
- "Sell in May and go away"
- "Don't fight the Fed"
- "Never short a dull market"
- "Cut losses and let profits run"

My suggestions for the stock market would be: - Liquidity premium (when there is forced buying or selling as evidenced by a sharp price move, it often pays to take the other side)
- Follow the insiders
- "Always copper the public play" (Bacon)

For physical commodities:
- Buy backwardation; sell contango
- "The trend is your friend"

Sushil Kedia writes:

Vedic Mathematics, a book I remember having sent to you by post a few years ago is a brilliant SYSTEM of only 10 rules that will facilitate a very wide variety of calculations. It can calculate as good as instantly a multiplication of any digits of numbers multiplied by any number of digits too. There are recipes in that…



What has been the history of any hedge funds that launched with the sole goal of focusing only on options as a trading and investment vehicle, other than of course the Long Term player and the pretty much re-incarnated again Imperial One? As a broad Fund class what is the history?

With or without that being available, what would the astute citizens of this list think are the challenges before anyone wanting to focus on such a strategy getting lured by the theoretical mispricing due to the "retail effect" in a not so old equity options market in a so called third world country? Some sort of a SWOT would help propel thoughts for sure, if you could care.

Other than the alinear payoffs and the "theoretically" infinite gains possible on calls and the theoretically "limited" downside on the puts which ignore comfortably the notions of widely changing leverage without undertaking any additional actions after the initial entry are there any specific risk return attributes that may help a larger investor diversify well in including such a Fund in its overall portfolio?

I know I have been dismissive, or at least sounding such, ab initio of any such advantages. But then, there are so many bright minds out here, that can prove me wrong in a jiffy. Waiting to be cut wide open and get some more education that may be appropriate for a speculator.



Today is 20/10/2010. What exceptional things happened today? Why did no one say anything about it today. At least I did not hear or read anything ?about it. Why are some symmetrical dates more talked about than others?

Do special number combinations have any significance on the way affairs are conducted? Like on 07/07/07 so many people married the world over. Why did nothing exceptional happen today?



 One wonders if by considering the distances and weight of one market from another one would create a gravitational attraction possibly related to square of distance. Would this be even better way to explain recent market moves than twitter? So many markets are up that they pull stocks with it. Every day the crude and the gold and the grains and the metals exert their gravitational attraction on stocks and it's hard for stocks to go down when gravity of everything else is pulling them up?

Ken Drees comments:

Attraction theory may also pull monies from undervalued sectors-like nat gas for example– keeping these sectors starving for investment.

Anatoly Veltman writes:

My take is the former recent relationship has been more a product of U.S. dollar's daily devaluation. Thus the commodity part of it was only a further derivative.

Phil McDonnell writes:

Imagine we are on an island with only two things to trade stocks and gold. Naturally we use sea shells for money. At any given time there is only so much money M. So the total price of stock and gold is proportional to that. In fact we can visualize the possible prices as a circle with radius M and the X and Y axis are the prices of gold and stock respectively. The locus of possible points they can lie on is given by:

M^2 = G^2 + s^2

where I have changed the x and y to g for gold and s for stock.

Since M^2 is a constant at any given time we can just call it c and then we have.

s^2 = c - g^2

showing the relationship. This is all very pretty theory but does it stand up empirically?

The coincident correlation base on daily percent changes between gld and spy for the last 105 days was about 1%, so not much linear going on. but when we look at the relationship between spy^2 and gld^2 we get a 42% correlation consistent with the formula above. When we rewrite the formula for m and not m^2 we get:

m = ( g^2 + s^2 ) ^ .5

which is just the distance formula from high school.

Thought question: What happens when the Fed adds Q to M during QE 2?

Sushil Kedia writes:

The House Money effect works the same way. There is more valuable collateral, there is a larger amount of mental wealth, there is a larger appetite for risk. Akin to the rabbit coming out of an empty hat, money grows in the minds of the market players, when things are moving up.

As one large down move comes in a widely betted asset it gravitationally sucks away the value of the collateral utilized for playing other assets. Like the invisible forces of gravity the various contracts naturally move by in varying proportions broadly in similar directions, mostly together.

I would be inclined to recognize the effect of the varying amount of bets inside different pits and the varying spread of those bets across hands of differing strengths. With that in place any static relationships in assets or contracts is less than likely to be existent for any periods of prediction worthy time horizons. The ever changing cycles are likely originating from this varying nature of the spread of the bets. The vector sum total of all current and past and future bets may indeed by hypothesized as zero. Yet the similar sum at the present moment is not zero. Every changing tick hurts or rewards different sets of people simultaneously.

So, without so much as trying to invoke my limited numeracy skills before the mighty minds, I lay a case, that the pursuit of discovering constant relationships in the markets is the innate desire of men to find a constant while knowing fully well that the meal for a lifetime indeed is the knowledge of ever changing cycles.

Ralph Vince comments:

I lay a case, that the pursuit of discovering constant relationships in the markets is the innate desire of men to find a constant while knowing fully well that the meal for a lifetime indeed is the knowledge of ever changing cycles.

What could be more true than that statement?

We build models of the market– some, with ever-increasing complexity.

Take the stochastic differential equation for price changes in continuous time, where the second term is the Weiner process:

S0 = u S1 dt + dX

Involved math for many of us– but, as a model for how prices change, …it too is pathetically lacking. Our models are not reality, just little peepholes on it's behavior at times.

Sushil Kedia replies:

To add, one early school beginner's physics question:

If gravity works the same way on a feather as well as on a stone, then why does the stone drop sooner to the ground?

Well, the air that provides so much of rest to the feather that it takes longer to come down.

Likewise, the "air" inside the markets that is the varying size of bets of any individual participant as well as the varying size of the total bets present in a market bring by the gravitational pulls to still carry wide and varying variances.



 I would love to hear comments from you all if you've seen Oliver Stone's new Wall Street II. Yesterday, my companion and I went to see the movie and nearly walked out after 15 minutes, it was that bad. Blaming speculators for the "Crisis," irrelevant discussion of "Moral Hazard," the Lehman and Bear Sterns references, heroic yet cutthroat actions of the bankers, artful cutouts of the talking heads of CNBC, the Oracle of Omaha, the improbable plot line, the horrible dialogue, Michael Douglas' insufferability, the resurrection of the corpse of Eli Wallach, the Phoenix like rise of Gordon Gekko, the tangled plot line!!!

I could go on and on. Does anyone else agree with me or am I overreacting? Frankly, instead of wasting my money on this horrible movie, I wish I would have sat home watching the local Spanish Channel watching my favorite telenovela, where the passion is real, and the revenge is sweet…and believable.

Sushil Kedia writes:

I attended the movie too. One good thing was the movie hall, the seats were extra comfortable, and it had a really good ambiance. Some things in India have changed for the better, in such measure.

But that's not all. Michael Doulgas resembled someone too popular on Wall Street. Someone whose name reads backwards and forwards the same kept coming to mind on the facial lines and contours that Douglas exuded effortlessly. The flinch, the long deep gaze, so many other things were all pretending to mimick the famous name. Was it a flawed make up design or a purposeful resemblance created for getting "eyeballs"?!

As a movie making exercise, this seems to me an outright fraud. But then again, I did witness such fraud pass by in the form of a movie effortlessly. The crowds in India may not have noticed it, really.

In the same vein, my two humble cents submitted herewith are that for non Wall Streeters the movie could well be a good entertaining account of so many things relating to lives on the Wall Street. A movie is after all an illusion and an entertainment. For those from the Street and around it, of course the real stuff is so much more real that forget Oliver Stone, any other movie maker will find it difficult to please us and to get close to portrayals of genuine resemblance.

But then, how could Douglas be made to resemble the big name so well. Accident? Design? Transferred Epithet?

The human touch, the daughter, the fetus, the tears all came in to show that the street does have living beings. Huh! I would say the guy scripting the story forecasted the depressing markets would be lasting until the 3rd quarter of 2010 and settle with a simpler way of reasoning why the movie is what it is: It wasn't made for educating this universe about what Wall Street is. It was made for making money while the makers forecasted the Street would still be not making any. Bad forecast, that's all. Else the movie being a movie is fine.

Jeff Watson writes:

Did you notice the photo-shopped picture on the fireplace mantle of Josh Brolin with his character and the Palindrome? I got a kick out of that one.



 Letter to my daughters on obtaining cent percent marks at Mathematics Term Examination, together:

Dear Muskaan & Khushboo,

Congratulations on achieving the highest possible score in your mathematics test. In the past too each of you has obtained a similar score but on different occasions.

I am all the more happy when I today receive your test reports and find that both of you have together achieved the highest possible, together while being in the VIIth standard and the Vth standard of your schooling, when you are 12 years and 9 years old respectively.

Concentration that helps in putting your best at whatever you are doing at a particular moment is clearly you have begun to exercise often. I want you to remember that when required you can practice the highest levels of concentrations necessary to get the best out of you. This score has been possible only with that.

Within a fixed period of time that an examination must be completed to think of nothing but the work at hand within a time bound manner is a mark of disciplined thinking and action. I encourage you to call upon this faculty as often as you are out to achieve anything, anywhere.

Mathematics is not just about numbers. Its an elegance of a state of mind and personality that transcends above the rhythms and cycles of perception and focuses on the completeness of relations, functions and theorems that describe specific constructs. Your ability today together, puts me at greater confidence that you will be achieving such poise and grace as often as you are required to excel at a particular situation.

The joys that can be achieved by solving a puzzle, a problem a challenge are ever present in any mathematical question that you attempt to solve. The prowess at mathematics should give you the opportunity to realize your ability at solving varieties of problems and puzzles that can be represented by symbols, signs and formulae. As you continue to grow as persons and as your repertoire of skills gets richer you should realize with ease that the most widely known scientist of our times, Albert Einstein, is known to have said that, “What can be counted may not matter in life and what matters in life may not be counted.” In stating such an idea he was never dismissive of the utility of counting but was emphasizing that the scientific approach, the path of reason, the pursuit of enquiry may not be limited by any one’s inability at converting thoughts to numbers, since before you can enumerate an idea or a thought you must grasp it to a depth that relationships of that idea to so many other ideas should be appearing very clear to you. Then an approach to quantification to test the consistency of the thoughts should get easier.

The bright glint that I noticed in the eyes of both of you as I met you with your reports tells me that achievement itself is a reward. The smiley that your teacher drew next to your marks is a memento of appreciation and acknowledgement. In life, there may be moments when appreciation for any achievement may not be as instantaneous and it may be a while before those around you will begin to appreciate of your work or contributions. I am sure you will remember the glint in your eyes today that you carry together and it shall be yours again and again in the future whenever you get the similar inner satisfaction of having done your best without having to wait for a smiley.

I must thank your teacher particularly, for such a nice and sweet gesture of saying so much to you in so few strokes of her pen. Brevity at any communication is elegant. So is the pursuit of any mathematical solution. Two different people can get the same answer, yet the one who achieves that with the minimum amount of reasoning and explaining has done a better job. Economy of movement is a hall mark of most achievers and in the elegantly written answer books that I see before me, clean hand-writing and simple solutions make me believe you are acquiring the correct attitude.

Objectivity that is feasible much more easily at Mathematics is not the sole reason for the higher probability of obtaining cent percent scores in this subject. There is a unique answer in Mathematics, most of the time. At other times if there is no single answer, there is a definite range or set of answers available most of the time. There are however, the irrational numbers, the indeterminate quantities, the undefined values (that often mistakenly are labeled as infinite) yet even in those outcomes it is uniquely possible to arrive at those conclusions. The abilities that you gather as good students of mathematics should help you acquire the wisdom to be able to cope up with the less deterministic situations that you would face in most other walks of your pursuits. The in-deterministic, non-deterministic and the undetermined are all to be studied with the help of the deterministic. That is what Isaac Newton, who perhaps was the best known scientist of the previous century, meant to say when he said, “standing on the shoulders of giants".

To be able to learn from others, to be intellectually humble in knowing and accepting you do not know something is the critical start necessary for beginning to know anything that you are going to know.

Lastly and as importantly as everything I have written to you in this letter, do remember always that numbers even if an invention of mankind as much any other language are perhaps most easily manifest everywhere in nature as compared to any other language known to man and thus likely your best medium for communicating the inner beauty that you carry.

Best wishes from a proud father that you both continue to achieve many encores,

With love,

Sushil Kedia



canarySome pretty awesome symmetry forming up this last month or so.

Chair commented before that the big down bars often seem to get mirrored by the big upside bars like today.

The other thing I've noticed is what a difference the next week makes. Last week the news stories were all end of the world, even trotting out Prechter. What a joke.

Why is it that a lot of big buying seems to occur at the highs?

As for pilot fish, seems like a big out of place vol bar is a good canary. (Sorry to mix metaphors.)

Nick White comments:

One would note that the sword in Asia has certainly not been sleeping since Friday…Therefore I would argue that such a rise as we saw in the S&P today is simply the US playing catch up with the Asian move from the holiday weekend.

I would also contend that there's a bit of relative catch up yet hanging in the stars.

Sushil Kedia writes:

How would a counter convert the concept of symmetry in prices over any time frames to testable hypotheses? I confess, I continue to have weaknesses in converting ideas to testable hypotheses. So, I will be learning from those who will share.

Pardon kindly if this next question diverts the thread to any other: How do folks like me sharpen our imagination to focus on converting vivid thinking to be able to arrive at testable hypotheses?




 With what is looking like will be an all European World Cup Final, one wonders if during economic strife prowess of nations at competitive pursuits such as sports have some underlying reflections of the tide at the moment or the coming change of tides.

I am hoping that the readers of this site who have been avid sports fans or followers will perhaps provide a good stab on this two sided conjecture. Didn't feel like dismissing superfluously this potential occurrence to be just a spurious correlation. Those more experienced in tracking sporting prowess will judge it better, and I lack that historical perspective for sure.



 I strongly recommend the book Markets, Games, & Strategic Behavior by Charles A. Holt.

It is an outstanding compendium of real executable games for speculative minds. This book has been structured very well. In the process of playing a lot of games that are worked out in this book (through an associate web based free utility for most of them), one is bound to build and discover many new ones and several great variations.

Kindly do spend your valuable time reading through at least the first few pages and hopefully a game or two, and you will likely be convinced of the utility of this good work.

Perhaps at the upcoming Spec Party some of these could be played. I would imagine with the web based utility all the DNA of the Spec list can participate in them one by one from wherever we all are. It could be a new burst of thought and energy in this learning group with such diverse minds and such diverse games ranging from almost every aspect of the market and including probability matching, lottery choice anomalies, Information Learning and Signalling, Takeover games, Auctions, Statistical Discrimination, Information cascades, Co-ordination, market manipulation, Traveller's Dilemma, Volunteer's Dilemma etc. etc.

I am just 10% in to the book and am craving to have this throughly played between all Spec List colleagues over time across the internet.

Experimental learning, if you might grant a euphimisim, could be a refreshing new thing for us Speclisters.



I periodically take a fresh look at the so-called "equity risk premium" for various global stock markets. There are many academic articles on this subject that are nearly useless for short-term market-timing, but quite helpful for long-term asset allocation. For example, here are two papers from a Google search on "Equity Risk Premium Across Countries":

Ibbotson, Chen: The Supply of Market Returns (2001) [30 page pdf]


Dimson, Marsh, Staunton: Global Evidence on the Equity Risk Premium, (2002) [17 page pdf]

What is the current situation? Examining the Bloomberg screenshot below, one notes that Japan has by-far the highest nominal risk premium. It's possible that this is due to their JGB yield at 1.28% — and if JGB yields increase by 100-200 basis points, the risk premium will decline by the same amount — reducing the apparent relative cheapness. Nonetheless, I looked at a handful of mega-cap Japanese stocks. When I plugged in a 1% growth rate and lowered the risk-premium to around 10-12%, the "theoretical" value of these stocks increased massively — in many cases predicting more than a doubling in valuation.I am NOT rushing out to blindly buy Japanese stocks, even though Toyota, Honda, Mitsubishi, UFJ, Canon, Sumitomo, Mitsui, Sony etc. model-up incredibly well on a Dividend Discount Model that assumes any positive GDP growth over the next decade.

But one wonders whether we are approaching trough valuations after a 20-year bear market? And, other than slow, trend-following technicals, what approaches would one use to make such a call?

Sushil Kedia adds:

If there is a larger risk premium in Yen terms, is it also the same in terms of Dollars?

What if Tokyo pits are pricing a much stronger Yen ahead in the year? Hungry mind is just generating possible explanations and keen to learn. With the JGB Yields being where they are for years, the real variation comes from the change in interest rates in the US treasuries. Is the Risk Premium in Japan a good way to start thinking of a theses that the interest rates in the world will be rising in other important places including the USA, later in the year?

Kim Zussman comments:

Here is log nikkei in USD. It appears US investors were less driftless than the Japanese.



Upside down openVis a vis yesterday's down open of 3%, capping a nice 200 point continuous decline in a month.

It is interesting to reflect (in retrospect) that when Collab and I got our first job 11 years ago at street.com the managing editor was not interested in anything about our employment or anything else except that we be pc and not mention Galton but kept up a steady stream of questions to me: "there's a rumor going around that you were caught short in gold and that you're being squeezed and that's why it's going up (then about 280), and wondering if you'd care to comment on a "need to know basis." One hadn't traded gold for years at the time having called it a day after they banned buying to bail the members out who were short against the Texans . But one was reminded of that by the rumor "the large man was selling" and putting pressure on the market on the down side with tetrapods (and doubtless flexions) piling in also yesterday at the open (though in the opposite direction). If the "large man" was in play, why it's like "Morse is back" and trolley and canal are ready to go through the roof.

Anatoly Veltman writes:

It is indeed interesting to recall the Sep 1999 Ashanti mine hedge default, their bankers covering from $255 all the way to a split second buying frenzy near $330 in the Comex pit, all in one week! They then took over a year to slowly deteriorate back to $255 double-bottom. We'll be readying for a mirror analogue, anticipating $1250 area futures double-top May 2010 

Rocky Humbert asks:

Anatoly, I would be most interested in understanding your reasoning why you believe that we have (in gold) the Nasdaq analog of March, 2000 — as opposed to the Nasdaq equivalent of Autumn of 1999 (or earlier); noting that in that Nasdaq blow-off, that asset was paper securities which could be, and were, issued endlessly, whereas in this market, the asset is a comparatively limited supply of metal that is valued at only 1% of the total global financial market…

And more specifically, can anyone identify any contemporary broad-based asset "bubble" which ended without central bank tightening– as a necessary (but not sufficient) condition? And if not, why should this time different? Stay safe and don't jeopardize your health.

Sushil Kedia suggests:

Why could there not be another interim situation in between what Anatoly is suggesting and what Rocky is thinking:

Gold goes to 1000 as well as 1400 within calendar 2010?

The safety trade can witness the largest volatility it has produced in this decade. As currencies are displaying signs of sloshing much wider than in the last decade while common conversations of most getting trashed abound, why should the expected to be super currency for ages, i.e. gold be spared of a widening range of outcomes?

Anatoly Veltman replies:

 Yes Sushil, current news-items certainly make the price of this most useless commodity on the planet volatile: Panicky Greeks Paying Over $1,700 Per Ounce For Physical Gold By Patrick A. Heller on May 25th, 2010

The fear running through the Greek populace is that the nation's government may default on some of its debts. Since 1965, the Greek government has imposed restrictions on trading British Sovereign gold coins (gold content .2354 oz). Despite those restrictions, the Bank of Greece reports that it is selling an average of more than 700 coins per day to worried Greeks. In the first four months of 2010, the Greek central bank sold more than 50,000 sovereigns at its main downtown Athens office. Bank officials estimate that at least 100,000 other coins changed hands on the black market. The Bank of Greece has received as much as $409 per coin, which works out to a price of more than $1,700 per ounce of gold! Prices paid on the black market are reckoned to be even higher. A popular spot for street vendors to sell their coins is near the Athens Stock Exchange. There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds



pez dispenser dispensing viagraHere are some poignant things to reflect upon about yesterday, May 21, I think:

0. The low of the day was below the low on the Flash Crash day.

1. A Millstein occurred, was it bullish or bearish and as of when.

2. The set up at the beginning of the day was highly similar the previous day. How best to define similarly without a neural net.

3. The low was not quite equal to the low of the year on Feb 7.

4. The interactions with bonds and oil and copper and the dollar was predictive.

5. It followed a series of disastrous Thursdays, with double digit S&P declines.

6. The sponsor said he wouldn't buy stocks.

7. A promoter said he sees S&P below 950 in fib retracement. Another sage from a broker's house saw stocks rallying. Presumably their disseminated views caused spikes at the time of announcement. Was there anything predictive in comparing the reaction.

8. The S&P pit opening followed the biggest decline in a year.

9. The fixed income prices opened at an all time high, and closed at an all time high but managed to drop a percentage regardless.

10. The flash rise occurred with 20 minutes to go from a 1.5 percentage drop in afternoon after a vastly different experience in prior days.

11. The courage to not be dissuaded out of your position from the other broker, or the inner survival man, or your assistant who always wants to take profits as of Friday 3:40pm would have been redoubtable.

12. Mr. Vix and Mr. Vic opened at one year highs and followed a similar trajectory to the fixed income.

13. A 10 percent correction occurred; is it bullish or bearish or random. Same for breaks of the long moving averages.

14. To what extent did May options expiration have a predictive effect.

15. Were the movements in the Euro and Asian markets overnight a pilot fish?

16. Was revulsion from the increases in "sharings" and "service" scheduled for the beginning of 2011 a factor?

17.  What political factors relating to the approval of bailouts by houses in Europe and reforms in the US played a part?

18. How do predicted earnings increases factor into the Fed Model and should the Shillerian 10 year p/e calculation be obfuscated with the man.

19. It was the biggest decline in a week in the year.

20. There had been a run of multiple intervals of declines in a row.

21. How did all this affect and react to the moves in individual stocks?

Inquiring robots within and without the mind wish to know the answer to such questions on a scientific and or useful basis for future input. What approaches and other more poignant queries should be proffered or gainsaid?


22. The sage likes to compare the stimulus bill to taking 1/2 a tablet of Viagra and then diluting it with candy. We need more he said.

What are the natural reflections engendered by such an utterance?

I'll give a prize at the annual spec party for the best such reflection.

Pitt T. Maner comments:

Bob Dole petting a dog on the headThe potential stimulative effects of lower oil prices come to mind. There are more scholarly sources to be found, but here is a snippet of thought.

"Every $1 per barrel drop in oil's price increases U.S. GDP by $100 billion per year and every 1 cent decrease in gasoline's price increases U.S. consumer disposable income by about $600 million per year."

Lower oil prices like Viagra would seem to be useful for the longer term mechanism of action effects but its the lowering of obesity (and sugar consumption) and belt-tightening of runaway spending that may be more important in the long run.

An image of Bob Dole petting his dog on the head comes to mind. 

Martin Lindkvist writes:

The sage seems to know a lot about the right dose of……candy. Some questions remain to be answered though. When he said "we need more", was he referring to the stimulus bill or the stimulus pill? And who are we? Should the market mistress be jealous? 

Sushil Kedia adds:

The mythical character James Taggart in Atlas Shrugged would have said so had Viagra been available in that age. Might I extend the tautomerization such that the James Taggarts hidden all over "in the system" are as sagacious as the sage or perhaps the other way round that the sagacity of the sage is a Taggartian mumble.

He never believed that anyone should be paying taxes. At least that's what he positioned to imply by never giving out dividends. He could have little regard for those who indeed tax their finances and their bodies to experience the pleasures of achievement and the achievement of pleasure, respectively.

Give me more! This ain't enough!!

Jack Tierney comments:

"Our first stimulus bill, it seemed to me, was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in as everybody was putting it into their own constituencies. It doesn't have quite the wallop." - Warren Buffett

A spoonful of sugar helps the medicine go down
In this instance, Mr. Buffett is borrowing from the equally iconic Mr. Disney and his tune "A Spoonful of Sugar Helps the Medicine Go Down." However, since so many different and divergent candies were necessary to satisfy the various "constituencies," few were pleased with the aftertaste. Mr. Buffett has suggested a second dose and "taking it straight" since July of '09. Unfortunately, inherent in his initial support and subsequent carping is the unavoidable insistence that there exists a stimulus package, which properly configured, will work. This is unfortunate because it foretells that something, something equally stupid, will be done.

The suggestion (whether sugar coated or not) is flawed on two counts (at least). First, the same "smartest guys in the room" who created the disease and subsequent medicine are once again heading up the project. Secondly, the historical record contains numerous examples of "stimulus programs" which have two things in common: they have been designed and promoted by the very brightest and they have all failed.

Further, if we are to adhere to our commonly held characterization of the market as The Mistress, then Mr. Buffett's Viagra suggestion is obviously misdirected. Although the recommended medication might do wonders for the stimulators, the only important response is hers (and I'm sure that I'm not alone in observing that on occasions, rare occasions, our enthusiasm just isn't enough).

At some times (perhaps at all times) we must let the Mistress work it out on her own. If TV ads and infomercials are to be believed, modern self-applicable developments have added to the numerous nostrums, aids, and approaches already available. Checking the historical record once again, we find that her response times can be capricious. But she alone determines the timing; the addition or withholding of a spoonful of sugar won't speed things along.

Steve Ellison comments:

"The set up at the beginning of the day was highly similar the previous day. How best to define similarly without a neural net."

A simple calculation of open relative to the previous close would have shown the similarity of Thursday and Friday. For example: "a 10 percent correction occured, is it bullish or bearish.or random. same for breaks of the long moving averages."Dr. Zussman showed last July that several moving averages from 40 to 70 weeks had good predictive value, so I would interpret the break of the 40-week average as bearish.

"the sponsor said he wouldnt buy stocks."

So what? He's a bond guy.

"What approaches and other more poignant queries should be proffered or gainsaid?

At the beginning of May, I posted the performances of 13 asset classes in a horse racing format. I suspect that some important "forms" in the markets last about two months. That is why I showed two-month performances and chose to post them at the beginning of a new two-month period. The S&P 500 had the second best return of the 13 asset classes in March and April. Furthermore, the form in March and April was a slow and steady upward trend. The public would be looking for more of the same in May and June, so something very different was guaranteed to happen.



Beware of the parade of technical analysts soon to make their rounds on
television.  When this happens a panic low is usually near.

Sushi Kedia asks:

Do you say this because either Fundamental analysts are always in panic/euphoria extreme psychologies or the quantitatively evolved price students (they too are technicians, which the Chairman has acknowledged several years ago and he has indeed suggested that this passe thought process of beating Technical Analysts be avoided) are never experiencing panic or euphoria?

George Parkanyi adds:

And beware the contrarians who call panic lows based on what goes on on television…



a quizOne may inquire in answer to Rocky's quiz to what pockets do the big v shaped moves big down and big up in a half hour accrue. One would not think that it would accrue to those who are leveraged more than 2 to 1 or 3 to 1, as not only must they meet initial margin but must meet maintenance margin before they are liquidated at the lows would not the ability to borrow from a big lender at low rates help the top feeders and flexions in such a regime? Just a theoretical query.

George Parkanyi asks:

Why not? You could target multiple stocks, some of which are just decoys to mask the main attack, work it from multiple accounts, have your "one cent" bids at the ready, and then bring the hammer down with a concentrated attack at exactly the place where most traders would place stop-losses. Enough kindling to spark a sudden flash fire. You slam the market down to the low bids placed that have been placed according to some pre-calculated algorithms that make it look random (which you've probably modeled already on a Cray). You cover with a huge profit. Others step in, it's all over, and you slink away. You would need to have detailed knowledge of how off-exchange platforms work (e.g. no stock-specific circuit-breakers). Some smart traders and top-notch trading platform programmers, with the appropriate financial backing, could pull this off. Come to think of it, it could have been a heist.

The main flaw I see with this though is that someone this smart would also have anticipated the attention that the anomalous trades would attract. In the end, some were actually busted. Could the manoeuvre then have been a decoy/catalyst for something else? Perhaps a huge, leveraged currency position, or one in some other correlated market like oil? If I were an sleuthing man, I would look there. Because of globalization and the interconnectedness of global markets, a foreign power could even set up something like this. Who might want to unload a pile of US Treasury paper, oh for example?

This would make a good movie.

Vince Fulco writes:

Last Thursday was eye-opening on so many fronts…

1) Technology has superceded our humanity– The exchanges and regulators proved themselves completely unprepared and uncoordinated for a growing cascade of one sided activity. What is so infuriating is that there has been a public warning by infrastructure experts and traders about the growing potential for systematic dislocations for a few years and as usual specs have been told, "all is well". Moreover there is evidence of a wholesale and I would say engineered withdrawal of bid side activity. Planes don't just fall out of the sky en masse.

2) Assume at all times that your systems will fail with questionable potential to regain access. I believe IB did the best that it could but I never saw the software behave in this manner after years of observing mkt stress pts. My DOM halted for 1-2 minutes twice with re-newed (displays of) activity 10 pts down each time and then a complete shutdown when SPUs were in the mid 60s-80s. The software came back up after a quick re-login however. Would be interested in behavior of others systems.

3) What we knew on de jure basis; that the exchanges will always do what is best for them, became de facto. Formal decisions as to what to cancel and what level to cancel (60%) were arbitrary, not subject to any outside scrutiny and not challenge-able. I was particularly bemused by the CME's almost immediate claim that their systems worked properly & there would be no trade cancellations even though the activity in cash instruments underlying them still needed to be examined more carefully and in limited circumstances were ultimately canceled. The House wins always in the end.

4) Amazed at the resiliency of human nature– while I am not surprised to see to this week's pop subsequent to ECB/EU/IMF activities, until trading activity fragmentation can be addressed more comprehensively, why are folks so confident that it won't happen again? And soon?

5) Trading is war– Any complacency can have fatal effects. One must always cast a wide net as there were suggestions and pre-cursors in other mkts, as much as 30-60 minutes prior, that would have kept one's exposure down if not non-existent. Always more to keep tabs on, more to learn and more to think about. And that's when fighting the last war.

Rocky Humbert responds:

As students of mathematical logic know, it is impossible to DISPROVE a conspiracy theory — because the absence of evidence is not a proof of anything. Hence I submit that the primary usefulness of speculative post-mortems should be introspection and self-improvement … (i.e. And what does this plunge foretell about the future? And what can be learned from the experience?)

On the first question, I recall a post by the Chair (some years ago), where he noted that when there's a horrible adverse price move in an open position — and the price then recovers, he anecdotally observes that one should exit — as the recovery was a golf "mulligan." We'll shortly find out whether the rally of the past few days is a mulligan.
Also on the first question, I was surprised to observe that yesterday's retail investor sentiment showed only a modest increase in bearish sentiment. Prior to the plunge the bull/bear/neutral ratios were 39/28/32 and yesterday (after the plunge and recovery) the bull/bear ratio was 36/36/26. So retail was evidently not spooked too badly … (I use this statistic as a qualitative contrary indicator.)

For me, the experience of last Thursday reinforces the value of always having dry powder to exploit panic (even if the prices are revisited), as the risk/reward of fading a market that declines 10% in ten days is vastly differently from the risk/reward of fading a market that declines 10% in ten minutes.

I would be most interested in hearing from others what lessons they learned…

Sushil Kedia comments:

If it is hugely profitable to build such a conspiracy, then with all the technology and all the geeks why do such events happen only so rarely?

Has the frequency of such conspiracy explained moves been rising?

The learning that I obtain from such an event, drawing on the Chair's older post of such being the golf mulligan and a recent one wherein he said that such moves clear out the short term longs and the spike back clears out the short term shorts too. So, the markets when turning from day to day battle shift gears for month to month and quarter to quarter battle move sizes, actually then such moves are like a "benign devil". The same way angina pains do trouble but are nature's blessing calling for a more thorough heart check up and recuperative measures to be brought in, moves as these reduce the number of people who would have suffered much deeper damage over a longer course of time in the particular markets.

Can't agree more with anything than Rocky's thought on having some dry power, always.This specific situation of electronic markets (that appear to be so high-tech and hence an illusion of having progressed) disintegrating for moments brings to mind the signature line of Mr. Bollinger: When you progress far enough, you arrive at the beginning!Man must work, to even have a hope to be paid. Any modifications to any degrees in the tools of work will not lead any man (computers too!) to a point where without work and just by stealing anyone can hope to be paid, consistently. Change the system to whatever, men will work even though sometimes thieves will be able to steal. Men may still not get paid upon work and it may not mean that it was someone's steal, since spills happen and will happen.

Victor Niederhoffer comments:

Well said. As Zachar points out and this was originally brought to my attention by someone deeply in my debt, who actually beat me the last time we played tennis, it's a millstein. If the shoe fits, wear it.



 At the Tea Centre in Mumbai, where every possible variety of tea leaf is sold and perhaps where every possible way of making tea is practiced as an art form, I had the occasion today to experience the Buttered Apple Tea.

Droplets of rejuvenation appearing to straight pour into the cuppa is what I would still recall of the experience. Ripe Apple Juice, Orange Juice, Nutmeg, (powder was added I was told upon inquiring) honey, and Tea Liquor blended together with a hint of butter and was served very hot. Ummmm… it was an experience I have decided that must be shared with my better half. Soothing, rejuvenating, and definitely with many hints of romance in the cup.

Oh yes, the two long sticks diced out of a fresh apple and floating in the tea-flask added to every feeling well.



I am reblogging an od post on the site titled "persecution as a spur to achievement".

I noticed a fascinating comment from Rocky Humbert only today. My comment to his comment is posted underneath.

Rocky Humbert on October 31, 2009 5:02 pm

The author’s choice of the word “persecution” is unfortunate and incorrect. Persecution is defined as the systematic mistreatment of an individual or group by another group.Short-term speculation is a zero sum game, and a trader willingly, and without coercion, places a bet. The author’s logic suggests that in a wager, the winner persecutes the loser. That is absurd on its face.Even if one accepts the author’s plausible supposition (that persecution can ultimately lead to achievement), he neglects to mention that persecution requires SYSTEMATIC mistreatment. Among speculators, only fools and masochists subject themselves to systematic mistreatment. A speculator facing genuine persecution would simply walk away …Lastly, let’s please keep a bit of perspective here. How does being on the wrong side of a trade in Hong Kong compare with being on the wrong end of a Turkish death march, facing a Russian pogrom, being sent to a Gulag, and countless other examples of discrimination, abuse, atrocities and crimes against humanity? Fairly insignificant and uninteresting, is my answer.

Sushil Kedia on May 2, 2010 12:57 pm

ASS-u-ME is one way of spelling assume and means as much. Winners persecuting losers as you rightly said is not persecution. But if large volume pumps have access to the central server of an exchange without the same privilege being shared by all other market participants. Big volume producing pools tilting the bid-ask pressure against the scattered retail positions is persecution.Is there a single stock exchange in the world where an information audit is being ordered and conducted by any regulator in the world? There would in such a way of thinking hundreds of ways in which persecution may have been playing out in the markets which is just one single word expressing the idea that the public loses more than it should be losing.



A few years ago I started noticing, the Chair terming the TA-25 as the pilot fish many a times. Does this new high there indicate something in today's times? How would one study such a thought methodically?



Logo of American and Foreign Power CompanyHow does a company like DuPont have a book of 5 bucks a share when it's been earning 2.00 a share for 100 years? Part of it is that it pays dividends of 85% of earnings. The kind of stock my grandfather would have recommended for me along with American & Foreign Power. Couldn't go wrong with that 10% dividend — until they were nationalized. That corporation was another of his favorites besides Union.

Rocky Humbert comments:

DuPont has been a poster child for the Modigliani-Miller theorem. They've been increasing leverage and buying back stock for years, which — depending on the price paid — can cause a perverse and self-reinforcing decline in book value. And even with a low book value, about 61% of their shareholder equity is goodwill. But their ROE looks very sweet at 25+%.

Ironically, DuPont was originally a dynamite manufacturer. Dynamite funded the Nobel Prize. Modigliani-Miller won the Nobel prize in 1985. So the circle is unbroken. 

Yishen Kuik writes:

A more extreme example is Colgate Palmolive, which at one time had negative book value. The shareholder's equity portion is still a negative number, and the persistent accumulation of retained earnings has since brought book value back to positive. It still probably has some fantastic price to book ratio.

Rocky Humbert adds:

The following stocks all have market caps over $1 Billion and negative book values:


The significance of this phenomenon is left as an exercise for the reader.

Sushil Kedia comments:

Historical Accounting leaves disproportionate under-priced assets due to inflation on the books making book-value appear to be very small in comparison to earnings, for very old and profitable companies that distribute large dividends.

For younger companies in fortune businesses such as exploration, new molecule discovery etc. anticipations of a breakthrough can have large market caps and low hard assets.

Franchise businesses, including those that thrive on brands such as Colgate, customer loyalty concepts etc. will have a very large proportion of assets that are intangible and never appear on the books of accounts making book values very small.

Companies that have dominantly assets with large depreciation rates allowed too will have lower than average b/p price ratios.

Companies that have taken over larger companies would have a lot of ethereal assets termed as "goodwill" making low b/p ratios again.

Phil McDonnell writes:

I note that Colgate has a return on equity of 90% according to Yahoo data. Big Blue reported today. They currently have a respectable 77% ROE. They are paying an increased dividend and buying back stock. To me it is interesting that the large stable companies that are doing this also have fairly large goodwill entries, as Sushil noted. For example Colgate has about $2B in goodwill on the books. Usually this means they paid too much for an acquisition. Too much means they paid more than the book value of the assets acquired. But in the case of stock buyback if the company buys its own stock at market, which is higher than its book value per share then presumably that shortfall is recorded as goodwill. If the stock rises or has risen in the past then that may mean there is hidden asset value on the books in some sense.

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

Steve Ellison observes:

I am looking at Oracle's 10K. Oracle used $3960 million of cash in 2009 to repurchase shares. On the statement of stockholders' equity, Oracle reduced common stock by $550 million and reduced retained earnings by $3410 million. Thus the effect of share repurchases was to reduce stockholders' equity, but this effect was more than offset by the increase in stockholders' equity from net income of $5,593 million. 

Sushil Kedia comments:

If Inflation Accounting seminars held by so many august Accounting Bodies all over the world in the last two decades could not decipher how it could really be done, assume for a moment at some point it will be done correctly.

But then the book-keepers that produce the inflation estimates and keep revising them invariably all over the globe (I guess all gummints are at least alike on this parameter whether they be Capitalists or Communists) are also just book-keepers.

So, this one conundrum will never be solved.

In recent decades there have been some high-brow management consultancy firms that are peddling ideas of Brand Valuation. But then if a company could own a brand worth a Billion Dollars and make only continuous losses their ability and talent at producing so much red is eventually leaving a value on the table of that Brand at just a risk adjusted present value aggregate of these losses as a negative number only. Brand Valuation as an Accountancy tool has no place in the Accounting World, save for nice trips to Bermuda for such conferences.

Replacement Cost Theories have been used and rather mis-used to pamper the valuations of cash-loss generating companies on an idea that it would cost so much to build this same factory today at the extreme end of bull-runs.

Then they say Cash is King. But the King everywhere in this Universe has been only trashing cash ever since it was invented. So, we go back to the beginning of this note. All roads lead to Rome, in the world of Fundamentals.

So what Fundamentals are we talking about at any point and under any framework?

At least the price followers, even if prices are manipulable and get manipulated every now and then are having a far simpler illusion of suffering from knowledge and the best part is this manipulation keeps coming regularly, tick by tick. The follower of price action recognizes if there is an incentive to an economic activity, it is happening already. So, irrespective of whether prices are manipulated or they are not, the stimulus to any system of taking decisions is consistent.

The Fundamental Manipulations are erratic, supposed to be non-existent until an Enron comes by every now and then while they are happening throughout erratically and then with an endless battery of ideal world assumptions the whole Art of Fundamental Analysis has such elegant and consistent formulae for everything. The quantitative screens in each and every idea in the universe of fundamentals is so self-sufficing and yet this form of art never could get known to be any variation of Quantitative Finance.

I am not against Fundamentals at all, but just wish my elegantly consistent brothers and sisters in this art form acknowledge the fool's paradise they are keeping building.



Martha StewartOne of my daughters is not very experienced at handling money, so my wife suggested that she buy some stocks to put her foot in the water. She chose company names she knew and liked like Netflix and Martha Stewart and American Apparel. "A young person's portfolio," her broker said. On average they are up 25% in the last two months.

In looking at her portfolio, I made a Baconian mistake. I said Martha Stewart is losing money on every sale and the sales are down. Don't buy it. It couldn't be good. My wife said, "She has to learn. Let her do it it." That one's up 40% or so. I am reminded of the time Collab and I were in our first six months of writing. Five of my daughters or siblings came to me over a weekend with requests to start or fund an Internet company. As I said at the time, "if so many people are coming to me, down on my luck and fortune, why imagine what the supply and backlog must be among the real players. It's about to burst." One has similar thoughts about my daughter's good fortune.

Sushil Kedia adds his two cents:

netflixMy two cents:

1) In the beginning we always call them lucky only. Too little data to conclude yet. Commonsense becomes more and more uncommon as each of us goes onto accumulate experience and other tools. Let her have her way. Let her find her own victories and lessons.

2) When my daughter would begin trading in some years, I would go short or long against her positions on a paper trading system I will maintain quietly and separately. Once her positions are closed by her, I would share my paper-trading risk management system with her to see where the deviations are. I would let her learn from my mistakes and wins against her rhythm, without pulling her away from her own. 

Michael Cohn shares:

american apparel"The Junk Rally & Quants: guru Matt Rothman says both quant and fundamental metrics continue to struggle in the 'junk' rally as Valuation remains 'largely irrelevant'. His models continue to show that stocks with variables such as the high short interest, weak b/s, highest beta, continue to significantly outperform. So how long can the junk rally go? The current low quality rally started March '09 is among the longest such rally on record, but, the underperformance of 'Quality' stocks is still only now a 'moderate' (9%) versus (10-18%) u/p of similar periods since the 1950s."

This seems to be a widespread issue according to Barclays.

Ken Drees adds:

Always jump on beginner's luck if you can.



 Please tolerate the mumbo as a brief preamble: While using a number of standard TA tools, including the TD indicators on intraday trading I have found my discretionary triggers shift down to a lower time interval whenever there are larger price moves beginning to happen vis-a-vis the recent few days price amplitudes/movements.

In simpler words, I have been finding it profitable to visualize that the speed of the market or the internal time of the market starts moving faster than the clock time when larger moves are happening. The counting of number of price bars with a high higher than X bars ago or number of price bars closing lower than Y bars ago etc. works better on smaller clock time frames in faster moving markets.

In the past, concepts as equivolume charts have been dissected under the quantitative spatulas here.

Wonder, if some of you better endowed quantitative minds will explore and play with equi-move charts kind of ideas which could begin with some measures of a type of volatility calculation such as the Mean Absolute Deviation over any period of clock time.

There is likely, a set of methods for cooking nice meals. Hope the process of shredding this idea will give some more clues on how to get there.



 I was recently asked by a golfer:

Here's a basic physics question for you. One golfer's clubhead speed is 100mph at impact with the ball and 105mph immediately after. He has an accelerating swing. Another golfer has 100mph clubheadspeed at impact but only 95mph immediately after. He has a decelerating swing. Assuming everything else is constant (type of ball, wind speed, etc), does one drive go farther than the other?

My attempt to answer:

The question is a surprisingly hard one, and I've thought about this kind of question in tennis as well. Here are two extreme scenarios that are easy to understand:

1) If the club (racquet) is much, much, much heavier than the ball (hitting a golf ball with a sledgehammer), then the speed of the club is all that matters.

2) On the other hand, if the club (racquet) is much, much lighter than the ball (hitting a bowling ball with a badminton racquet ), then the speed prior to collision hardly matters, and all that matters is how much you shove through during the actual collision.

In any sports/ bat/ ball/racquet situation, you're always somewhere in between the two extreme scenarios described above because that's the best way to design the bat/racquet/club. (It is analogous to having your car in the right gear for the speed that you're driving.) So there's not any simple answer except that it's somewhere "in between". It's neither 1st gear nor overdrive, but something in between. You need high speed, but also a somewhat "firm foundation". (A quibble — it will be absolutely impossible for the swing to be moving faster immediately after compared to immediately before. [I'm modeling the club-ball collision as essentially instantaneous.] Would require you to apply an infinite torque or force or whatever applied by the golfer to the club.)

Art Cooper comments:

 This seems an obvious application of the basic principle taught to someone learning how to hit a baseball: follow-through on your swing for a better hit. It must be the case that an accelerating swing in baseball, golf, tennis or anything else will impart more force (for a longer movement of the ball), because the moment of contact is longer than instantaneous. 

Sushil Kedia writes:

You have to make an assumption that the movement of the club is following a harmonic motion as in a pendulum. Highest Kinetic Energy at the point of equilibrium and zero at the extremes. Acceleration will have to be negative from equilibrium onwards.

Case 1:

Velocity of the club after impact > velocity of the club before impact: This will be possible only when the point of impact is reached before the point of equilibrium.

Assume mass of the ball is B and the acceleration it achieves on impact is A1. Then the amount of force transferred in this case is B*(A1)^2. Since there is an equal and opposite force it exerts on the club. The net acceleration of the club at the point of impact will be calculated by adjusting the existing harmonic form of the kinetic energy equation MINUS B*(A1)^2.

If this value is 105 mph it only tells us that without knowing the length of the club AND NOT just the effective weight (Center of gravity adjusted leveraged weight for the length of the club) it would be impossible to know at which angle the impact happened.

So either it is not possible for this to happen of there is inadequate data for comparison since you mention everything else is constant.

Case 2:

Velocity of the club after impact < velocity of the club before impact: Without knowing the acceleration of the ball at the point of impact (which can be estimated by estimating the values of friction, time before which the ball stops and the distance traveled) it is not possible to calculate the net force transferred by the club into the ball at the point of impact. EVEN if one assumed that the impact happened after the equilibrium point was reached on the trajectory of the club swing. It is worth mentioning here that the swing of the club would HAVE TO HAVE A NEGATIVE acceleration beyond the point of equilibrium else it is not the point of equilibrium.

So, in both cases 1 and 2 the assumption of everything else is constant is a situation of inadequate data. If however the question is implying that the club hit both the balls at the same angle, then the question is a trick and does not have a solution.

Stefan Jovanovich writes:

 Here is a link to a fascinating site called batspeed.com — the most comprehensive study of the baseball swing on the web.

Charles Pennington comments:

There's no way to solve this problem theoretically–only experimentally–but there is a good theoretical framework to think about it. You model it as a totally elastic head-on collision between a mass M moving with speed V and a mass m (the golf ball) moving with initial speed 0.

In that case, the final speed of the ball is:

v = V*(2M)/(M+m)

and the final speed Vf of the "club" (*) is

Vf = V*(M-m)/(M+m)

(Note that this is always less than V, and could even be negative, e.g. if a golf club hits a bowling ball.)

The problem is, what do we use for M? Do we use the mass of the club? The mass of the golfer who's connected to the club? The mass of the earth, which provides some friction so that the golfer doesn't slide backwards?

There are some simplifying cases:

If M>>m (sledgehammer hits golf ball), you'll see that the equation reduces to v=2V, i.e. the ball will fly off with twice the initial speed of the club.

If M<<m (feather hits golf ball), then the equation reduces to v~(2M/m)V.

The only way to find out the value of M is to do an experiment: get a real golfer, measure his (pre-collision) swing speed and the speed of the ball, and then use these equations to find the golfer's "effective M". A golfer who braces himself more and has a solid stance might have a bigger effective M than a golfer who uses a more floppy, wristy swing–but he also might have a lower V, so his shot might end up with less speed.



parabolaAn interesting and scholarly article on basketball angles and spins in the Washington Post, kindly sent my way by Dan Grossman of Florida, indicates that physics calculations show that the angle with which a shot is thrown influences its accuracy. The gist is that the higher the arc, the greater then chances it will go through. Also, the higher the height the ball is launched from, the greater the margin of error on the shot, and the greater the success. Taking one thing with another, a launch angle of between 45 degrees and 55 degrees seems best.

Angles have played a big role in stock market technical analysis. The most influential angles are those derived from the work of W. D. Gann who believed that when price breaks through an angle of 30, 45 or 60 degrees from a previous low to previous high, a continuation in direction of the break through was possible. As to how to compute the previous low or high, where it should start, where it should end, and what the time scale should be — why, that's why there are 1.4 milion entries on the subject of Gann angles with most concluding that they have been superceded by more sophisticated tools in these days of modern computers.

Being one to believe that taking the pencil to paper might help to find regularities, I computed some subsequent prices moves for the last 15 years for daily, weekly, and monthly prices. I looked at the angle between the two last moves of an index. For monthly prices, I looked at the subsequent moves following the moves in the previous two months. For example I looked at the moves in January and February to predict March. For weekly moves, I looked at the two previous weeks to predict the third week. For exampe the first and second week of the month to predict the third. For daily moves, I looked at the previous two days to predict the third. For example, Monday and Tuesday to predict Wednesday. The angles formed could be computed by using trigometric identities to compute the adjacent angles and noting that the sum of the three angles is 180 degrees. Here are the results:               

subsequent period   prior     previous    expectations   number of obs

monthly                    +         +                       4                53

monthly                    +         -                      -4                 41

monthly                     -         +                      7                 40

monthly                     -          -                      -6                33                                                                                                              

weekly                      +         +                      -2               185

weekly                      +         -                       4                186

weekly                       -         +                      -3               189

weekly                       -         -                        1               147          

daily                        +         +                      -0.7             952

daily                        +         -                       -0.5             898

daily                        -         +                        0                904

daily                         -       -                          1    744                                                                                                          

The many regularities that this table reveals are a good start to find angles that are useful for success in shooting for profits in markets. 

Bill Rafter offers:

If there is some mystical or otherwise relationship of price to time, it would perforce need to dictate the scale of the price charts for any angles to describe that relationship. In earlier times graphs and charts were drawn in pencil on standard graph paper, such as 10 x 10 to the inch. If everyone kept the same charts in the same scale, an argument can be made (i.e. the self-fulfilling prophesy) for various angles, Gann or otherwise. However the person who used a scale not similar (in the geometric sense of the word) to the standard scale would have different points of intersection with respect to the same angles as the standard scale. Fast-forward to today and we find computers rescaling charts to fit on the visual page to the extent that no longer is there a standard scale. So at the very least, there can no longer be a self-fulfilling prophesy. Whether there is a price-time relationship, I do not know. But the next time I see Master Yoda I will ask him.

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

Jim Sogi writes:

 One of the problems is asymmetry. Contrary to symmetry theory, the markets are not symmetrical. It makes the Gann ideas or other symmetrical equations inaccurate. This includes normal distributions.

Sushil Kedia comments:

A few years ago Mr. Sogi had written a review of a book from a publisher in Australia providing co-ordinate geometry treatments of the Mathematics of the Divine Ratio. The Chair and Dr. Castaldo too have written about the applications of polar co-ordinates to transforming prices to study appropriately, thereon. Perhaps a number of ideas from that book could be applied to produce suitable transforms and then fitments to the effect of say treating the rate of drift as equivalent to an angle of zero or one would provide perhaps some worthy examinations of the other standard angles as 1/3rd or 2/3rds (pi/12 or pi/6) etc.

Jim Sogi replies:

Why is it that the last few weeks, the price followed an upper and lower line so well as moving mechanically upward? It has kind of broken that recently, but it seems more than random things the mind puts together like a taking patterns out of random dots. I've graphed random series and seen the so called trends, but they don't seem as linear. And it seems to continue for days and weeks.

On the subject of the negative time idea Rocky talked about earlier, and since it's spring now, a look at our Gregorian calendar shows the inaccuracies in the counting system. Assume as a mind experiment that the market operates on absolute time. Given an inaccurate Gregorian system, at times the measurement of absolute time might appear to jump or reverse at various adjustment points. See the wikipedia entry on Julian Day Calculation and on the accuracy of Gregorian Calendars.

Pitt T. Maner III writes:

John WoodenThe discussion on shooting angles in basketball reminded me of one of John Wooden's favorite ideas which is to use the backboard or "glass".

Within days of implementation of this new 'back' board, players found that they could gauge the angle and use this new tool to their advantage to make shots. The problem today is that players have either forgotten or never learned its full advantage. Arguably the most successful coach of his era and probably of all time, UCLA Hall of Fame Coach John Wooden was renowned for teaching his players to use the glass both in the post and especially off of fast break transition. Coach Wooden's teams won 9 straight NCAA Titles (10 in 11 years) a feat unparallel before or since in collegiate basketball. Coach Wooden believed that if his players practiced making 5-10 foot bank shots at the 45 degree angle off the break and could make them at a rate of about 75-80% these shots were nearly as good as getting a lay-up. For those young players that missed the opportunity to see the great UCLA teams they were almost always successful in transition. Probably the single greatest scoring performance ever in an NCAA Championship Game was by UCLA's Bill Walton’s 21 for 22 field goal shooting performance against Memphis in the 1973 title game. Bill Walton’s' patented move was the up and under using the glass.

I have found that it is possible to use the target square on the backboard to advantage when shooting free throws and banking shots in instead of trying to get a "swoosh" each time. Having a visual target behind the "bucket" seems to help.

Banking in shots, however, is probably best used (like Wooden suggests) when shooting from the sides in basketball. Wooden believed in playing percentages and when a basketball hits the backboard it has almost a "second" chance of going in as opposed to hitting the front or side of the rim or completely overshooting or undershooting the mark. I think the coach would have preferred a sure layup over a dunk any day—and how many times has one seen a sure dunk pop out when thrown down with too much force when a layup would have scored two.

Not quite sure what a market analogy would be for a backboard–perhaps some type of straddle where you can make money on the continuation of the angle in either direction?At any rate one of the fun aspects of the NCAA basketball tournament is getting a chance to see various styles of play and the leveraging of seemingly higher risk approaches. The Cornell–Kentucky game on Thursday night, for instance, if it stays close, could be an example of excellent, confident outside shooting and defense vs. more pure interior power, younger talent and athleticism (and good outside shooting too). But as they say, you can "live and die by the 3-pt. shot".



 Most of us view the probability of an event as being between zero and one. But this is a simplification. Negative probabilities exist in physics, and they "probably" exist in the markets.

Additionally, probabilities greater than 1 exist too. Probabilities which are less than zero or greater than one are called "extended probabilities."

This is the first paper that I've seen which builds a mathematical model of interest rate options for negative probabilities. Previous papers have dealt with "risk-neutral" and "psedo-probabilities." The authors also promise an upcoming paper that describes financial models for events with a probability. The paper makes good reading for those who enjoy dividing by zero, and taking the square root of a negative number.

For the less geeky, besides negative interest rates, can anyone think of some real world examples of negative probabilities? Or probabilities greater than one?Is "Hell freezing over" an extended probability?

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

Bruno Ombreux comments:

If it is less than 0 or more than 1, then by definition, it is not a probability. It is not even a measure. They could call them anything, for instance "tiger-striped ferrraris", but they should not call them "negative probabilities".

The reason for a semantic discipline requirement, is that this tongue-in-cheek article, is targeted at finance people. People in the finance industry are generally clueless and take this kind of joke at face value.

Right now, I am studying Bayesian statistics, where they make ample use of calculation hacks and gimmicks. For instance they use Dirac masses as probability densities (height is infinite, width is zero, and area 1 ). But they know exactly what they are doing and nobody is fooled by the vocabulary.

That's different when the public is the banks or HF unwashed masses. For these, a dog should be called a dog, a cat a cat…

Rocky Humbert responds:

While I have often have my tongue planted in cheek (as well as foot planted in mouth), that is actually not the case here.

Mr. Bruno's first sentence is entirely correct with respect to "classical" probability theory. However, he might consider the possibility that Extended Probability Theory is analogous to Einstein's Relativity Theory extending Classical Newtonian Physics. (i.e. there are practical applications of atomic physics in our mundane lives — one doesn't need to travel at the speed of light to see this.)

I'm not a mathematician (and I don't play one on TV either) but I'm told that negative probabilities have a long history for people thinking about the foundations of quantum theory. Feynman wrote about them and the concepts led to his initial work on quantum computing. (Basic quantum computers now exist.)

Additionally, in markets, I believe that "Dutch Books" may give rise to extended probabilities.

I can't quarrel that some folks in the finance industry are clueless. (C'est moi, Monsieur!) but I don't find Brownian Motion-based options pricing models entirely satisfying either… hence I try to keep an open mind.

Jon Longtin writes:

Negative refraction I would caution against mixing mathematics with physics. Math is an (actually the only) absolute science, who's existence is defined completely in terms of stated rules and relationships. It is, at the end of the day, a very large body of definitions.

Probability, in the mathematical sense, is the chance that a particular outcome will happen, with the assumption that that outcome can at least happen. If an event can never happen its probably is zero, and if it always happen it is one. *Mathematically* to speak of events outside of this context is meaningless.

Physics is, well, physics. The world is the way it is and it's our job to describe it to the best of our ability. A tool that does this remarkably well is mathematics. Often, though, as we learn more the physical models have to be revised, expanded, and reinterpreted, given new information and insights. When we look at our new and improved models through the lens of the old model, thought, strange things happen. This is true with relatively, quantum mechanics, and when they discovered that the sun went around the earth, to name a few.

There are, for example, new materials that are characterized as having a negative index of refraction, n (a measure of how strongly materials bend light, and is the reason a pencil looks bent when in a glass of water); classically vacuum has n = 1 and air is about 1.0001 or so, water = 1.33, with values less than 1 physically impossible. There are, however, new materials being developed that do not naturally exist in nature, but rather are engineered structures that give the illusion of having a negative index. The point is no physics are being violated here; only that the model needs to be revised, and fitting the new material into the old model will result in surprising and sometimes counterintuitive understanding.

It is sometimes tempting to introduce an extension to the old model, such as e.g., negative refractive index and negative probability, but the more rigorous approach is to redefine the physical model from the ground up to capture the new phenomenon in a rigorous way.

Jon Longtin, Ph.D, is Associate Professor and Undergraduate Program Director, Department of Mechanical Engineering, State University of New York at Stony Brook

Bruno Ombreux replies:

In the case of the negative probability article, they are quick to dismiss the obvious and parsimonious solution that everyone has been using, and replace it with some harebrained theory.

Negative interest rates are nothing new and not a problem. We have had plenty of trade-ables that have always been able to get negative, with active OTC option markets in them, eg crack spreads…

The simple solution is to use a normal law instead of log-normal, and if you are still not happy, to use the empirical distribution.

Tom Marks comments:

 There is a fine volume recently out by the wonderfully polymathic Clifford Pickover called The Math Book. "From Pythagoras to the 57th Dimension, 250 Milestones in the History of Mathematics.

Reading each of these 250 entries is like doing a set of 25 push-ups for one's mind. And not just the left side, as the methodology behind fractal artwork indicates.

On the subject of squares of a negative number of which Rocky wrote, Dr. Pickover touches on the formerly ridiculed notion of imaginary numbers, the contributions of Bombelli, et al., and writes:

An imaginary number is one whose square has a negative value. The great mathematician Gottfried Leibniz called imaginary numbers 'a wonderful flight of God's Spirit; they are almost an amphibian between being and not being.' Because the square of any real number is positive, for centuries many mathematicians declared it impossible for a negative number to have a square root. Although various mathematicians had inklings of imaginary numbers, the history of imaginary numbers started to blossom in sixteenth-century Europe. The Italian engineer Rafael Bombelli, well known during his time for draining swamps, is today famous for his Algebra, published in 1572, that introduced a notation for √-1, which would be a valid solution for the equation x² + 1 = 0. He wrote, 'It was a wild thought in the judgment of many.' Numerous mathematicians were hesitant to 'believe' in imaginary numbers, including Descartes, who actually introduced the term imaginary as a kind of insult."

Leonard Euler in the eighteenth century introduced the symbol i for √-1 — for the first letter of the Latin word imaginarius — and we still use Euler's symbol today. Key advances in modern physics would not have been possible without the use of imaginary numbers, which ave aided physicists in a vast range of computations, including efficient calculations involving alternating currents, relativity theory, signal processing, fluid dynamics, and quantum mechanics. Imaginary numbers even play a role in the production of gorgeous fractal artworks that show a wealth of detail with increasing magnifications."From string theory to quantum theory, the deeper one studies physics, the closer one moves to pure mathematics. Some might even say that mathematics 'runs' reality in the same way that Microsoft's operating system runs a computer. Schrödinger's wave equation — which describes basic reality and events in terms of wave functions and probabilities — may be thought of as the evanescent substrate on which we all exist, and it relies on imaginary numbers.

Here is Dr. Pickover's website (well worth a look).

Rocky Humbert replies:

With your reference to Dr. Pickover, you tied together many loose ends:

Mr. Maner alluded to the fact that there is a probability greater than one that "…vampires will invade the literary world and be a profitable genre." He referenced the epic drama: "Abraham Lincoln: Vampire Hunter " Low and behold, it was Dr. Pickover who invented vampire numbers– I would wager that this is the first time that negative probability, markets, Abraham Lincoln and vampires were all discussed in the same thread on Dailyspec. (The probability of this happening is comparable to the odds that the S&P will rise five more days in a row. I therefore conclude that this must be an omen, and I just bought ONE March S&P 116 call as a homage to negative probability and vampires.)

Sushil Kedia writes:

The oracle at delphiThe first and the simplest example of negative probability at work in the markets comes to my mind from the Chair's oft emphasis on deception in the markets.

Let me use an example:

A street conman's game very much prevalent in India, near the smaller train stations and ports, where the hustler holds a heavy bag of muslin with two hands and offers a wide peep inside for you to see a nicely mixed hoarde of coloured and natural peanuts. The odds offered are 3:1 for you to multiply your money if you lift up a coloured peanut. You rush in playing an unfair game apparently to your advantage. When you shove your hand in, the mouth of the bag is held much closer around your wrist than when you were inticed to take a game loaded in your favour.

You pull out the peanut and it is not coloured.

The trick deployed is that there is another bag within the bag containing only uncoloured peanuts.

In the awareness of the hustler, probability of the outcome is certain due to his ability at deception. In the awareness of the player the probability of the outcome is somewhere close to 50:50. In the awareness of an analyst like me who has burnt the hand that tried picking the coloured peanut many times 50/(50+50+100) or 0.25 assuming the hustler fails at closing out the bag with mixed peanuts forcing your hand into the hidden bag with only plain ones.

The difference in the probabilities known to the newbies and those who have burnt their hand and become analysts is the 0.75 gap which is really the negative probability on which the hustler is peddling his skill.

Replace the peanuts - plain and the mixed ones with earnings guidance and announcements and you realize the negative probability the masses face vis-a-vis the insiders assuming all else being equal.

Replace the peanuts - plain and the mixed ones with counted stats the pros are playing with and the bags of code (not only computational but simply deal flow informational) the glittering big firms can have.

So on and so forth.

With this perspective gaps in perception, information, imagination, awareness, model specification, ability to loot, peddle, hustle etc. etc. a concept of negative probability fits in well with comprehension. The Oracles of Delphi as explained in the Education of a Speculator played really on the negative probability the masses believe are non-existent and happy to live with such belief. Despair, disdain, pursuit of short-cuts, road to quick riches have all been built with bricks of negative probability.

The first and the simplest example of negative probability at work in the markets comes to my mind from the Chair's oft emphasis on deception in the markets.

Let me use an example:

A street conman's game very much prevalent in India, near the smaller train stations and ports, where the hustler holds a heavy bag of muslin with two hands and offers a wide peep inside for you to see a nicely mixed hoarde of coloured and natural peanuts. The odds offered are 3:1 for you to multiply your money if you lift up a coloured peanut. You rush in playing an unfair game apparently to your advantage. When you shove your hand in, the mouth of the bag is held much closer around your wrist than when you were inticed to take a game loaded in your favour.

You pull out the peanut and it is not coloured.

The trick deployed is that there is another bag within the bag containing only uncoloured peanuts.

In the awareness of the hustler, probability of the outcome is certain due to his ability at deception. In the awareness of the player the probability of the outcome is somewhere close to 50:50. In the awareness of an analyst like me who has burnt the hand that tried picking the coloured peanut many times 50/(50+50+100) or 0.25 assuming the hustler fails at closing out the bag with mixed peanuts forcing your hand into the hidden bag with only plain ones.

The difference in probabilities known to the newbies and the analysts is 0.5-0.25 = 0.25 the awareness advantage.

The difference in probabilities known to the analysts and the hustler is 1-0.25 = 0.75 the hustling advantage.

The difference in probabilities known to the hustler and the newbies is0.5-1.0 = -0.5 the ignorants negative probability

Awareness Advantage MINUS Ignorants negative probability = 0.25-(-0.5) = 0.75 = The Hustling Advantage or in other words, the negative probability is Awareness Advantage - Hustling Advantage.

Replace the peanuts - plain and the mixed ones with earnings guidance and announcements and you realize the negative probability the masses face vis-a-vis the insiders assuming all else being equal.

Replace the peanuts - plain and the mixed ones with counted stats the pros are playing with and the bags of code (not only computational but simply deal flow informational) the glittering big firms can have.

So on and so forth.

With this perspective gaps in perception, information, imagination, awareness, model specification, ability to loot, peddle, hustle etc. etc. a concept of negative probability fits in well with comprehension. The Oracles of Delphi as explained in the Education of a Speculator played really on the negative probability the masses believe are non-existent and happy to live with such belief. Despair, disdain, pursuit of short-cuts, road to quick riches have all been built with bricks of negative probability.

T.K Marks writes:

On the subject of meals, I see today a poignant portrait of the food chain. These photos from Colorado are spectacular.

"…The starling seems to be completely unaware it is on the lunch menu as the bald eagle makes it attack at high speed…" On some level we've all been starlings at one point or another.



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

In high-frequency finance:

The first step involves the collecting and scrubbing of data.

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

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

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

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

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

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

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

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

Sushi Kedia writes:

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

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

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

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

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

Russ Sears comments:

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

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

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

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

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

Jeff Rollert comments:

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



Volume, from Jim Sogi

February 2, 2010 | 2 Comments

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

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

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

Sushil Kedia comments:

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

Bill Rafter writes:

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

Here is an excellent graphic I prepared relevant to volume.

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

Kim Zussman writes:

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

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

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

t-Test: Two-Sample Assuming Equal Variances

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

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



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

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

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

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

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

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

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



 One of the great things about trading is that it brings you face to face with many of your personal faults and shortcomings. With maturity should come recognition of personal faults. Unfortunately, some or most of these personal faults are not easily fixed and are real limitations. Of these limitations, some are psychic but others are physical, such as hearing loss. Psychic faults are anger problems, narcissism, etc. These faults can be damaging to your life, your loved ones, to your bank account, and to your health.

It is important to recognize and deal with these faults. Faults are easy to see in others, but almost impossible to see in yourself. Very very few can recognize their own faults and limitations. The most common response is denial and shifting the blame to others or outside forces. Many elderly people have hearing loss, but for odd reasons, deny it. They blame others for mumbling. Alcohol addiction is a prime candidate for denial. The list goes on.

It's difficult to deal with the realization that you have faults and limitations. People can be unbelievably obstinate in denying faults that seem so obvious to others. It makes it hard to perform and live on. Who wants to live with the realization that you may not be as smart or as tough as you think? That is why the easiest solution is denial. In many cases even if the fault is recognized, it is hard or impossible to cure. It may be hardwired in, or it might be caused by a physical limitation. The answer is creating some sort of workaround that minimizes the damage caused by the personal fault or physical limitation. A simple fix for hearing loss is a hearing aid. Other faults present greater hurdles to find a solution or to even to recognize.

Nigel Davies writes:

There's still room for self-deception in markets regardless of the bank balance; you can lose when playing well or win when playing badly. And this may be especially pronounced with methodologies which have a high percentage of winners plus a few big losers.

Chess tends to have less of this because your results contribute directly towards a published rating and each win or loss has a fixed value. But if someone really wants to kid themselves they can do it there too.

Sushil Kedia adds:

Markets produce the same series of prices, volume, open interest etc. for each participant, yet the individual performances off the market are so different. I thus conclude that none makes any money off the market and each makes money off themselves utilizing the market as the proverbial touchstone where the self is rubbed.

It is the different speculations originating from the unique anticipations that differentiate each performance. The attitudes, beliefs and convictions that form the a,b,c of any personage reflect in the choice of systems, choice of methods, actions taken, actions avoided etc etc.

This could well be true of any profession, yet the instantaneity with which a mind interacts with the financial markets makes for the most expeditious feedback system. Marked to market is an idea that is most easily implementable in a trading / investing career. Like a mirror the market reflects you only. For all the cosmetics that is around it is still said that the mirror never tells any lies. So for all the cookery and creativity that can be and is, the P&L eventually never lies.

At a recent past when the credit marts were being forced into dispensing away from the MTM requirement because all the mirror was displaying was a sad requiem of the dead bodies, the dyeing bodies, the destructed youth and vigor it was an ostrich burying the head in the sand act. Hope, free markets will never again give up the reality check and fault facing device ever again but have the courage to give up the dyeing or dead that are so horrified to look at themselves in the MTM mirror.

Russ Sears writes:

What this analysis is missing is that many marked to market advocates miss are many markets are not liquid. Further, many markets even liquid markets quickly can become illiquid. The policyholder does not choose what bank to use based on market forces, nor the bank what to invest in based solely on market forces.

Because your neighbor trashed his house, and then let the bank take over may suggest that you personally lost some value to your house.

When several of your neighbors do the same… you have lost even more on paper. Have you lost any real wealth? Should you be forced to sell it, if your marked to market nearest neighbor model put you underwater?

Likewise, when there was too many buyers,not liquid enough seller and your price doubled. Did your wealth really increase, if you stayed put?

Taking out the collateral, and accepting the inflated prices as Marked to Market prices on home equity loans got alot homeowners an banks in trouble. Should the banks be forced to lend if they believe the house price is inflated long term?

If you want to have Marked to market to determine "death" then you must have true market forces determining if a bank is dead… not some regulator who will be forced to jump the gun to give the organs to those on life support. The markets would if allowed, no doubt determine how close a bank really is to death by a very broad flexible array of models, not some fixed regulators model. And these models will limit who and how many of these potentially illiquid loans a bank would be willing to hold, not some regulator.

Currently death is determined by marked to model… so there is enough left in the company that FDIC can survive. If policyholders where forced to make this decision themselves, Without regulators setting up an arbitrary marked to regulatory model cushion of protection, the policy holders and the banks would be forced to be more conservative and transparent to gain the policy holders trust. And the process of a death would be much more gradual, with a risk premium limiting how much of these potentially illiquid assets it would hold.

Marked to market is only good if you can tell me the liquidity premium. In a market set up for marked to model then forced to switch to marked to market, this premium is bound to jump.

In a market full of few buyers and a forced domino effect of sellers, this premium must to be very high. If you do not trust the models, it is not estimable.

In short, you can not have a clear picture using regulatory forced markets and models at the front and then switch to marked to market forces on the the Death bed. Policyholders with the moral hazard blurred vision using regulators simple marked to model glasses at the beginning of the process (which bank to invest in), regulators telling banks what they can successfully invest in using simple capital model and then using a comprehensive marked to market process on the death bed. They would all fall together.

keep looking »


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