Jun

16

 Refreshingly old school, and I thought a good fit with some of the other pursuits of dailyspec readers:

"Even in the Digital Age, These Young Champs Still Care About Marbles" :

PITTSBURGH—Bobby "Bobbo" Narr, a sunny fifth-grader with flaming red hair, can wallop a baseball but prefers shooting marbles.

His sister and cousin are former national champs, and this month he has been spending two hours every night with his coach doing marble drills at his neighborhood court, a 10-foot cement ring under a steel bridge.

"Gotta practice to get better," says Bobbo, who warms up his thumb with 50 short-range "tap shots." Every year, his goals are the same: Qualify at the county championships, then win a national title. The 91-year-old National Marbles Tournament, which runs Monday through Thursday in Wildwood, N.J., claims to be the longest-running youth sports event in the country. Last year, Bobbo finished eighth in the nationals.

Playing marbles has mostly died out but thrives in pockets across America including Pittsburgh. The city has thousands of mibsters, as players are called, and about 40 former national champions, including many from the same families. In some neighborhoods, the passion that normally follows Little League baseball and Pop Warner football surrounds little spheres colliding inside 10-foot cement rings.

Marbles, as old as Ancient Rome, and the root of billiards, bowling and golf, was popular in early America. Abraham Lincoln played to relieve stress during the Civil War. In Pittsburgh, a marble-playing tradition was fueled by the booming glass industry, which preceded the making of steel in Western Pennsylvania.

Mar

24

 Durk Pearson and Sandy Shaw are MIT trained scientists with interesting ideas about life extension.

I read their most well known book Life Extension, A Practical Scientific Approach many years ago, and still have a now yellowed relatively beaten up copy of it. I think the tricky thing about what they are attempting to do is that the research on antioxidants is mixed at best. In fact, many of their earlier recommendations may have resulted in an increased risk of some cancers. In looking at their current formulation, they have greatly scaled back the amount of certain antioxidants, probably based on later research. Kurzweil is another one we have mentioned on this list who is doing everything he believes possible to extend his life via supplementation.

I am perhaps not the best poster child for life extension as I have struggled with my weight most of my adult life, but I have had a strong interest in it, particularly the area of supplements, for decades. I am still interested in supplements, but I am currently of the belief that vitamin D is the only one worth taking without a doubt. I also do take fish oil and more recently ubiquinol. Despite the mixed study record on fish oil, I think it is worth taking a chance on it.

It is very challenging to parse out what supplements may actually be of value in the quest to extend life.

Jan

28

 The beauty of a Martingale strategy is that we have price distributions that are bound at zero.

We are in a casino, where red can only come up on the little wheel X times in a row.

And no one in this business can get past their pre-conceived notions to capitalize on that.

No one.

Instead, the entire industry wants to focus on price direction, the immediate direction of price, which has nothing to do with what's going on after the next play. Nothing at all.

anonymous writes:

Mr. Vince, would you mind expounding on this concept of for the dunderheads like me. I get that a price of a stock is bound at zero (I'm hoping I at least understood that comment correctly), and that red can only come up a finite number of times in a row as a result. How does this help with a Martingale strategy in the real world with a limited bankroll and uncertainty over how many times in a row the wheel actually does come up red?I am obviously not looking for a grail with these comments and realize they got beyond a simple Martingale, but would like to explore your concept further if you're gracious enough to share more food for thought.

R. Vince responds: 

It gets messy quickly now, so I will try to keep it at 38,000 ft. Beyond the next, immediate play, or trade, or holding period, where <<what one has to risk is a function of what has happened to what they have to risk up to that point>>, you are somewhere on a curved line (for 1 proposition. For N propositions, you are in an N + 1 dimensional manifold. So, for 1 proposition, you are in a 2D manifold - a plane. I bound the manifolds at 0 and 1 for all axes except altitude - which is the cumulative expected return. So you are on a surface in an N+1 dimensional manifold.

Everyone is in this manifold, on this surface when the caveat (inside <<…>> above) holds, which includes those practicing portfolio insurance, any type of portfolio re-balancing, replacing components in an index, any type of short or levered ETFs, any managed programs, etc.

And I contend, ultimately, the only thing that really matters in trading (over consecutive trades or holding periods) is where you are on this surface, and possibly, how you are moving about it. Again, the most sophisticated, thorough and ultimately practical (some might argue otherwise) would be the most recent paper with Lopez de Prado and Zhu.

The point is, where we are on that surface, and how we are moving about it, we are either oblivious to or are using to satisfy certain criteria. For example, one who wishes to maximize their MAR ratio would want to be at those points on the surface that are in the sub-manifold of what we all "zeta-points" on it. Another — If one wants to begin to maximize time at or near equity highs, they traverse a path between some loci on the surface and 0,0…0 going downwards with sinning periods, upwards with losing.

Without violating the proprietary ideas of other colleagues, we can look at randomness, and at this hypothetical bounded roulette game in terms of this surface and our criteria.

What to me, at this point in my life, is most interesting about this now is not so much the trading implications, but the more broader applications of this. As a trader, we seek growth, but there are many more functions in life that comport to this same growth dynamic where we seek to diminish growth, and I find applications for it everywhere I look.
 

Jan

2

 The movie was a biopic of a complete scumbag given to excessive drug use and hookers (not that I have a problem with drugs and hookers). He worked the financial system illegally defrauding a lot of innocent people in the process and worst of all, in my opinion, was a rat. I think Leo captured his magnetic personality very well, and I think Scorsese made a very entertaining film about one example of testosterone driven excess. I really enjoyed the movie and feel that it holds its own with any of Scorsese's canon. It also appears to stick pretty closely to the details put forth in Belfort's purported memoirs and the legal record. I think he presented the story well; it WAS a story about debauchery and depravity. Also, small nit to pick, that was a Lambo he destroyed.

Dec

24

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

Dylan Distasio writes: 

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

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

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

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

Jeff Sasmor writes: 

The NYT reported about Overstock.com accepting Bitcoin.

Stefan Jovanovich writes: 

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

A guide to using Bitcoin.

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

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

Sep

9

 I have read few less toxic examples in recent memory that demonstrate perfectly the idea that has the world in its grip, as the Chair would say, than this piece.

"The Wealthy's Compassion Defecit" By David Wolpe:

September 8, 2013

"We know that wealth does not always make people happy, but does it make them kinder? Studies suggest exactly the opposite. Instead of being more magnanimous, the rich are more likely to lie, cheat, steal and in general display less compassion than the poor. And this finding remains consistent even after controlling for gender, ethnicity and spiritual beliefs.

…As a rabbi, I see a spiritual explanation as well. We all know, deep
down, that most of what we have is a product of good fortune. No matter
how hard we work, we did not earn our functioning brains or the families
into which we were born. We didn't choose being born into an era, or a
nation, that allowed our talents to develop. We ride in cars and live in
homes we did not build, are warmed by heating and cooled by air
conditioning we did not invent, live in cities others created for us
organized by a government and protected by a military shaped by our
predecessors. Yet we still point to our accomplishments and proudly
proclaim, "I did this!"

No one likes to feel that what they have
achieved stems more from luck than merit. So the well-off salve their
consciences by assuring themselves that it is hard work and merit that
brought them success, which also leads them to conclude that it is a
lack of merit that keeps others from succeeding.
"

And so on.

This in particular sounds like the Rabbi is channeling Barry's "You didn't earn this" rant. I wonder if he is a supporter.

Aug

30

 For those interested in reading up further on the flexions and Ms. Wedel's work, the latest issue of Pacific Standard magazine has a nice introduction to this aspect of her work titled "Meet the Flexions."

I only have the print version and am unable to link to a soft copy, but the website for the magazine is psmag.com.

The article is particularly timely with the Prime Mover lately attempting to transmogrify himself into the creature from Jekyll Isle by sheer force of flexionic will.

Mar

28

 Before work I drink two double espressos. I wouldn't have the courage to leave the house otherwise and go to work. I just rely on jitters to move me uncontrollably and eventually I bounce out the door. An espresso around my house/work costs approximately $3.00. That's $6.00 a day. I drink these on weekends as well, so, that would be around $42 a week and there are two of us in the house. $84 a week. We go through around $10 beans per week. We also need to factor in cleaner for the machine, but I bought industrial bulk cleaner for $20…it'll last a year or two even with weekly double cleans. We also give others a coffee when they come around. I'll ignore that, however.

I bought the coffee machine for around $800 on special and it makes a very tasty cup. We've had it since late 2007. So, we've been drinking $4,368 per year for four years, so $17,472 for the life of the machine. Only $2,080 for the beans over four years. All up, I think we're ahead. There are power costs and so on, but, they're minor. We've probably saved, conservatively, around $13,000 in the last four years.

Here is a good article reviewing the best home coffee machines.

Jeff Watson writes:

I drink a lot of Cuban Coffee, which is espresso, and is very sweet. My pot cost $12 at Target and I've had mine for at least 15 years.

I buy Cafe Pilon which is priced at 4 bricks for $22 and that's a 2 month supply, figuring 4 cups a day.

It takes less than 5 minutes to knock out the coffee.

Dylan Distasio writes: 

My company recently eliminated the free Green Mountain brewed coffee as part of a bean counter initiative and switched over to Flavia packets which is a very poor substitute. I have been going downstairs to buy a large cup of coffee a day for $2.67 but am looking for a cheaper alternative.

I am about to order one of these aeropresses based on the reviews I've read of the device and the coffee it makes. It is essentially a gentle one cup espresso maker which can then be turned in a cup of Americano if desired simply by adding additional hot water.

Update:

 So I got my Aeropress and wanted to report back my coffee findings to the group. I am a huge fan of this device and believes it consistently brews a delicious cup of coffee quickly and easily. The only downside I see is that it can only brew one cup at a time. For me, this is a non-issue though since I am using it at work and not for a group. Even if I used it at home (I am considering getting a 2nd one for that purpose), my wife does not drink coffee. I have a Keurig I had bought for convenience at home in case I wanted a quick cup of joe on the weekends. There is no comparison between the two not surprisingly; the Aeropress blows the Keurig with its k-cups out of the water.

Just a little additional background on my coffee habits…I drink my coffee black with a few exceptions…I generally don't like SBUX brew. I am with the folks who call them Charbucks. I prefer McDonald's or Dunkin Donuts coffee, but will drink the SBUX Blonde or an Americano (espresso plus hot water) there under duress. I am not a coffee snob (at least not yet) so you will not be hearing me talk about brewing beans picked out of civet droppings or $1000 burr grinders.

I picked up a bag of whole bean Jamaican Blue Mountain coffee from Costco for my first brews with the Aeropress. I am using a burr grinder versus a bladed one but it is a relatively inexpensive Mr Coffee one I bought years ago when I was experimenting with a Braun Espresso maker. I am grinding relatively fine somewhere between espresso and french press.

Once the coffee is ground, it is a very quick, simple process to brew a tremendous cup of coffee. The Aeropress comes with a measuring scoop which I use to scoop around 2 - 3 scoopfuls into the device after placing a fresh filter disc at the bottom. I then pour relatively hot water obtained from the dreaded Flavia machine onto the grounds and stir with an included stirrer for approximately 30 seconds (they recommend 10 seconds). I then insert the plunger piece into the waiting grounds and with some elbow grease slowly press the coffee down through the filter leaving the grounds behind. After that, I add additional hot water to my coffee mug to craft an Americano. I have tasted it undiluted and it is also delicious. I'm not really sure it would replace an expensive espresso machine since it is not applying the same pressure, but for me, it is a nice cup of what the Aeropress folks call espresso.

Clean up is simple. You just unlock the piece that holds the filter in place, and plunge the grounds into the trash. After that, it's a breeze to rinse off.

One of these would also be great for travel and camping/backpacking. It is pretty small and easy to carry.

In case you didn't notice, I am sold on the Aeropress. I'd highly recommend checking it out if it sounds like a good fit for your purposes. I'm looking forward to experimenting with the grind settings and some different coffee beans in it.

Just to continue this discussion, does anyone have any whole bean coffee recommendations to try?

For those of you interested in debating how many angels can dance on a java bean, check out coffeegeek.com also. The minutiae available for coffee lovers there may blow your mind.

Dec

10

Modernist Cuisine is a scientific book about cooking using science rather than tradition to develop the best quantitative parameters and methods for cooking. A teaser for the book describes cooking poached eggs at 144 degrees rather than the usual boiling water. It takes 25 minutes but the eggs are perfectly consistent with a smooth soft texture throughout the white and yolk.

It turns out that egg coagulates at just over 140 degrees. The violent boiling water disturbs or breaks the whites before they are cooked; when water doesn't boil, the whites don't break, and it is enough to cook the egg.

There are a number of other foods that also can be cooked at lower temperatures such as steak which needs 138 for a consistently perfectly cooked medium rare steak evenly through the entire cut. The steak is cooked in temperature controlled 138 water inside a sealed bag to the correct temperature. Then just brown the exterior to seal it on the bbq or pan and to add flavor. Special equipment helps such as the Sou Vide cooker.

Dylan Distasio writes: 

I have been lusting after a copy of Modernist Cuisine since it was released, but have been unable to convince the wife to let me blow $450-500 of hard earned cash on it as an amateur cook, It's truly a labor of love. Nathan Myhrvol, one of the co-authors, was the CTO of Microsoft before moving on to pursue his love of food science. You may be interested to know that Modernist Cuisine at Home was released earlier this fall. It is one oversized volume as opposed to four separate ones and is geared to recipes and techniques that are a bit more feasible for a home cook.

It is also significantly less expensive and probably does not sacrifice too much for the home cook at a current price of $105 on Amazon. I have a copy sitting here waiting for me under the Christmas tree that my wife was kind enough to give me, but that I had to promise not to open ahead of time. If you're interested, I'll post my impressions to the list after I open it and have a chance to peruse it and cook from it.

Jim Sogi gives us an update:

Modernist Cuisine at Home by Nathan Myhrvold just arrived. Reading his CV is astounding. He has multiple degrees, Phds and has worked with Stephen Hawking. He made millions at Microsoft early on and after an early retirement, he devoted his genius to cooking. This book is to cooking what Ed Spec is to investing, using the scientific method to cook.

He used sealed pouches to seal in foods while cooking. He uses pressure cookers to bring out smooth caramelly flavors in vegetables which require higher temperatures than boiling water allows. The expensive part is buying the additional equipment such as the sealer, the sous vide bath, the induction stove. One could get by with a digital thermometer on a budget. If I ever get to another Spec Party I promise to demonstrate the techniques.

Jul

31

I was cleaning out one of my drawers recently, and came across an interesting pamphlet on Crises and Panics by James L. Fraser. It's an interesting if brief history up through the early 60s. I thought I would share his comments on identifying traits and causes of panics/crises. I am paraphrasing a bit and not completely quoting him on each bullet point here. Bear in mind, this was written in 1965.

Traits:
1) Extravagance of living, first by a few, and then by many…
2) General belief in impregnable prosperity…
3) Lavish private expenditures, which appear to be natural offshoots of immense federal projects…
4) An appetite for speculation
5) Easy money and availability of credit

Indications of impending crises:
1) Rising prices
2) Increased activity of established businesses seeking more production, more sales…
3) Active loan demand
4) Strong increase in labor employment
5) Extravagant public and private expenditures
6) Speculative mania, together with dishonest methods, fraud
7) Labor strikes and increased general violence / social instability
8) Excessive pride of opinion, especially an "American First" attitude

Causes:
1) Great failure of confidence at crucial moment(s)
2) Magnificent abuses of credit
3) Readjustment of conditions to changes in values/prices
4) General fall in prices
5) Changes in the monetary unit / revaluation
6) Contractions of or lack of money
7) Over production or under consumption
8) Psychological tendencies which covers a multitude of ideas, of which only a few ever hit the public press.

I also found his comments on "The Permanent Crisis 1960-?" interesting:

"Homer said 'After the event, even a fool is wise.' I suppose before the event, even a wise man looks foolish. Today, with strong opinions and solutions being voiced daily, a wise man tries to look for facts and thoughts which are forgotten in the heat of backing the opinion of the moment. Social control is exercised now more than ever before. We have a service-oriented economy, supported by the Federal Government as a prime mover in all walks of life. This is social action. We may not wish it or like it but we have it."

The rest of the pamphlet is also a great read, and reminds one of a quote from my favorite book of the good book (this is for Gibbons):

That which has been is what will be, That which is done is what will be done, And there is nothing new under the sun. Is there anything of which it may be said, "See, this is new"? It has already been in ancient times before us. There is no remembrance of former things, nor will there be any remembrance of things that are to come by those who will come after.

Jul

13

 Perhaps someone can explain this one for me:

Facebook is valued at an astronomical amount. Its revenue base is, basically advertising. But FB is sustained, use-wise, by kids and young adults ( <30 ), who at one time had a fair bit of purchasing power and/or influenced significantly what a typical family bought.

Today, however, that demographic group doesn't have that kind of purchasing power. So what's the appeal for advertisers in supporting FB? Is there any data to suggest that ad buys on FB have a higher ROI than other media venues?

If not, is FB just a lousy investment, or a good one because these things are temporary?

Anatoly Veltman writes: 

Also, consider the theory of reflexivity in the case of FB, of self-perpetuation. I notice that my 11 y.o. daughter has gained self-confidence (and self-absorption) via FB-ing.

Those kids flaunt their "social edge" over the older purse-holders, and pull on purse-strings with ever-increasing zeal.

Like Henry Ford said, "I'll pay my workers enough to buy my cars", FB is fostering its own consumer channel.

Gary Rogan writes: 

The hope with large end-user software companies has always been that they (a) create dominance in their particular specialty (b) use this dominance to figure out as yet unpredictable way to monetize way beyond their current valuation (c) use this dominance and their speed of execution to stay ahead of adverse end-user trends. If often hasn't worked out this way, but of course when it does you get outsized returns.

Stefan Jovanovich writes: 

For the most recent quarter FB generated roughly $.5B in EBITDA - the same result that my favorite submarine with screendoor investment - AMAT - produced. FB did it with 1/4th the number of employees and 40% of the revenue. Does that justify a valuation 5 times what the market now pays for Applied Materials? Yes - if the belief continues that network effects will predominate in social media as they have in paid search. The world will need the production of foundries - both steel and silicon - but it will only pay a premium for businesses that promise that their profit margins will increase on marginal sales because there is no used/distressed inventory out there to compete with the "new" products. The answer will be No only if the world of corporations and teenagers decides that Google+ is a better way to sell their virtual images to the world. (Note to file: since those of us here at Chaos Manor now buy and own stocks as if they were cars and houses - i.e. once we find one we like well enough to buy, it is usually a decade and more before we even think about selling, these comments are only for people - all 3 of you - still willing to attend early morning mass at the church of Buy and Hold.)

Peter Tep adds: 

Above all else, Facebook is just a huge time sink and besides being a networking tool, is another place for people to gloat and boast or climb the social hierarchy — meant in a non negative way. With so many kids using it and literally connected to it 24-7, it's probably going to be a good investment if Facebook finds more ways to market to it's users on an even more emotional level. Has anyone seen the series posted on Ritzholtz blog about this?

I guess it is a great investment because it keeps people emotionally connected, like a great movie is playing out in front of them and they are part of it. If Facebook refines its marketing strategies even more using its users' data, then I guess the sky's the limit.

Jack Tierney writes: 

David asks some important questions regarding FB and its value. I agree that the current price is astronomical, but have very little knowledge of the operation — I am not a member and, barring any unforeseen developments, will not join. I have followed FB for sometime and have not joined because of the incredible amount of information they can gather regarding your personal history, preferences, and affiliations.

That very knowledge, though, explains why this could be a very rewarding investment. Back when I was still employed I did some work with the "research and marketing" groups. One of the first puzzling discoveries I made while going over some data was that, although our newspaper regularly received a huge amount of national food advertising, the relatively small markets covered by the Miami Herald and the Milwaukee Journal, received more.

It was explained to me that both cities were unique in that they were split almost evenly demographically. The wealthy, well-to-do, and upper middle class occupied one half of town, those not that well off, the other. This gave General Mills, Coca-Cola, Proctor & Gamble, etc. ideal platforms from which to launch new products, different packaging, innovative couponing programs, size and container preferences (12 oz. cans vs. 16 oz. bottles).

These two cities gave marketers some valuable insight into buyer preferences…yet it was no where near good enough. The Holy Grail, what each individual preferred, was not only impossible to discover, but impractical to reach. That may now be achievable with FB.

While many who are members argue that they reveal very little about their preferences, few are aware of how much their "friends", directly or indirectly, reveal about them. The most memorable story sent to me regarded an English woman who had been "on the dole" for a couple of years, receiving whatever that country's monthly stipend is for an unmarried, unemployed woman with two children. Someone from Inland Revenue (apparently the equivalent to our IRS) decided to check up on her. Rather than checking her page, he started with the pages of some of her friends.

He happened to come across one that featured a several month old picture of the woman in question, relaxing on a beach in some exotic, expensive European resort — with her new husband. Her friend also happened to mention how fortunate she had been to have an employer who let her take a month long paid vacation.

Well, the outcome was not a pretty one. But the story illustrates that if a "friend" should just happens to mention you're a pizza lover, expect to get an uncommonly large number of pizza promotions - from Pizza Parlors in your very own neighborhood. (How did they know???)

If FB plays this right, they could pull in billions. Marketing has always been about reaching the maximum number of potential buyers for the least cost. From what I've read about FB, this is within their reach. If they follow through, or allowed to follow through, their reach is incredible and I would consider buying.

J.T Holley writes:

I'm 41. I choose to "like" The Jefferson Theater so that I could see the feeds/updates of concerts that were being booked. I got notice that they were having a Southern Rock Band "Blackberry Smoke" play on July 25th. They also said that if you "liked" the announcement then you would be put into a drawing for free tickets. I won. I have two free tickets and allowed them (they asked) if they could say that I won.

GM and all others that don't understand the power of FB are foolish. It reminds me of A. Miller's "Death of a Salesman" and Charley's wise words:

"The only thing you got in this world is what you can sell. And the funny thing is that you're a salesman, and you don't know that." Charley

and he best double negative ever to be used in writing when Charley addresses Willy (foreshadowing).

"Nobody's worth nothin' dead." Charley

Google became the yellow pages.

FB is becomin' greater than the yellow pages.

It's a tectonic shift that many aren't willin' to accept or grasp. I'm nobody and humble and I get it.

Dylan Distasio writes: 

While I think your example is a good one of what Facebook COULD monetize, they are far behind Google on most advertising metrics and have a very low click through rate on the ads they do allow. It's understandable, Google is in the business of ads and has been at it for longer. Zuckerberg seems hesitant to admit or embrace the fact that FB is also in the business of advertising.

And the fact that Google is a yellow pages should not be scoffed at. It is a large part of why their ads in search work and demand higher prices. They are for things people are looking for and highly targeted.

I think with the amount of personal data Facebook has, they have great potential to monetize ads. The big question is whether they are interested, and if so, will they be able to execute.

The current issue of MIT Technology Review has a great article on a team at FB that is looking at the bigger picture in sociological terms of what they can do with the data. While their explicit goal is not focused on monetizing the data, some interesting techniques for doing so may come out of it indirectly.

Facebook has to be careful about how far they go in using people's data in the interest of monetizing it, and has to build a more sophisticated toolbox of ad types and techniques if they want to compete with Google. While they have certainly reached what appears to be critical mass as a social network, people can be fickle with their allegiances, and are happy to jump ship to something else when they get bored or feel slighted. FB will be forced to walk the same tightrope Google does if they want to seriously compete with them.

It should be an interesting couple of years watching this unfold. That said, I think based on the current view of things, FB is tremendously overvalued unless they are willing to start heavily exploiting the data in their possession. I'm not sure Zuckerberg is willing to, and he controls the company with 51% of voting shares. He's now a billionaire and can run his own agenda for quite awhile at the shareholders expense. As an example, I would question his acquistion of Instagram for $1 billion dollars but I guess time will tell. It will help them in the mobile space where FB is currently very weak, but we'll see if it was worth a billion to buy a company with no revenue.

Apr

18

 I think the following passage from Siddhartha by Herman Hesse has a lot of gems in it for speculators and gamblers despite the fact that Siddhartha is attempting to wash his hands of these filthy earthly pursuits in an attempt at spiritual nirvana:

The world had captured Siddhartha: voluptuousness, lust, lethargy, and in the end even greed, the vice he'd always thought the most foolish and despised and scorned above all others. Property, ownership, and riches had captured him in the end. No longer were they just games to him, trifles; they had become chains and burdens. A curious and slippery path had led Siddhartha to his latest and vilest form of dependency: dice playing. Ever since he had ceased to be a Samara in his heart, Siddhartha had begun to pursue these games with their stakes of money and precious goods- games he had once participated in offhandedly- with growing frenzy and passion. He was feared as a player. Few dared to challenge him, for his bets were fierce and reckless. He played this game out of his heart's distress. Losing and squandering the wretched money was an angry pleasure; in no other way could he have shown his contempt for wealth, the idol of the merchants, more clearly and with more pronounced scorn. And so he bet high and mercilessly. Despising himself, mocking himself, he won thousands and threw thousands away, gambled away money, gambled away jewelry, gambled away a country house, won again, lost again. That fear- that terrible and oppressive fear he felt with rolling the dice, while worrying over his own high stakes- he loved it. Again and again he sought to renew it, to increase it, to goad it to a higher level of intensity, for only in the grasp of this fear did he still feel something like happiness, something like intoxication, something like exalted life in the midst of this jaded, dull, insipid existence. And after each major loss he dreamed of new wealth, pursued his trading with increased vigor, and put more pressure on this debtors, for he wanted to go on gambling, he wanted to go on squandering all he could so as to continue to show his contempt for wealth. Siddhartha lost the composure with which he had once greeted losses, he lost his patience when others were tardy with their payments, lost his good-naturedness when beggars came to call, lost all desire to give gifts and loan money to supplicants. The one who laughed as he gambled away ten thousand on a single toss of the dice turned intolerant and petty in his business dealings, and at night he sometimes dreamed of money. Whenever he awoke from this hateful spell, whenever he saw his face grown older and uglier in the mirror on his bedroom wall, whenever he was assailed by shame and nausea, he fled further, seeking to escape in more gambling, seeking to numb himself back into the grind of hoarding and acquisition. In this senseless cycle he ran himself ragged, ran himself old, ran himself sick. Never before had it seemed so strangely clear to Siddhartha how closely sensuality was linked to death. Siddharta had spent the night in his home with dancing girls and wine, had made a show of superiority before others, of his standing, though he was no longer superior, had drunk a great deal of wine, and had gone to bed long after midnight, weary and yet agitated, close to tears and despair. For a long time he sought sleep in vain, his heart full of misery he felt he could no longer endure, full of a nausea that coursed through him like the vile, insipid taste of the wine, like the dreary all-too-sweet music, the all-too-soft smiles of the dancers, the all-too-sweet perfume of their hair and their breasts. But nothing made the nausea well up in him more bitterly than his thought of himself. He felt nausea at his perfumed hair, the smell of wine on this breath, the wary slackness and reluctance of his skin. Just as someone who has eaten or drunk too much vomits it up again in agony and yet is glad for the relief, sleepless Siddhartha yearned for a monstrous wave of nausea that would rid him of these pleasures, these habits, this whole meaningless existence and himself along with it…

Mar

17

 I am so removed from Wall Street that this may be an obvious point:

I think it will turn out that Greg Smith did Goldman Sachs a great favor. No amount of purposeful PR could have helped GS so much and turned the tide running against GS so effectively as Smith's pompous, self-serving and unsupported resignation op ed.

Except among the irrational haters of wealth and speculation, Smith's op ed will wind up generating sympathy for GS, and I predict this week will mark the bottom of GS both in reputation and stock price. It will be pretty much all up from here.

The true criticism of GS, of course, would be its corrupt, crony-capitalist relationships with current and prior Presidential Administrations. But that's too subtle and knowledgeable a criticism. Rather the criticism in the popular mind is "greed". Smith's attempt to cloak his resignation in anti-greed will be seen through and will lead to greater acceptance of a beleaguered GS just trying to go about its business of making Wall Street work.

Rocky Humbert writes: 

As a GS alum, I would like to offer a few observations, without directly commenting on Dan's point.

When I left GS as a vice president in 1989, GS was run by Whitehead and Weinberg, successors to the legendary Gus Levy. The firm was a private partnership, and importantly, the investment banking/capital markets side of the company dwarfed the trading side of the company. This is a critical distinction from today. Sure, Bob Rubin's risk arb desk was hugely profitable. Sure, we did some big block trades in equities; but the much higher commissions of that period, and the firm's limited capital, ensured that the focus was on flow and not on principal transactions. By then, Traders were second class citizens versus the hermes-wearing, first-class-flying I-bankers who, at that time, would never ever represent a company in a hostile takeover. Of course there were some guys who pushed the envelope on occasion (I won't name names), but there was a distinct belief that everything flowed from the profitability of the clients. For an analogy of the inherent tensions between Ibanking and trading, revisit the Gluckman/Peterson feud at the ancient Lehman Brothers (pre-Amex deal).

That really was the GS culture back then. Heck, Weinberg drove a crappy Ford sedan because we did the Ford IPO. And few things could get you in trouble faster than talking badly about an important client. It was unthinkable that we would push a client into a security that we thought would turn out badly. We looked down our noses at Bear Stearns and the other bulge bracket firms who were known for that sort of thing. (Aside: I posit that the GS cultural evolution can be gleaned from the type of car the CEO drove.)

The world evolves, and I believe that the evolution of GS into its current form is a reflection of:

1) The end of its being a private partnership — which ensured risk taking with OTHER people's money. I still remember having a particularly bad losing day when Eric Sheinberg walked up to me, whacked me on the head and said with a reassuring smile, "Don't sweat it. It's ONLY money…..and it's MY money."

2) The domination of trading profits versus investment banking revenues. Management realized you can only grow investment banking to a certain size due to its service nature; whereas you can compound capital by investment and trading in a theoretically unlimited way.

3) The growth of trading technology and impersonalization of counterparty relationships. (It's much easier to "screw" someone who you don't know.)

4) The 10 percent rule, where they fire the worst performing 10% of employees every year. Back in the Whitehead/Weinberg day, such a concept would have been unfathomable. It really was a family lifetime employment sort of feel, not dissimilar to GE before Jack Welch and IBM before Lou Gestner.

5) And many other examples that correlate with a 30 year bull market in debt as a pct of GDP.

I am not lamenting here. I am simply saying that Smith is right when he observes that the GS culture has changed.

Too, the world has changed.

And, to be honest, I don't really understand why Smith wrote that piece except as an attempt to be Michael Lewis-esque, but without the chuckle factor.

Jack Tierney writes: 

Notes of interest in the GS "time to buy?" discussion: Goldman's full-year net income hit a record $13.4 billion in 2009, then slipped to $8.4 billion in 2010 before tumbling to $4.4 billion last year. Goldman's share price has plummeted from its 2009 high of $192 to the current quote of $111. During 2009 and 2010, Goldman spent 71% of its net income buying back its stock. But last year, the company spent 264% of net income buying its stock (excluding the repurchase of preferred stock from Warren Buffet, Goldman still spent 140% of its net income buying its own shares last year - double the rate of 2009-10.) Last week, Goldman executives cashed in $20 million worth of stock that had been "locked up" for the last three years. Over the last five years, Goldman's management spent $21 billion of the shareholders' capital buying GS stock in the open market at an average price of $171 a share. Today, the stock sells for $111. On a mark-to-market basis, therefore, Goldman's stock buy-back "investment" has produced a loss of about $7.3 billion for shareholders…. Last week, nine Goldman insiders sold their stock as fast as the law would let them. They cashed out $20 million worth of stock at an average price of $107.44.

Fred Crossman replies: 

Great points, Jack, on buy backs. I noted that American retailers have continually expanded at a much greater rate than the population growth. In addition to declining per store sales and income these retailers have been furiously buying back stock since 2007 to goose earnings. LOW has reduced shares outstanding by 12%, BBY 18%, HD 20%, KSS 11%, WMT, 15% and SHLD 29%. All buybacks above book value (destroying share holder value). Especially HD, now trading at 4.1 times book. 

Bruno Ombreux writes: 

There is a very simple way not to be screwed by GS, or anybody else. I am talking about trading, not corporate finance.

If you are making trades directly with GS, you are presumably a company, not some small private speculator. So you have a tool which is called "Risk management policy" and you make it a sackable offense not to comply with it. In the risk management policy, you list the markets and the instruments people are allowed to trade.

For instance:

- only markets with at least 3 active market makers and x trades/per day
- only vanilla instruments like swaps In addition, you have procedures like "trader must obtain 3 quotes from 3 different counterparties prior to making a trade", and a track record of the consulted counterparties and their quotes must be kept in the trading system, for each trade. In these types of market, you are not trading every 5 minutes, so you have the time to do all this.

There is no way you are getting screwed if you restrict yourself to simple instruments and they have the best bid/ask available among several other market makers.

Rocky Humbert comments: 

Sorry, but I don't understand your distinction between trading and investing. I also don't understand your definition of vanilla. I am however a fan of "rocky road" flavor.

I agree with you that entering trades that you are not sure to be able to exit is risky. But if the market provides you with a sufficient liquidity premium, it's rational and it can be profitable. But only if you do it right of course.

Bruno Ombreux replies: 

Trading vs investing: this could be the beginning of an endless semantic debate.

But let's use a couple of examples:
- trading: I buy a basket of stocks this morning with the intention of reselling before the close
- investing: I build a portfolio of stocks with the intention to keep it a relatively long time, because I think that these stocks value will increase due to whatever reason, growth, value, the economy…

I also like the following classification, which I believe comes from Minsky:
- Profits on the position neither depend on price variation of the asset, nor on cost of carry: I am investing.
- Profits do not depend on price variation, but only on positive carry: I am trading.
- Profit depend on price variation of the asset: I am speculating.

The example and the definition are not equivalent, but they give a rough idea of what trading is and what investing is. The border between both activities can be blurry. But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

Now, to answer your second question, what is vanilla? Vanilla is anything that is simple, easy to understand and commonly traded. In the energy markets, everybody trades swaps and Asian options. These are vanilla. What is not vanilla would be a double-barrier option on Singapore 180 cst Fuel Oil, settled at the average CAD/EUR exchange rate lagged 3 months vs the Fuel oil averaging period. That is not vanilla, and definitely more simple than many equity derivative deals.

Dylan Distasio comments: 

But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

I will let those wiser than myself comment on the rest of your analysis, but the above jumps out at me as a poor definition of investing. Holding a bond to maturity may be a valid example of your argument, but there are plenty of people arguably INVESTING in other instruments who need a market to close their positions. A few off the top of my head include real estate, stocks, bonds not held to maturity but still held as investments, commodities including physical ones held in safes or other venues. Of course you need a market to close out most investments! I may be missing something but this seems obvious. If you cannot find someone else to buy or sell your investment at the time of closing the position, you have zero liquidity and for all intents and purposes zero value if you need that liquidity immediately. Without a secondary market, most investments cannot realize their value.

Sep

12

 I suspect that this video is a preview of something that will be the next great bull market, a bull market that will dwarf the dot com market, a bull market that will be representative of a society changing technology right out of a science fiction novel. This new technology will redefine, reinvigorate, and recreate the industrial revolution.

Ralph Vince writes:

This technology has been around a long time for prototying componentry. There is a particular file format (comprised of a tringualr mesh of 3 d vertices) which many CAD formats readily convert to OR can be converted into.

I think where the rubber meets the road on this is the ability, ultimately, to do away with the machining of parts, particularly out-of-service parts. Try getting parts to very old cars for instance. With a CAD drawing of such a part, the physical part — or, the physical components to the assembly of the part, could readily be recreated. I did a ton of work with this kind of stuff — what the video doesn't go into is that the drawing itself can have engineering rules embedded within it. It;s more fantastic really than the video shows!

Dylan Distasio writes:

I agree that this one will eventually be a game changer. Although what I'm about to link to is more of a hobbyist unit, it is still impressive in its abilities, especially for the price. I've seen demos of these firsthand, and they're pretty cool for a home user:

Shapeways is also doing some pretty cool stuff with this in the commercial space, and offers a lot of different materials.

Aug

23

 It's my experience that if you need to sell a portion, even if that portion is 100%, via a stop order, you're in too heavy to begin with. Being in too heavy is to be too dependent on luck.

Dylan Distasio writes: 

Ralph,

Can you expand on your definition of "need"? Let's use the case of HPQ as an example. x had an investment hypothesis that no longer necessarily holds true after the potential value destruction of recent company decisions. As a result, he decides to liquidate half. Maybe someone else gets in a few weeks ago after the discussion on HP here, as they agree it looks like a value play, but they have a rule to always attempt to minimize losses on new positions to a flat 10% to protect capital and to always use stops because they need them for discipline. So they get a ~20% haircut after getting stopped out on the gap down.

I'm not sure either situation of a 50 or 100% liquidation was based on what I would call need, but rather some kind of capital preservation or very basic risk management rules.

In all serious, how would you define need as I think it is worth looking into this further? Potential loss of all capital? Forced margin liquidation? I agree that being in with too much leverage or too large a position opens you up to getting taken out by noise, but what is need versus risk management?

Chris Cooper writes: 

I took a big loss on Monday of the week before last. I then cut my trade size in half, and manage to end up flat at the end of the week. The week actually would have been very profitable had I been willing to stay with my original sizing. But Ralph is correct, and I decided that if I am getting scared by a big daily loss, I'm trading too heavy, so I have left the trade size at that halfway point.

On the other hand, one might choose a rule that pares back the trade size when volatility increases. These were intraday forex trades, and clearly that week was exceptional in terms of volatility. The problem is that the volatility spikes that kill me do not appear to be predictable. Therefore I have to trade most of the time at a level that seems relatively placid in order to avoid being frightened into damaging behavior occasionally.

Gary Rogan writes:

I think this illustrates the point I was trying to make originally about the lack of logical underpinnings in the "sell half" decision: it's an emotional decision because you (a) get scared by the suddenness and violence of the move an its effect on your net worth (b) belatedly realized that you were in too much. Now the second part is sort-of logical, but it really points to the lack of imagination about what a position can do when you get into it: you imagine a slow gradual move and the thing suddenly loses a big chunk of its value without much warning. This is not theoretical for me, because for the first time ever I have faced the following: two days after buying a stock it suddenly loses 25% of it's value in a day. This happened TWICE in a row on top of that, and only underscored to me that you never know enough to say with confidence that you will not lose all, and quickly. Therefore you should assume that that's the case from the very beginning. 

Ralph Vince replies:

Dylan,

I'm really referring to liquidity concerns; Rocky's decision to liquidate half, I assume, is a risk-management procedure here, as opposed to a strategic one based on changed fundamentals (I may be, and, in retrospect, likely am wrong about this!).

Any risk-management concern where someone "needs" to get out, shy of that investment being entirely wiped out, will, in time, be entirely wiped out, or damn near whether by an Enron, or those gilt-edged AAA GM bonds at one time.

Dylan Distasio responds: 

Gary,

Although I don't typically trade that way, I don't think the sell half is necessarily an illogical or emotional decision depending on the scenario. We have no way of knowing what the reason behind selling half is for a given individual. Reducing a losing position size is, in my mind, a way to mitigate risk of additional loss while still having some skin in the game. Keeping some powder dry is (I would imagine as an amateur) one of the more important survival skills in this game. The person selling half doesn't have to be in too deep to their overall capital pool to want to protect half of what remains of that position based on changing circumstances. Losses do add up over time.

Alston Mabry writes: 

I have found that trading breaks down into (1) analysis, and (2) execution. With "analysis" being a period of calm, quiet reflection (maybe with a cold beer) over a crowded spreadsheet; and "execution" being whatever I have to do to manage my lizard brain once there is real money at stake. They can be such radically different modes of being that sometimes it's very difficult to establish a link.

If I make "analysis" and "execution" the axes of a graph, I can place each of my trades on the graph in the appropriate quadrant: {analysis(good), execution(good)} = exhilaration, {analysis(good), execution(bad)} = regret, {analysis(bad), execution(good)} = relief, {analysis(bad), execution(bad)} = self-loathing.

The challenge of trading is that there is only one quadrant you *want* to be in.

Chris Cooper adds: 

Rocky wrote:

"I challenge anyone to demonstrate a single person who blew up while sticking to the rule: "Only add to a winning position.""

I can't meet your challenge, but I did have a week where I lost 50% of my equity. Your observation does not apply to those trading with leverage. I am now learning to scale back the leverage, make adjustments in trade size more frequently than weekly (should be real-time), and to write models which account for higher correlations during times of stress.
 

Aug

18

 One has found that when companies pay up like this it is the handwriting on the wall.

Anatoly Veltman comments: 

True. I wonder, in addition, if the new world order means that Gold also looked at that.

Mr. X. writes:

One notes that the target of this transaction was Motorola rather than a certain Canadian smartphone manufacturer who gained a certain personage's attention based on similarly superficial and glib generalizations.

One wonders what this personage's knee-jerk reaction to the deal would have been — had the CEO of the acquiror been a god-fearing male Democrat-leaning Yalie, over the age of 65, who cheats on his wife, plays golf on Sundays with government officials, and tennis on Tuesdays with other prominent financiers…. Might that have taken the writing off the wall?

Importantly, one notes that Bloomberg is reporting that the Google agreed to pay a shockingly high $2.5 Billion breakup fee if the deal doesn't close (an amount more than 6 times the typical amount). This is bizarre and hardly subtle — so the buyer is either an idiot or he knows something that we don't know. Before rushing to judgment, one is inclined to believe that there is more than meets the eye here — and some elucidation may be provided in the soon-to-be-filed merger proxy statement.

Dylan Distasio writes:

I think at the end of the day, when all is said and done, assuming this deal goes through, the price will appear to have been a bargain. Google has had phenomenal success with Android, and as a result is in the crosshairs of both Apple vis a vis their patent battle with HTC, and with Oracle who in typical Ellison fashion picked clean the bones of the once mighty Sun, and let loose the lawyers of war. Oracle is going after the core of Android by claiming infringment on their acquired Java portfolio. With 17,000 patents just added to the Google portfolio, give or take, a cross licensing agreement with either opponent is much more likely as a worse case scenario for Google, IMO.

Motorola, despite their tarnished reputation compared to their go go days, also brings a hardware design and manufacturing ability that Google is sorely lacking in house. They took a gamble on Android, and were there with the original Droid which with the help of Verizon's heavy advertising really did more than anything to bring Android to the forefront. Google will now be able to realize their vision of what a flagship Android phone should look like with more success than they had with the ill-fated Nexus launch. They will have the capability to leverage the hardware to the hilt with the guys and gals writing the drivers in house.

The one area they will have to be careful about is alienating other major Android players like HTC. HTC's CFO was towing the line so far this morning, welcoming the deal. Microsoft is going to be heavily courting the large players for the Windows 7 phone OS, so there will be at least one alternative available to other Android handset manufacturers. I'm relatively confident Google will tread lightly though, and at the end of the day, Android is now a relatively mature OS that is FREE to the other manufacturers.

Google had a large warchest of cash, and a smash in Android that needs to be protected. I think for once, the premium will be money well spent. The landscape of tech mergers and acquisitions is littered with disastrous decisions and lack of the ever evasive synergies. I'll go on record as saying, this time it will be different, assuming the deal is not derailed by the Feds.

Drinks are on me if this one doesn't pan out over the next few years.

Gary Rogan adds:

I can't imagine that Google will not sell or spin-off the hardware business or the mobile phone part of it and keep the patents. They got MULTIPLE Android makers mouth exactly the same party line today, and they either threatened them (unwise, and hard to achieve reliable results so quickly) or promised neutrality. Keeping the smart phone manufacturing is a sure-fire way to sow discord in the eclectic Android community which can't be worth it for them. All they need is the hardware slaves killing each other making more and more popular phones to keep the advertising dollars coming in.

Aug

14

For any Specs interested in brushing up on their artificial intelligence, Stanford is graciously offering what appears to be an excellent intro course online in October for free. Hope to virtually see some other Specs there to discuss the course. Let me know if anyone else is going to be taking it.

Jul

19

 This morning something called "OTR Global" started a rumor that RIMM will discontinue the Wi-Fi version of the PlayBook tablet. This was picked up by an exceedingly large number of blogs and later more serious websites. In particular, the widely-read, openly pro-Apple BGR blog I had mentioned before picked this up and published an article without the "Wi-Fi" in the title, with a headline that RIM is about to kill the Playbook altogether. It later added the "Wi-Fi" to the headline. In the article it now cited Mike Abramsky of RBC who has recently turned dramatically anti-RIM with the following: "In a note to investors Monday afternoon, RBC Capital Markets Managing Director Mike Abramsky reiterated an OTR Global report that Research In Motion is possibly planning to stop production of the BlackBerry PlayBook’s Wi-Fi model." Interesting choice of words, "reiterated…possibly planning". I could "reiterate" that Hu Jintao is "possibly planning" to personally pilot a new kamikaze nuclear-tipped missile into a major US city, and I wouldn't even be lying. I mean it's not very likely, but possible. Later in the day RIM tweeted that this is "pure fiction", but who will notice? This denial is now on a few obscure websites and some comments elsewhere, but the damage has been done. They are truly trying to kill it.

This morning some Forbes columnist in his blog wrote another deathwatch post on RIM that was widely distributed as well. In it, it stated that RIM is planning to release QNX phones at the end of 2012. I posted a comment on his blog article saying that the company had repeatedly said that it would be in EARLY 2012. He replied that that wasn't true, although I have personally heard it in the quarterly call and also read it in a live blog from the shareholders meeting. He was later called on it by another commenter.

I just find this to be an amazing effort.

Rocky Humbert replies:

Mr. Rogan: I don't think this subject is boring at all; it's a live laboratory experiment in all of what makes up speculating, investing and more generally, human psychology. It's generally accepted that a speculator should primarily concern himself with what other market participants are currently thinking — and what other market participants will be thinking in the future.

In contrast, an investor should be focused on his assessment of the intrinsic value of the enterprise and whether Mr. Market is pricing the enterprise sufficiently below its probable future intrinsic value so as to provide a margin of safety and attractive return on shareholder capital. It's critically important to not confuse the two, or as Keynes said, "In the short term, the market is a voting machine, and in the long term, it's a weighing machine."

If, based on your research, you have decided to own this stock for a few years (as an investor), you might consider tuning out the market chatter since it's value is relatively limited for someone in your shoes. However, I believe that chatter becomes important for investors only when the chatter (and speculative flows) cause feedback loops. A falling share price (and credit rating) causes an increased cost of capital for an enterprise. That harms the enterprise's competitive position (versus companies with lower costs of capital); it makes recruiting and retaining talent more difficult; and it can also scare off potential customers (even if the product is excellent). These feedback loops (a variation of Soros' reflexivity) can help explain why certain trending strategies appear to work.If you believe this pernicious feedback loop is underway, it may reduce the future intrinsic value. Lastly, assuming that RIMM survives in some form, I believe the most difficult question for a value investor is when and how much capital to commit to a stock that is declining while other sexier stocks are rising. If the investor's money management is flawed, or his timing is flawed, RIMM may prosper yet the investor doesn't.

Lastly, I'd argue that one of the biggest mistakes any investor can make is thinking "I just want to get back to even." Because if RIMM turns around on its business execution, you will surely be tempted to exit in the high 40's … whereas all of my work suggests that you should consider buying more RIMM should the fundamental turn — rather than selling.

Dylan Distasio writes:

Gary,

If RIM actually delivered a quality product that people wanted, all of the below would be a moot point. People trading RIM stock might have skin in the game on the short side, and be enjoying churning the rumor mill, but again, if RIM actually made anything people wanted to buy, the stock price would eventually follow the sales/earnings. RIM is headed the way of PALM if they don't get their act together soon. Balsillie and Lazaridis are on another planet, and refuse to acknowledge the dire situation they have put their company in. In addition, they have not been making friends in the press or with analysts.

I'm not sure what is so amazing about this effort. The weak are preyed upon in both the marketplace and the stock market. The vultures are circling, and shorts are doing what they always do, piling on as much as they are able to. If you're buying what RIM is selling, look at this as a buying opportunity.

FYI, I have no exposure to RIM or any of its competitors, so I have no axe to grind, but what is happening now appears to be out of the standard playbook for a heavily shorted, potentially dying entity.
 

Jul

4

 I had meant to post this a while back about Intel making the leap to 3d transistor design in the commercial environment. From a layman's perspective, this appears to be a big deal. Intel has been working on this since the early 2000s and is now ready to ship by early next year. The 22nm design is a step forward as it allows more transistors per area than the 32nm one, but the big news is the tri-gate design. It should result in very low power chips potentially, with less leakage at the transistor gate.

I would be interested to hear Gary's thoughts on the technology, but I believe this once again demonstrates Intel's technical prowess and continued innovation. TSMC, a large competitor foundry, is nowhere close to the commercial deployment of this technology. They are not planning on commercial production until 2015-16 when they move to 14nm structures. The low power possibilities of these chips may open up the smartphone market to Intel and fire a shot across the bow of ARM Holdings which currently dominates the space. Intel may finally be able to grab marketshare in the smartphone and tablet market with Atom processors running this tech.

I have been considering picking up some Intel as a long term holding in my IRA based on a number of factors including their relatively fat dividend yield. The above would point to a solid game plan going forward. I think Intel is doing some interesting things from the technology standpoint right now:

Intel is taking nano-scale chip design literally to another level. After more than five decades of putting flat (or planar) transistors to work in billions of chips in billions of digital devices ranging from big-iron mainframes to minuscule embedded sensors, Intel said May 4 that it now will build the tiny processing units in three dimensions, instead of two. They are called Tri-Gates, and Intel first disclosed the technology that goes into this chip design in 2002. Intel's 3D Tri-Gate transistors enable chips to operate at lower voltage with lower leakage, providing a combination of improved performance and energy efficiency never before seen in the chip industry, Intel Senior Fellow Mark Bohr said.

The channels of electricity on three sides of the vertical fin structure make up the 3D nature of the transistor. The 22-nanometer 3D Tri-Gate transistors (a nanometer is one-billionth of a meter) provide up to 37 percent performance increase at low voltage compared with Intel's currently shipping 32nm planar transistors. This significant gain signifies that they are ideal for use in small handheld devices. These new transistors will reside on Intel's soon-to-come 22nm Ivy Bridge processors, due out late this year.

More in-depth analysis here

Jun

24

I try to stay true to the spirit of the dinner party, and avoid overt political comments, but I believe the following piece sums up well everything that is hateful and wrong with the current administration. At a time when small businesses need to be encouraged more than ever, Geithner dispenses the following wisdom:

Treasury Secretary Timothy Geithner told the House Small Business Committee on Wednesday that the Obama administration believes taxes on small business must increase so the administration does not have to "shrink the overall size of government programs.

The administration's plan to raise the tax rate on small businesses is part of its plan to raise taxes on all Americans who make more than $250,000 per year—including businesses that file taxes the same way individuals and families do.

Full story here .

I have never seen such outright hostility towards those who want to succeed than I have from this administration. It's incredibly disheartening.

Jun

23

 What higher purpose is involved in all the news about Greece? How does it help the flexions? And how does it make man small? The answer must lie somewhere related to these last two.

Vince Fulco writes:

1) "Only Govt has the answers…"
2) The powers that be must deliver bad medicine (aka taxes) regardless of one's individual responsibility/frugality/discretion/smarts.
3) Overcomplication hides the truth as long as possible.
4) Suffering should be shared by the masses, prosperity obtained/retained by the sharpies

Jeff Rollert comments:

Actually, I see the flexions losing control. The public has tasted information freedom. They won't give it up easily. If Greece says "No" then their world changes rapidly. In my circle, the banks are "reaching out in the community" with ever greater frequency. Yet, consumers interest in their products is waning, except at the mid/mega cap level and gov't.

Dylan Distasio replies:

Jeff, can you elaborate on what you mean by information freedom, specifically in reference to the Greek situation?

I think some of the flexions have already profited in the first round of the Greek bailout by offloading bad debt to the ECB from the private sector when the ECB agreed to take it. I'm sure the other ones tied up with the IMF have a strong incentive to make the Greeks take their medicine.

I don't see how the Euro will survive this situation long term. It is very unlikely that Greece's economy is going to improve enough to meet these payments especially with a Draconian austerity plan. All this new bailout is doing is delaying what appears to be the inevitable. It might take another year or two for the pain to become insurmountable for the ECB and Germany/France, but they will eventually be forced to stop throwing good money after bad. The Euro is a flawed currency and there was no exit plan built into it. Greece, Spain, Portugal, and Ireland all need to devalue their currencies to one degree or another and are unable to. This situation is untenable.

  Things fall apart; the centre cannot hold;
   Mere anarchy is loosed upon the world,
   The blood-dimmed tide is loosed, and everywhere
   The ceremony of innocence is drowned;
   The best lack all conviction, while the worst
   Are full of passionate intensity.

Ralph Vince writes:

I agree with all except it "it could get real ugly part." Not that I don;t think the possibility exists, but my analysis leads me to believe we are on the brink of gigantic, unprecendented economic growth in America, that we are rounding the turn, given a trough of some sort around 2014-2015, things REALLY take off after that.

And as we saw with China post-Tiananmen, nothing quells the masses like economic growth.

This is an extremely sophisticated society that, in the main, on the level of the individual, produces, despite their governement. In the main, Americans are quite peaceful, self-organizing, self-reliant people when need be. The seeds of pare-to-the-bone efficiency are in place here like nowhere else, the technological advantages now in place and as-yet unfelt — a catalyst need only emerge. The amount of available capital, so desperate now for a return, will be the second great biblical flood.

Talk to the younger crowd, and you see they isotropically have little faith in the future, little appetite for risk. They aren;t going to all be right. We re in the prime years to push all of our chips as individuals out onto the table.

Stefan Jovanovich writes:

I share Ralph's optimism about future returns in what the old men with canes would have called "sound securities". If I had the energy for it and did not still live in California (aka PIGS West), I would be buying and managing as many small businesses as I did 20 and 30 years ago. I don't find the absence of "faith in the future" among young people to be as alarming as Ralph does; I don't remember even thinking about the future when I was 15 and 20 and 25, and the young people I now meet who "have a plan" are basing their projections on what they have learned in school, not their dreams. The others - who are properly cynical about school - understand that their fate is largely at the hands of the marketplace. But they are not scared. Quite the contrary. They seem to be far more comfortable with risk and uncertainty than my generation ever was and still is (we seemed to think we had the divine right to complain and receive whatever medications were available to escape from the pains of actual life.) I think intelligent young people now understand the difference between risk (doing potentially dangerous things that require skill and practice to avoid harm) and the arrogance that comes from ignorance. Extreme sports have never been more popular; but Lack's kids and others are sensible enough to wear helmets voluntarily. The kids are all right.

Jun

8

 I find Tyler Cowen to be a very interesting, stimulating individual and am looking forward to his upcoming talk at the NYC Junto. I read his latest "The Great Stagnation" in preparation for the talk. It is a quick read, and well worth checking out. While I enjoyed it, I disagreed with many of his arguments put forth in it.

The premise distilled is that the US was in a unique spot in its younger days to take advantage of a large variety of low hanging fruit due to a variety of factors resulting in increased prosperity, and that since the mid 50s the pace of innovation has plummeted and the rate of return of technology has diminished greatly, requiring more and more dollars for less and less life altering discoveries. I take full blame for any misinterpretation in putting forth Tyler's arguments, but the above was my take away.

He references the work of Jonathan Huebner in attempting to quantify innovation rates, and put forth the argument that things are ugly from 1955 onwards. I believe there are major problems with Huebner's methodology despite a laudable effort, including a very subjective measurement of exactly what an innovation is by definition. He uses patent data also which while not without problems is at least measurable in some form compared to the other method he uses for counting innovations.

Here is one review of said work.

 Tyler also argues that "current innovation is more geared to private goods than to public goods…with only slight additional benefits to the majority of the population" and that "the basic material accoutrements of life (again, internet aside) haven't changed much since he was a kid."

I don't believe I am wearing a pair of rose colored glasses when I say that there has been tremendous amounts of innovation and technological progress since the 50s in the US with great benefits to large swaths of the population. The progress in integrated circuits and computers alone is absolutely amazing in my opinion. Materials science has also made great strides. Despite the BP mess, the oil and gas industry continues to innovate. These are just some areas I can think of right off the bat. There are many more, but I've got to call it a night soon.

I found the whole line of argument reminiscent of the perennial naysayer Paul Ehrlich.

I'm not sure if anyone else on the list has read the book yet, or has any opinions, but I'd be interested to hear what others think. I believe science and technology have delivered and will continue to deliver advances that improve our lot. I also believe there is plenty of innovation still happening and that will continue to happen which is a net positive to the majority of the population.

May

9

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

source.

Paolo Pezzutti writes: 

I think Europe will be in a serious crisis when a slowdown or recession comes. The system is so fragile and some countries are so close to the edge of non sustainability of debt payment that it is only a matter of time before we see them sink. However, the system is so resilient that you don't know how long this situation can last. I have been betting on this event for months and months now and I have put together only losses on this scenario.

Apr

24

 I just did a quick read of Fisher's Crashes, Crises, and Calamities: How We Can Use Science To Read the Early-Warning Sign s. Although I found it to be light on applied theory, I thought some of the general ideas put forth in it were worth some additional investigation.

He discusses the impact of negative and positive feedback on systems. In really simple terms, negative feedback is generally a stabilizing influence on a system but it needs to be applied quickly as a series of rapid small changes versus a larger more gradual one, and positive feedback near a transition point can cause a system to suddenly change states.

One of the more interesting phenomenon he talks about is the Allee effect in which a population can grow if it is above a certain level, but will enter freefall if it is below that cutoff density. He talks about a problem with flamingos breeding at a certain zoo due to this effect which was alleviated through the use of mirrors to give them the illusion of a higher density.

One of the other areas of interest is the idea of resilience in systems, and the fact that it is the loss of it that leads to rapid state changes in systems as they are more easily pushed through a tipping point. Loss of resilience leads to a system that is slow to recover from an initial assault, and less able to maintain equilibrium after a subsequent one.

He argues that there are 5 key early warning signs indicating a loss of resilience:

1) Increasing occurrences of extreme states

Fluctuations near a critical point can drive huge jumps between alternative states.

2) Fluctuations between different states

3) Critical slowing down

A progressively slower ability to recover from small perturbations as a crisis approaches. Under this section, he mentions Parkinson and his concept of injelititis as a disease that brings down companies. Parkinson's Law and injelititis are a subject worth an entire discussion on in their own right:

4) Changes in spatial patterns

5) Increasing skewness in the distribution of states

He also spends some time on Toynbee and his idea of the life cycle of societies corresponding to a musical rhythm of three and a half beats to the bar. This plays out as a period of initial growth followed by some event that marks an end to growth, and then a three and a half beat pattern of collapse…recovery…collapse…recovery…collapse…recovery…final collapse.

Overall, I found some interesting food for thought here.

Ralph Vince adds: 

Interesting post Dylan, thanks. I would add to this, though, a very simple amendment note– crashes in commodity prices are most often preceded by a contraction in open interest. 

If, in the midst of a price run-up (typically, what we would call a "parabolic-style" run-up, and OI begins to roll over (because a run-up is typically seen with expanding OI), as OI decreases and the price continues its rise, it's about over, and likely to come down symmetrically with how it ran up. I am speaking only of hard commodities here, not financial ones.

Henry Gifford writes:

This is similar to my old trick of watching the thickness of the multiple listings book to gauge interest in real estate, now there are gauges such as average time between listing and sale of property, etc. Proxy for OI.
 

Apr

23

 The enclosed list of best selling books of all time  is an excellent indicator of popular culture I think, and should have interesting market applications. How would one dig down into that, and do you think or do you think it's not applicable?

Steve Ellison writes:

The first thing I notice is what a diverse list it is. The Lord of the Rings is a fantasy book. Think and Grow Rich is a self help book. There are conventional novels, children's books, religious books, and even a book about science by Stephen Hawking.

Charles Pennington comments: 

Who'd have guessed that A Tale of Two Cities is the best seller (single volume) of all time? I didn't even know it was the best-selling Dickens novel, which apparently it is by a factor of 20, since no other Dickens novels appear in the list. That's very surprising; am I misinterpreting?

Stefan Jovanovich writes:

 No misinterpretation here. ATOTC was so wildly popular in the U.S. - like all Dickens' writings - that people in New York and Boston and Baltimore (? not absolutely certain about that one) literally waited at the dock for the packet to arrive from England with the latest installment. One reason Dickens disliked America and Americans is that some of our enterprising ancestors are known to have bought a copy of the latest serial, set it in type over night and had reprints out on the street the following morning for sale - at, of course, a suitable discount from the price of the legitimate copies.

Tale of Two Cities was also the last book that "Phiz" illustrated. Starting with The Pickwick Papers, Dickens has written "monthly parts" that were sold as part of a serial publication. (It literally revolutionized British publishing.) The serials were close to being graphic novels. Robert Seymour, George Cruikshank, and George Cattermole all did illustrations. Hablot Knight Browne (1815-1882) — "Phiz" — did the ones that are best remembered. When Dickens began self-publishing in his own weekly periodicals, Household Words and All the Year Round, Dickens fired his friend as chief illustrator. The parallels with Walt Disney are interesting.

Pitt T. Maner III writes:

In digging down a bit one sees that 3 of the authors, with over 100 million copies sold, are buried within a couple of hundred miles of each other in England (within a shared cultural environment) and that some of their literary themes had connections with class or race distinctions and warfare /murder (Dickens–French Revolution, Tolkien–races of mythological creatures, Christie– see wiki article on And Then There Were None (which originally had a different title and is about murderers from different classes being tricked into meeting on an island and being tricked in some cases into bumping each other off).

There is a whole series of study devoted to the Chinese book Redology and (having not read it), " Dream of the Red Chamber" appears to involve issues of class mobility.

Tsao Hsueh-chin, the author of A Dream of Red Mansions, lived between 1715 and 1763. His ancestral family once held great power. As such, he led a wealthy noble life in Nanjing as a child. When he was 13 or 14, the family was declining and moved to Beijing, where life took a turn for the worse. In his later years, he even led a poor life.Drawing on his own experience, Tsao Hsueh-chin put all his life experiences, poeticized feelings, exploratory spirit and creativity into the greatest work of all time - A Dream of Red Mansions. Drawing its materials from real life, the novel is full of the author's personal feelings filled with blood and tears.

A Dream of Red Mansions is a novel with great cultural richness. It depicts a multi-layered yet inter-fusing tragic human world through the eye of a talentless stone the Goddess used for sky mending. Jia Baoyu, the incarnation of the stone, witnessed the tragic lives of "the Twelve Beauties of Nanjing", experienced the great changes from flourishing to decline of a noble family and thus gained unique perception of life and the mortal world. Revolving around Jia Baoyu and focusing on the tragic love between Jia Baoyu and Lin Daiyu and Xue Baochai against the backdrop of the Great View Garden, the novel portrays a tragedy in which love, youth and life are ruined as well as exposes and profoundly reflects the root of the tragedy – the feudal system and culture.

Found here.

Terrible things can happen if you leave the rich and powerful unchecked and unpunished… is that close to the themes that may be partially beneath the success and appeal of the above best sellers of all time.

The meme being that it will be back to the dark ages of murder and mayhem on earth if government social services are the least bit underfunded and the rich continue to not pay their fair share.

Dylan Distasio writes:

I thought it might also be worthwhile to look at bestsellers by decade. There is a course on 20th century American literature that has been kind enough to share their materials with the interwebs. The full list by decade for the 20th century is at the below link and is worth checking out.

Pitt T. Maner III comments:

In my first paid job as a 12-year old library aide, Agatha Christie made shelving a pile of returned books easy– her works constituted 10% of the pile and were quickly put back with little effort to the same spacious shelf location. I remember reading "Jaws" then, a book hugely popular at the time.

It is doubtful, however, that the Palm Beach socialites checking out multiple Christie books each week would ascribe her popularity to the "Burkean paradigm".

The following is a piece on Christie from a self-described "Wilsonian". Perhaps an example of reading into things a bit too much…the retrospective reasons for success when starting with a point of view.

Her work conforms to Burkean conservatism in every respect: justice rarely comes from the state. Rather, it arises from within civil society – a private detective, a clever old spinster. Indeed, what is Miss Marple but the perfect embodiment of Burke's thought? She has almost infinite wisdom because she has lived so very long (by the later novels, she is barely able to move and, by some calculations, over 100). She has slowly – like parliament and all traditional bodies, according to Burke – accrued "the wisdom of the ages", and this is the key to her success. From her solitary spot in a small English village, she has learned everything about human nature. Wisdom resides, in Christie and Burke's worlds, in the very old and the very ordinary.

Apr

6

Composing in an art studio, I have tried a few ways of showing music alongside paintings. What I am thinking of for the next occasion in June is to put my music on the wall as flattened scrolls, to be read from left to right.

A notice would tell people to text a code to a number, which would result in them automatically being sent an MMS message inviting them to hear the piece on their phone. This would give an immediate, independent and private experience, preferable to the jukebox programs I have been using till now (which needs me there all the time to tell them what to do), and preferable to giving them links to online sources (in the context of an exhibition).

I have found out how to send music files to phones - the missing link for me is how to set up a service which responds to the person sending a text message code, which is common in business (e.g. talk radio auctions "text your bid to this number . . ." so I wondered if anyone on the List can shed light on how to do it.

Another approach which comes to mind involves those mysterious square boxes which look like Aztek patterns, but which I gather enable a smartphone user to point their device at the pattern and then be directed to a weblink, which I would of course ensure led to music - has anyone information about said patterns (I have only been noticing them for a few months)?

Dylan Distasio comments:

Hi Laurence,

I can't really help with your first question, but I can hopefully point you in the right direction on the second.

The Aztec looking patterns you're referring to are what is known as a 3d barcode. There is pay software that will generate these, but it sounds like for your purposes, this free web barcode generator will work. It lets you enter a URL and will generate the corresponding barcode for you to print, copy, etc. When users scan it with their phone camera and barcode software it will translate back to the url.

Hope that helps!

David Hillman elaborates: 

 Not to nitpick nor be contentious in any way, but to be precise, as I wrote Laurence off list this morning, the Aztec codes, including the QR code to which Dylan refers, are in fact what we in the industry refer to as 2D barcodes, i.e., they're constructed to contain data in the X and Y axes and are read by 'imaging' the code rather than 'scanning' it.

The difference is that, in imaging, an image of a 2D code is taken and decoded into digital data, where as in scanning, light emitted by a laser [typically] is shown onto the code, then reflected back to the scanner, where the difference in the reflectivity between the spaces and bars is measured and decoded.

The more traditional barcodes one sees, e.g., UPC codes found on retail product, are referred to as linear or 1D barcodes, i.e., the data encoded therein can be read only along the x axis by scanning and decoding the variations in the vertical bars and alternating spaces.

One might correctly observe that a linear code has a second dimension. Yes, technically, there is the y axis. But, data cannot be encoded vertically in a linear code, thus, we refer to a code's dimensionality by the number of axes along which data may be endcoded and stored. Think of chess. A traditional board has both an x and a y axis. 3D chess, however, having a z axis as well, is played in 3 dimensions. So it is with barcodes.

In addition, there are 'stacked barcodes' which are in fact a series of linear 1D barcodes stacked upon one another along the y axis presenting the general appearance of a 2D code, when in fact, it is not. Because these are 1D, they can be scanned rather than imaged by passing a laser slowly across the code from top to bottom.

There are indeed 3D barcodes, also called "bumpy barcodes", but those must have dimension beyond the x and y axes, i.e., a z axis. Therefore, for a barcode to be 3D, it must be embossed on [or depressed into] a surface in a process called direct part marking, or DPM, so that all three axes are present. 3D codes are then read by special devices designed to detect variation in height as well as along the horizontal and/or vertical axes.

There is another twist, though, which is the addition of color to a 2D barcode, including the QR of which we speak, which gives that code another dimension, however non-spatial it may be. I believe the use of color on QR codes was pioneered by the Denso Corp. of Japan, but I do not deal with them or their products, so I cannot speak informatively to that technique.

The Aztec code in question was developed in 1995 by Andy Longacre [quite a brilliant fellow, btw, a mathematician and pretty fair operatic singer] of Welch Allyn, a company with which I dealt for many years prior to its being subsumed by Handheld Products and that then by Honeywell a few years back.

That code as well as all other varieties are referred to as 'symbologies' and there are scores, some more or less industry specific, e.g., UPC used in retailing, while others are more widely utilized. The most widely used 2D codes are the 'matrix' codes, but Longacre's code, which is now in the public domain, was one of the first.

The advantage of adding a dimension to a barcode, from 1D to 2D, or from 2D to 3D, is that each added dimension greatly increases the amount of data that can be encoded. For instance, while a 1D code may hold 9 or 10 digits in a horizontal inch or two, a 2D code that requires less real estate than a postage stamp may hold 200 to 300 characters, and a 3D code in the same space may contain thousands of characters.

It is also important to understand that while imagers designed to read 3D and 2D codes can read a 1D, a laser scanner designed to read a 1D linear barcode cannot read a code with more than one dimension. It is critical in designing a system or application to ensure that a proper scanner is employed. The consequences of not doing so should be obvious.

That said, as far as I know, there are no smart phones currently capable of imaging and decoding what we in the industry call a 3D code. Given that new technology is released at the speed of light and I am not a telecom guy, there may well be some of which I am not aware. However, there are many phones very certainly capable of imaging a 2D code, including the one I wear on my belt that sports such an application.

The crux of the issue here is that when planning to use barcodes there are a few things of which one needs to be aware.

1. Barcoding isn't rocket science, but it can be complex and takes expertise to get it right. Seemingly inconsequential factors such as too much ambient light, refraction of reflected light, the angle at which scanners are held, inadequate contrast of the bars and spaces in a code, and near-invisible abrasions among many others can all make the difference between success and failure.

2. There are many people, including trained IT folks and engineers, who think #1 is BS. Among these are the many who call a pro to fix what went wrong when they tried to do it themselves and failed. DIY can be frustrating, not to mention extremely costly.

3. There is much misinformation regarding barcoding out there and the lingo is often misused, even by some quasi-professionals.

Otherwise, it appears Dylan has done his homework and the online barcode generator he has referred looks as if it may work nicely for Laurence given one's understanding of what he wishes to do. The only argument I have with the reference is the use of the term 3D barcode instead of 2D to refer to QR, which one sees referenced incorrectly on any number of websites, but it is still incorrect according to AIM [Association for Automatic Identification and Mobility, the preeminent trade organization] standards.

It may seem like a small point, but I make it given the 3 above items and in the hope of saving potential confusion and frustration in Laurence's endeavour, which, FWIW, I happen to think is brilliantly conceived and is something I'd love to experience.

One other thing learned in almost 25 years of doing this. Paraphrasing Dave [Richard Dreyfuss] Whiteman in 'Down and Out in Beverly Hills' speaking about owing his wealth to manufacturing coat hangers……barcoding ain't sexy, but somebody's gotta do it and it keeps a nice roof overhead.

Still, there are wistful moments during which I think it might be a bit more fun and exciting to be an international jewel thief. It's always about risk/reward, n'est-ce pas?
 

Mar

28

 I'm about to sit down to read L'Amour's memoir Education of a Wandering Man. One of the things about this book that immediately appeals to me is that he kept a record of everything he read between 1930-1937 that is available at the back of the book. As someone who loves to read, and also loves lists, it doesn't get much better than this. As an aside, if you're a list fanatic like me, check out Eco's The Infinity of Lists : An Illustrated Essay.

I thought I would share some tidbits on his reading appetite.

Over this 8 year time period, he read 731 books. This works out to roughly:

91.4 books a year
7.6 books a month
1.9 books a week

There are a lot of interesting items on his list. His interests appear to cover a wide range of topics and authors. Everything from detective stories to Nietzsche is on here.

Bo Keely writes: 

Thanks for the reminder & fresh info on L'Amour, who single-handedly thrust me into a lifetime of adventure and escape. My favorite short story is 'the strong shall live' about a cowpoke who gets stranded in the blazing desert near my rancho where one day and night I unintentionally re-enacted the plight and escaped, with a L'Amour tip, by finding a stone cistern of water and spitting guppies, but lived.

Mar

25

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

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

[…]

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

Stefan Jovanovich writes:

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

Dylan Distasio writes:

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

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

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

But concerning this: 

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

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

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

Paolo Pezzutti writes:

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

Ken Drees adds:

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

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

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

 

Mar

10

 This question is for the grain trading experts on this list…

I'm a novice at trading commodities and am still learning the ropes but have been focused on corn and wheat since last June…Please forgive me if this is an incredibly naive question to ask…

I've noticed in the last few sessions that nearby old crop corn has been correcting well off its highs, whereas new crop December corn closing prices have been holding in a very tight range. Does anyone have any thoughts on why this is happening?

I can understand the theory that new crop corn may not move up as much as old crop right now because the total plantings devoted to new corn are still wide open, and the nearby price level is encouraging farmers to lean towards corn when making crop choices for December, I find it interesting that December corn has not really budged downward as old corn has corrected.

Just trying to get ideas on possible explanations and maybe get a meal out of this situation…

Feb

12

 Thought this would be of interest to the Chair and other followers of Captain Pollard…

HONOLULU — In the annals of the sea, there were few sailors whose luck was worse than George Pollard Jr.'s.

Pollard, you see, was the captain of the Essex, the doomed Nantucket whaler whose demise, in 1820, came in a most unbelievable fashion: it was attacked and sunk by an angry sperm whale, an event that inspired Herman Melville to write "Moby-Dick."

Unlike the tale of Ahab and Ishmael, however, Pollard's story didn't end there: After the Essex sank, Pollard and his crew floated through the Pacific for three months, a journey punctuated by death, starvation, madness and, in the end, cannibalism. (Pollard, alas, ate his cousin.)

Despite all that, Pollard survived and was given another ship to steer: the Two Brothers, the very boat that had brought the poor captain back to Nantucket.

And then, that ship sank, too.

On Friday, in a discovery that might bring a measure of peace to Captain Pollard, who survived his second wreck (though his career did not), researchers announced that they have found the remains of the Two Brothers. The whaler went down exactly 188 years ago after hitting a reef at the French Frigate Shoals, a treacherous atoll about 600 miles northwest of here. The trove includes dozens of artifacts: harpoon tips, whaling lances and three intact anchors.

The discovery is believed to be the first of a Nantucket whaler, one of an armada of ships that set sail during the early 19th century when the small Massachusetts island was an international capital of whaling. It was a risky pursuit that led sailors halfway across the world — and sometimes to the bottom of the sea.

"Very little material has been recovered from whale ships that foundered because they generally went down far from shore and in the deepest oceans," said Ben Simons, chief curator of the Nantucket Historical Association. "We have a lot of logbooks and journals that record disasters at sea, but to be taken to the actual scene of the sunken vessel — that's really what is so amazing about this."

The discovery was, in some ways, as fortunate as Pollard was cursed.

The Two Brothers — which was bound for the newly opened Japan Grounds after whalers had fished out the Atlantic and parts of the South Pacific — was long known to have sunk on the night of Feb. 11, 1823, off the French Frigate Shoals.

Full article at NYT.

Feb

12

I found a very inspiring poem today, but alas,it was uncredited. I found so many lessons in life as well as markets that I felt compelled to share it.

If you think you are beaten, you are;

If you think you dare not, you don't.

If you'd like to win, but think you can't

It's almost certain you won't.

If you think you'll lose, you've lost.

For out in the world we find

Success begins with a fellow's will:

It's all in the state of mind. 

If you think you're outclassed, you are:

You've got to think high to rise,

You've got to be sure of yourself before

You can ever win a prize.

Life's battles don't always go

To the stronger or faster man,

But sooner or later the man who wins

Is the man who thinks he can.

Dylan Distasio comments: 

Thanks for sharing, Jeff. The author is Walter D. Wintle.

Feb

3

 Raven minds are capable of all manner of sophisticated ploys and deceptions and signaling at a distance over time.

Here is a link to a 2010 film about the man who has spent quite some time amongst ravens and who has researched and written about their keen intelligence.

"AN UNCOMMON CURIOSITY: at home & in nature with BERND HEINRICH" follows Bernd Heinrich, one of the world's most insightful and original biologists, over the course of a year as he reflects on his past and shares his ideas about nature, science, art, beauty, and writing. Heinrich has been both a Guggenheim Fellow and a Harvard Fellow, and has been awarded two honorary doctorates. Considered by many to be today's finest naturalist author, Heinrich has written 18 books on various aspects of the natural world and published numerous scholarly papers, professional book reviews, book chapters, and articles for magazines and newspapers as diverse as the New York Times, Outside and Runners World. In addition to his scholarly work he is a world-class ultramarathoner currently holding a U.S. 100-mile track record.

Dylan Distasio adds: 

this isn&#8217;t happiness."

Although I have not had the pleasure of seeing this film (I didn't realize it was out there, thank you, Pitt!), I would also highly recommend his books, especially Mind of the Raven, since we are on the subject of birds. Raven's are arguably one of the smartest of all birds, and are able to solve puzzles that even many mammals would have trouble with.

I especially enjoyed his other book Winter World, about the ingenuity of animal survival about how various creatures make it through a tough, lean winter.

Totally unrelated, but on the subject of Scott's favorite nuisances, I saw a coyote walking on the snowy tracks of my Metro North train station earlier this week here in Connecticut. The air was cold and still and the moon and what I assume was Venus were up in the pre-dawn sky. The coyote was skulking nervously southwards down the opposite tracks. He stopped to stare at me for a few moments before resuming his nervous journey. I've also seen a beautiful red fox in the warmer months hanging around our birdfeeder looking for a quick meal. Quite a menagerie here in suburbia.

Jan

27

I'd like to share this thought provoking article, "It's Time to Make Insider Trading Fully Legal":

The newspapers in recent months have been full of bombshell stories about insider trading on Wall Street. According to an account in the Wall Street Journal, "the investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in US financial markets, including new ways nonpublic information is passed to traders through experts tied to specific industries or companies." The basic argument made against what its detractors call "insider trading" is that the ability to act on nonpublic information creates an unlevel playing field that decreases faith in the stock markets themselves. If access to information is made equal, small investors will allegedly feel more comfortable placing their savings in the markets.

One problem with the above theorizing is that what most deem "insider trading" has never been defined by lawmakers or the courts. Worse, not considered enough is how both the economy and investors are harmed when necessary information is obscured, thereby perpetuating unrealistic share valuations.

Ultimately, it should be said that to ban insider trading is to block use of the very information necessary for markets to function properly. The better solution is to cease prosecution of what is already vague, and in the process reward market sleuths whose efforts will ensure properly priced shares, and in the case of poorly run firms, no further waste of capital.

Read the full article here

Dylan Distasio replies: 

I would assume the author of this article is attempting to ignite a controversy, but I will go a head and take the bait… He writes:

One problem with the above theorizing is that what most deem "insider trading" has never been defined by lawmakers or the courts. Worse, not considered enough is how both the economy and investors are harmed when necessary information is obscured, thereby perpetuating unrealistic share valuations.

To this I would reply: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." or perhaps in the vein of Stewart "I know it when I see it."

Here's an example of what I'm referring to, although in this case, it's a goose not a duck:

Insider trading is an economic plus. Arguably the greatest reason that governments should encourage insider trading has to do with economic growth. To put it very simply, we live in a world of limited capital, and insider trading ensures that share prices will reach fully informed levels as quickly as possible.

To encourage the opposite, as in making insider trading a crime, is to delay the happy process whereby companies achieve a fair price. To the extent that market altering information is kept from reaching the marketplace, companies doing what investors want will necessarily not receive as much capital as they otherwise might. Poorly run companies will receive more capital than they can efficiently use.

This is a laughable justification…Insider trading doesn't help share prices to "reach fully informed levels as quickly as possible." It helps the few with privileged information line their pockets in an unethical manner. The fact that it is insider information by definition dictates that it is not being disclosed publicly and thus does little to allow share prices to quickly reach a new equilibrium. A public news release that a company didn't get expected FDA approval for a new drug, as in the recent case of MNKD helps the stock reach a new equilibrium rapidly.

Hypothetical insiders quietly dumping their shares and trying to cover their tracks as best as possible ahead of a news release serves no one other than themselves (This comment is not in reference to MNKD).

I thought I had seen everything until I read this article, I apologize in advance for feeding the troll.

Rudolf Hauser writes:

An officer or director of a company has a fiduciary duty to represent the interests of the company's shareholders. As such they should not be allowed to use material information about their companies that has not yet been reported to the public and shareholders for their personal advantage in changing their position ahead of shareholders in response to either good or adverse developments. Such insider trading should be subject to breach of fiduciary duty legal actions to reclaim an any advantage plus punitive damages. Given that a company with many small shareholders might not find it advantageous on an individual basis to sue the SEC should have the power to sue on their behalf. Those involved in arranging deals, etc. likewise have a fiduciary duty to the companies involved as their clients not to act on such information. This is what the law would look like if I were writing it.

When it comes to others who are not in a position of fiduciary duty, I too would not make such use of non-public information illegal. If the news is positive it provides the seller with a better price than he or she would otherwise have–which helps rather than hurts them. Likewise, with regard to such selling on non-public information, the investor intent on buying receives a lower price–which again is to his or her benefit, not detriment. The only ones who might be hurt are those who might decide to act based on the new price before the full impacts of the developments in question are reflected in the stock price. I would guess that the former are more likely than the latter instances. The wider the scope of what is called insider information, the more nebulous the concept and the more it discourages analysis. For example, if one has many industry contacts who can provide a feel for industry trends without any providing what would be considered information in itself, at what point does the interpretation of the law become so broad that having such a information network is itself considered inside information? The regulators have a tendency to try to keep expanding the reach of the rules they impose.

But of course, I am not the one writing the laws. So whether good or bad, the law is what it is and should be followed until such time as it is changed by proper legal process.

Jan

18

I am reading "Battle Hymn of the Tiger Mother," the book excerpted in the WSJ article for which Mr. Coyle kindly posted a link. Aubrey is taking Mandarin from a disciplinarian Chinese native, and I said I'd be interested in her opinion. Her reaction to the article: She was furious. She had grown up under just such a mother, and it wasn't a happy memory. Her mother would say, "I would rather have given birth to a piece of roast pork than you" to shame her, and the recollection still stung, years later. We may admire the Chinese kids for their "A" report cards, but they in turn envy the American ability to think "out of the box," innovate and found big enterprises.

I like Ms. Chua's style, and the book certainly is thought-provoking. I agree that the best way to self-esteem is to master a skill. However, the short biography she provides in the book provides an unwitting clue as to the drawbacks of the Chinese approach. At Harvard, she was unable to ask questions in class, as her instinct was to simply take notes on everything the professor said. When it came time for a job interview for a Yale professorship, she found herself tongue-tied and wasn't hired. (She did get the job seven years later, after writing a cutting-edge book on how ethnic conflicts doom democratic majority rule in the Third World.)

Dylan Distasio comments:

David Brooks responds to Amy Chua with piece titled "Amy Chua is a wimp ".

I have the opposite problem with Chua. I believe she’s coddling her children. She’s protecting them from the most intellectually demanding activities because she doesn’t understand what’s cognitively difficult and what isn’t.

Practicing a piece of music for four hours requires focused attention, but it is nowhere near as cognitively demanding as a sleepover with 14-year-old girls. Managing status rivalries, negotiating group dynamics, understanding social norms, navigating the distinction between self and group — these and other social tests impose cognitive demands that blow away any intense tutoring session or a class at Yale.
 

Jan

12

 For those with more than a passing interest in the history of exploration, I would highly recommend checking out Howgego's four volume magnum opus the Encyclopedia of Exploration. For those unaquainted with him, he's a retired physics teacher who has spent the past 15+ years researching the history of travel and exploration. While no encyclopedia can be perfect, the amount of quality work put in by one man amazes. In the age of wikipedia, this collection demonstrates why there will always be a place for meticulous research.

The collection is broken down into 4 volumes:
Part 1 covers up until 1800.
Part 2 covers 1800 to 1850.
Part 3 covers 1850 to 1940 (Oceans, Islands and Polar regions)
Part 4 covers 1850 to 1940 (Continental exploration)

The sheer scope is improbably hard to imagine, and the writing is very well done for an encylopedia. There are also tons of citations.

For those who just want to dip their toes into the waters, Howgego also has a very nice condensed volume called The Book of Exploration which highlights 150+ of his favorite explorers and includes maps, etc.

More info from the publisher can be found here.

Jan

2

 There is something about True Grit that is truly loathsome. Each of the 3 main characters is deeply flawed. Marshall Rooster Cogburn is a drunk and dead beat who speaks unintelligibly. Texas Ranger LaBoeuf is a show off, loser, and a chauvinist. The girl is sharp tongued, litigious, and naive (no wonder she didn't get married). It all fits in with the idea that has the world in its grip, that the purpose of life is to keep oneself small by sacrifice. There is no chemistry or romance between any of the characters except for Pepper the Quixotian leader of the outlaws, who as could be predicted was the only man good in his every day business of being a outlaw. No wonder this Western follows the code of the west breaking, denigrating Brokeback Mountain and no wonder that Louis L'Amour's novels have sold more than all western authors combined since the beginning of time, and that they dare not make one of them or an Atlas Shrugged, in favor of this disrespectful Portis trash that violates all the rules of good mystery by having one hair breadth, extraordinary, lucky escape after another, and stereotyped snake bite scene (a la Larry Mcmurtry) release the tension.

P.S I have never written about a subject not directly related to the multivariate analysis of time series that Mr. Jovanovich has not corrected and amplified on where I was astray. And I must admit that I didn't realize that the Western Novel was yet another of his expertises. Okay, I want to know from him if he agrees with me, on this one point that Monte Walsh is the greatest western novel, (if the chapter where the accountant comes to reduce the pay of the hands that took vengeance on the trainmen doesn't make you cry, I'll eat that hat the accountant wore that was so tempting to Hat, Cal and Monte), and the best business novel of all time.

Stefan Jovanovich replies: 

Grub street used to honor the basic code for reviewers: read the book first, then slander the author. We should do the same. Portis' book is like neither of the movies; the John Wayne version comes much closer in spirit, but it is still far, far too "nice". The actual novel is a memoir written by a tough-spirited, one-armed spinster Presbyterian capitalist remembering the one man whom she loved and how they avenged the murder of her father when she was– by other people's standards– "still a girl". Blaming authors for what Hollywood makes of their books is like blaming men for the conduct of their ex-wives after they finish paying the alimony; all the authors can be held accountable for is the size of the check they cash.

I am old enough to have lived near (but definitely not in) Beverly Hills when Louis L'Amour still gave readings at the library. He was a great and good man, and– yes– Monte Walsh is the classic. As is often the case, my anger is misdirected; what infuriates me about this latest version of True Grit is what is says about the Coen brothers' decline and fall. The novel will survive their abomination of it; hell, it will probably be reread again. But for the Coen brothers, what hope is there now? Intolerable Cruelty is the best and funniest film ever about Hollywood and lawyers and now the guys who made it can only do splatter trash.

P.S. Eddy just called. She thinks our only hope is to pray that South Park's explanation once again holds true and blame it all on Matt Damon and his friend. 

Dylan Distasio writes: 

At the risk of raising some hackles, I'd make the argument the McCarthy's "Blood Meridian or the Evening Redness in the West" is one of the greatest Western novels in that genre and one of the best I've read from 20th century authors in general.

J.T Holley writes:

If you like Blood Meridian then go read Suttree. IMHO, it is an existential masterpiece. Cornelius being a man of the "made, trust-fund baby, life of given not earned goes to be a fisherman in TN. Though the content could be considered as a rebellious misguided stab at the establishment, I found it a read that was of self-introspect, self-realization, self-reliance while battling vices with choice by going to the extreme to find such. Once again not oft mentioned amongst Cormac's works, I feel it is one of my favorite reads to crack open and read again. I'm a Southerner so the read is much suited to me, so some of the "in between the lines" stuff might not be appreciated.

Jim Wildman writes: 

My personal favorites in the Western genre.

"The Virginian" (Wister) if for no other reason than "Smile when you call me that"…and the baby swap prank.

"A Man Called Noon" (L'Amour) always makes me think about how I define who I am.

In "The Last of His Breed" Mr L'Amour applies similar themes from his Westerns to modern times. For my taste, the book is a bit long, but in fairness, it takes a while to walk across Siberia. And it has a great last line.

Trader Craft comments: 

Another great classic of the West is Thomas Bergman's "Little Big Man". Much better than the Dustin Hoffman movie.

Scott Brooks writes:

 As one who doesn't read a lot of westerns, (and I'm sure the purist will scoff at me) I have to say that Larry McMurtry's, "Lonesome Dove" is my favorite of that genre.

Good guys and bad guys. Multiple story lines all intertwined. Sudden and unforgiving death. Fortunes made and fortunes lost. Adventures piled on top of adventures. Good choices and bad choices. Friendships that are strong, but that don't override honor. Human foibles that override honor to do what is perceived as the "right thing". False friendship's that never were except to be used as seen fit by the "user".

Story of youth and aging and lesson's learned, lessons shared and lesson's taught. Love found, love spurned, and love lost. The superficial wannabes intermingled with the intellectual drivers. The high self esteem and low self esteem of characters revealed for the world to see.

Characters that arrive unexpectedly and stay and others that depart just as unexpectedly. Ego's that clash and feelings that are hurt. Life and time wasted on loves that can never be.

High risk adventures fraught with deadly consequences. People that love risk, taking more and more risk because the downside never happens to them…until it does.

Their are cowboy versions of "Eddie Willer's" (hard working and reliable) tying their horses to the wagon's of cowboy versions of "John Galt" (hard working reliable, but intellectually superior)…..but in a much more realistic sense….i.e. there's no mythical "static electricity generator" or "nearly infallible hero's"….just really smart people who make more good decisions than bad decisions…but who make bad decision…sometimes with catastrophic consequences.

I could go on and on, but something has just struck me as I write this general description of "Lonesome Dove"…..am I describing a Western Novel, or the modern day "Spec List".

Jack Tierney writes:

The Chair's mention of L'Amour reminds me that I've neglected to comment on the man's autobiography, "The Education of a Wandering Man". Unpublished during his life, the manuscript was found in his desk only later. The author of the Introduction speculates that L'Amour purposely put off publication fearing charges of braggadocio.

After reading the book, it's a possibility. For many years he kept a written record of the books he had read– the selections are so diverse and numerous that it's impossible to pigeon-hole his preferences or determine how he found the time.

Because of finances, he left home at early and, Hoffer-like, rode the rails in search of employment. He also shipped out for as many foreign ports as he could find, baby-sat an abandoned mine for three months in the middle of nowhere without any human contact, and took up small-town prize-fighting when he really needed money and the locals really needed a fight.

But no matter where he was or how broke, he always had books. If there's any drawback in his story it's the realization that one could have read much, much more if he hadn't been sidelined by trivialities.

Pitt T. Maner III writes:

 It looks from L'Amour's autobiography that, from the years from 1930 to 1937 in particular, he tried to read approximately 100 books and plays each year. They were not what you would think a man writing Westerns would be reading.

Not a bad New Year's resolution if one has the time. It takes discipline too.

A quick perusal indicates he liked to read several books by one author or playwright that he liked within each year. Certain themes or genres captured his attention. Perhaps he was buying books in bulk or series from bookstores.

In 1930, for instance, he read many of the plays of Eugene O'Neill. In 1931 he read Flaubert. Shakespeare and Detective stories were popular with L'Amour in
1932. It looks like works by H.G. Wells and Conrad were favorites. L'Amour's lists are interesting because there are many books included that are not commonly read these days.

For instance "Trader Horn" by A.A. Horn and Ethelreda Lewis was a book made into a movie with filming done in Africa under extremely difficult conditions (they don't make movies like the used to).

The world was less explored and a bit more mysterious just 80 years ago.

The best writers often do a tremendous amount of critical reading and know a little bit about a vast array of subjects— even things that would be considered controversial today.

Dec

31

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
0.050.

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,

Dan 

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):
37.84
15.83
7.20
25.97

.451

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.

Warmest,

William

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: 

 RTP
TSO
SLV
LVS

Evenly between the 4 (25% each)

Sushil Kedia predicts:

 Short:

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,

Regards,

Alan

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

POT
MS
CME

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.

Cheers,

Gibbons

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)

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

Long:
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: 

Financials:

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.

Metals:

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.

Energy:

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.

Agriculture:

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.

Music:

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.

Other:

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.

Sincerely,

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

WILD CARD
3 JAN BUY PLATINUM and hold to end of year.

RATIONALE:

. 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:

Buy:
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:

Buy:

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
vigilantism)

Nov

29

 Hi all,

Hope everyone had a great Thanksgiving… I was just wondering if there are any electronics aficionados on the list.

I've been working with an amazing little gadet called the Arduino which can be programmed to control a wide variety of devices, and have also been soldering some kits together like this one.

I am still very new to this stuff though, and was wondering if any readers had advice for a beginner including potential recommendations on books or websites for learning more.

Thanks, Dylan

Nov

13

 Do you all have any suggestions for childrens money books? Any ideas for a ten year old? I read The Richest Man in Babylon when I was 22– if that gives you any idea on the lack of money/market books in my young life.

Alan Millhone writes:

The money books I had when ten were by Whitnam, and there were slots for collecting dates of Lincoln pennies and buffalo nickels and mercury dimes etc.

Dylan Distasio responds: 

Hi Alan,

Thanks for bringing back some wonderful childhood memories for me. My father passed on coin collecting as a hobby to my brothers and myself when we were children. I haven't been very active with it as an adult, but I used to love sorting through change bags from the bank in search of silver coinage or old pennies to fill my Whitman coin folders. I grew up in the 80s when you still had a chance to come across some silver ones (granted they were not in very good condition). I also have some old Morgan heads and other assorted issues. One of my favorite coins as a child was the "steel" penny from 1943.

More recently, I've collected proof sets of the state quarters series, although not for hopes of financial gains, I just love the look of a proof struck coin and find the state quarters interesting.

Sep

30

 I really enjoyed Maker Faire! There were a ton of great activities, lectures, and geek gear. I was really encouraged to see the amount of young people there who were enthralled by science and inventing, and also appeared very eager to learn.

We hear so much about the decline of US competitiveness in technology and entrepreneurship, and the lack of interest in the sciences. Compared to the dark mood currently hanging over our great nation, this event was a much needed breath of fresh air for me. I saw rows of eager young kids attending workshops to learn how to solder and build what might have been their first electronics projects. Others were learning how to put together tiny BEAM bots. There was a sense of wonder in the air, which filled me with excitement and brought me back to my own early days of discovering the sciences as a child. Who knows what kind of fires these early sparks will lead to, and what amazing new technologies one of these kids may eventually come up with?

I got to finally see 3D printers first hand, that while not perfect compared to commercial models, may usher in a personal manufacturing revolution. For a relatively inexpensive amount, you can build your own completely open source 3d printer that allows you to make objects from different materials in a matter of hours limited mostly by your own imagination and ingenuity. Nigel could print his own custom designed chess pieces!

I was lucky enough to see a lecture from the creator of the Arduino, an inexpensive, powerful, easy to program chip with an assortment of customizable input/outputs that empowers tinkerers, artists, scientists, and others to come up with and control amazing creations.

One of my favorite talks was by a gentleman who had created a locked puzzle box as a wedding gift for a friend that would only open in a specific place to reveal its contents using an Arduino and GPS component.

I also got to see how to do some easy home electroplating which will make a great demo for my daughter when she gets a bit older.Finally, I treated myself to a kit to build an Ice Tube Clock for my next electronics adventure in the Maker Tent which had tons of interesting stuff to peruse and purchase.If any of this sounds interesting, I'd highly recommend checking out their magazine.

It was a wonderful day! As I left, my only regret was that I could not see everything they had to offer. I left full of hope for the next generation of inventors and entrepreneurs, and I loved the Jet Ponies!

Sep

21

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

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

Anatoly Veltman comments:

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

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

Ralph Vince writes:

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

Larry Williams observes:

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

Dylan Distasio asks:

Hi Vic,

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

Larry Williams attempts an answer:

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

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

Sep

9

 No doubt there's plenty of market lessons across the board in this lot. The ten bloodiest bed time stories :

Remember the cosy nights of your childhood tucked up in bed as mummy or daddy read you softly to sleep?Well have a read of this lot and you may discover that the tales you remember fondly are actually pretty gruesome.
From the Little Mermaid's suicide to Geppetto the child hating carpenter in Pinocchio, the shine applied to the Disney adaptation wears off upon closer inspection.

Tales of fathers selling daughters, matricide, serial wife killing and cannibalism. Sleep well children…

Kevin DePew writes:

My wife recently brought home a "classic Sesame Street" DVD from NYPL for our two-year-old. The beginning had a stern warning: "For Adults Only. These early 'Sesame Street' episodes are intended for grown-ups, and may not suit the needs of today's preschool child." So we looked it up and found this Virginia Heffernan review from the NYT from 2007:

"The old "Sesame Street" is not for the faint of heart, and certainly not for softies born since 1998, when the chipper "Elmo's World" started. Anyone who considers bull markets normal, extracurricular activities sacrosanct and New York a tidy, governable place — well, the original "Sesame Street" might hurt your feelings."

Well, it's true that bull markets no longer seem normal.

Dylan Distasio writes:

I have a nice illustrated hardback of DER STRUWWELPETER, one of the darkest of the German books of which you speak that I am planning on introducing my daughter to…A free illustrated English version is available online on Project Gutenberg.

Victor Niederhoffer comments:

The literature on why children should read horrible stories is pretty voluminous and convincing. German kids are exposed to particularly horrible stories. I had the pleasure of receiving the original of one that he invented and illustrated for his family from the great MFM Osborne as a token of esteem for Gail, my first wife.

Aug

26

A very interesting article:

It's a mystery that presented itself unexpectedly: The radioactive decay of some elements sitting quietly in laboratories on Earth seemed to be influenced by activities inside the sun, 93 million miles away.

Is this possible?

Researchers from Stanford and Purdue University believe it is. But their explanation of how it happens opens the door to yet another mystery.

There is even an outside chance that this unexpected effect is brought about by a previously unknown particle emitted by the sun. "That would be truly remarkable," said Peter Sturrock, Stanford professor emeritus of applied physics and an expert on the inner workings of the sun.

Aug

26

 For anyone interested in learning more about what life is like inside North Korea, I'd highly recommend checking out "The Aquariums of Pyongyang" written by Kang Chol-Hwan who after returning to North Korea from Japan with his affluent family who dreamed of a Communist utopia, ended up in the Yodok concentration camp at the age of 9.

It's a heartbreaking description of his 10 years of internment there. He eventually escaped North Korea and even met with Dubyah.

It's available on Amazon and well worth checking out in either book or Kindle format.

Aug

16

 I introduced my 28 month old daughter to the Wizard of Oz recently, and we spent the morning watching the entire thing on Blu-Ray. It's hard to believe this movie was made 71 years ago! The Blu-Ray video and audio quality, by the way, is phenomenal. Warner did not skimp on the transfer; the technicolor pops off the screen, and the sound is crystal clear.

It is hard to imagine what this film must have been like to produce. The movie was shot with a film speed of ASA 8! As a result, the amount of lighting required almost defies the imagination, resulting in 100 degree non-air conditioned sets with most of the actors in heavy makeup and costumes. The cameras at that time weighed 500+lbs which presented a challenge for any type of shot where they needed to move. Early Technicolor shot colors differently from their underlying ones, so the ruby slippers and yellow brick road had to be tweaked painstakingly to find the right tone. The sheer number of custom costumes that needed to be designed and created is rarely tackled in a modern day feature.

Amazingly, Over the Rainbow was almost cut from the final movie! It may sound corny, but every time I hear Judy Garland singing that piece, I'm moved and saddened.

Anyways, my daughter is absolutely in love with the movie. I don't necessarily expect her to take away any messages from it as this age, but I think there are worse things to teach a child about than the importance and true meaning of brains, heart, and courage.

I've seen the WOZ many times at this point, having grown up with it on television as a kid, and now that my daughter is hooked on it, I'm sure they'll be more viewings than I care to imagine, but it never gets old. It's a great story, with fun musical numbers, and amazing production values.

I'd recommend giving it a viewing if you haven't watched it lately. The 71st anniversary just passed, Google had a cool homage for the day. My recent viewing has also re-ignited my interest in reading the original novel which somehow I have never done.

May

23

loukoumiMy best friend is Greek and has been in Greece for a month. He always brings me back some Loukoumi (a cheap dessert to offer your company). He was told that most likely he would not be able to bring any more onto the plane. Reason? Its texture resembles C4! Anyway he brought me a small bag packed in his luggage. I can taste the Rosewater as I savor a piece. He has bought at the same shop in Athens for many years. It comes loose in pieces surrounded by powered sugar and in a paper bag. I love the taste and texture.

Dylan Distasio writes:

On the other side of the aisle, they call these Turkish Delights. When I was in Istanbul many years back, the young children would peddle these to tourists. I am a fan also.

Alan, since you like Loukoumi, I would highly recommend checking out an American variation here. They are absolutely delicious. Our relatives out in the Pacific Northwest ship them out to us as a Christmas treat. 

May

10

 Now here is a good read for keeping a bad trade in the proper perspective– Cormac McCarthy at his best.

With these images in the front of the mind, every living thing looks like the gift of new life, here and now, just look out the window.

Dylan Distasio writes:

If you enjoyed The Road, I would highly recommend you check out McCarthy's Blood Meridian, or the Evening Redness in the West. As much as I enjoyed The Road, I feel Blood Meridian is his best work. It is at the top of my list of favorite books.

This is from the author's website:

Critics have compared Cormac McCarthy's nightmarish yet beautifully written adventure masterpiece, Blood Meridian, or the Evening Redness in the West, with the best works of Dante, Poe, De Sade, Melville, Faulkner, Flannery O'Connor and William Styron. The critic Harold Bloom, among others, has declared it one of the greatest novels of the Twentieth Century, and perhaps the greatest by a living American writer. Critics cite its magnificent language, its uncompromising representation of a crucial period of American history, and its unapologetic, bleak vision of the inevitability of suffering and violence.The novel recounts the adventures of a young runaway, the kid, who stumbles into the company of the Glanton Gang, outlaws and scalp-hunters who cleared Indians from the Texas-Mexico borderlands during the late 1840's under contract to territorial governors. Reinvisioning the ideology of manifest destiny upon which the American dream was founded, Blood Meridian depicts the borderland between knowledge and power, between progress and dehumanization, between history and myth and, most importantly, between physical violence and the violence of language.

May

10

 For those interested, PBS is running a 2 hour documentary on the history of whaling titled "Into the Deep" tonight, Monday 05/10/10.

The focus is one that should be familiar to readers of this site, the 1820 wreck of the Essex by a sperm whale, but it covers the history of American whaling up until its decline post-Civil War.

Pitt T. Maner III writes:

This was a very interesting and enjoyable program. Thanks to Mr Distasio for the notice. Whalers as explorers, skilled manufacturers, salesmen, and spreaders to some extent of American democracy.

One wonders if we are not nearing the end of the petroleum era now (say 50-100 more years, Peak Oil possibly being close at hand). Ironic that we have a massive environmental release to go out on the tail end. The use of baleen as an almost plastic-like or fiberglass-type substance centuries ago was mentioned. Further googling indicated it was used extensively for awhile in women's hoop dresses. It was valuable material before plastic. Here is a somewhat amusing history from the 1870s NYT.

A strange whaling story was noted in the PBS show–the loss of the last old time US whaling ship The Wanderer in a hurricane in August 1924 after a large, nostalgic crowd came to see it off for a final trip. No crew was lost. But another one not mentioned was the sinking of a whaling ship by a sperm whale just before the publication of Moby Dick. Very strange.

The Ann Alexander was a whaling ship from New Bedford, Massachusetts that was rammed by a wounded sperm whale on August 20, 1851 near the Galapagos Islands. Her sinking may have contributed to the success of Herman Melville's book Moby-Dick. Melville was quite surprised to hear of the above:

For some days past being engaged in the woods with axe, wedge, & beetle, the Whale had almost completely slipped me for the time (& I was the merrier for it) when Crash! comes Moby Dick himself (as you justly say) & reminds me of what I have been about for part of the last year or two. It is really & truly a surprising coincidence — to say the least. I make no doubt it is Moby Dick himself, for there is no account of his capture after the sad fate of the Pequod about fourteen years ago. — Ye Gods! What a commentator is this Ann Alexander whale. What he has to say is short & pithy & very much to the point. I wonder if my evil art has raised this monster.

Letter to Evert Duyckinck, in response to news of the sinking of a whale ship by a whale, November 7, 1851

Melville, as noted in the PBS program, faded as a writer after the publication of Moby Dick and turned to poetry–not very successfully according to some, but he did continue to tackle deep themes and thoughts. One poem on the shark and pilot fish seems apropos (ah but to be a nimble pilot fish and avoid the jaws of Fate!)

The Maldive Shark 

About the Shark, phlegmatical one,
Pale sot of the Maldive sea,
The sleek little pilot-fish, azure and slim,
How alert in attendance be.
From his saw-pit of mouth, from his charnel of maw,
They have nothing of harm to dread,
But liquidly glide on his ghastly flank
Or before his Gorgonian head;
Or lurk in the port of serrated teeth
In white triple tiers of glittering gates,
And there find a haven when peril's abroad,
And asylum in jaws of the Fates!
They are friends; and friendly they guide him to prey,
Yet never partake of the treat -
Eyes and brains to the dotard lethargic and dull,
Pale ravener of horrible meat

—-Herman Melville

May

3

The fitbit--a popular self tracking toolThere is a very interesting article in the NY Times Magazine on quantifying how one's life is spent. Perhaps some nuggets in there applicable to trading:

Humans make errors. We make errors of fact and errors of judgment. We have blind spots in our field of vision and gaps in our stream of attention. Sometimes we can’t even answer the simplest questions. Where was I last week at this time? How long have I had this pain in my knee? How much money do I typically spend in a day? These weaknesses put us at a disadvantage. We make decisions with partial information. We are forced to steer by guesswork. We go with our gut.

That is, some of us do. Others use data. A timer running on Robin Barooah’s computer tells him that he has been living in the United States for 8 years, 2 months and 10 days. At various times in his life, Barooah — a 38-year-old self-employed software designer from England who now lives in Oakland, Calif. — has also made careful records of his work, his sleep and his diet.

A few months ago, Barooah began to wean himself from coffee. His method was precise. He made a large cup of coffee and removed 20 milliliters weekly. This went on for more than four months, until barely a sip remained in the cup. He drank it and called himself cured. Unlike his previous attempts to quit, this time there were no headaches, no extreme cravings. Still, he was tempted, and on Oct. 12 last year, while distracted at his desk, he told himself that he could probably concentrate better if he had a cup. Coffee may have been bad for his health, he thought, but perhaps it was good for his concentration.

Barooah wasn’t about to try to answer a question like this with guesswork. He had a good data set that showed how many minutes he spent each day in focused work. With this, he could do an objective analysis. Barooah made a chart with dates on the bottom and his work time along the side. Running down the middle was a big black line labeled “Stopped drinking coffee.” On the left side of the line, low spikes and narrow columns. On the right side, high spikes and thick columns. The data had delivered their verdict, and coffee lost.

Riz Din comments:

Interesting article. I've tried a few tracking experiments such as strict calorie counting, but it gets really obsessive because it is such an active process (I carried a little pen and pad around with me for a month). At present, logging activities such as time spent doing activity x, foods eaten, exercise taken, etc, has a strong reflexive element as the act of measuring interferes with the normal course of affairs. Even tracking tools on smart phones require a manual input element, which will distort affairs and can burden (as well as enlighten) the mind in many ways. On the upside, this is all great when you are striving to achieve a set goal over a short period of time, just less so when you are just getting on with life and want feedback on yourself. Because of this, I think data driven living will really take off when the data is collected passively and can then be reviewed periodically. I can imagine, for example, a technologically wired up house filled with sensors that silently logs your whereabouts and activities and produces a monthly report.

My favorite realizations from tracking exercises are that I tend to overweight recent experiences, and also that I am often caught in repetitious cycles. Another key benefit is that list keeping/tracking serves as a kind of photo album of memories: I've kept a booklist (in Google Docs) of all books read over the past five years or so, with a simple five star rating system, and by filtering to see my favorites I am able to see what type of person I was and the type of person I may be becoming. All very interesting.

Russ Herrold writes:

Here is an interesting read for those interested in a life ruled by numbers:

"Ubiquitous self-tracking is a dream of engineers. For all their expertise at figuring out how things work, technical people are often painfully aware how much of human behavior is a mystery. …"

This is not specifically applied to numercially driven trading or investing, but the emphasis on accurate and contemporaneously generated records mentioned in the latter pages of the article resonate with what our aspirational selves may seek to attain in the financial markets:

- trade from numerically validated setups ['Past results may not be indicative of future results' vs. 'History does not repeat, but it sure does rhyme a lot']

- do post-analysis on what worked, and when a plan was followed, and when it was not ['If you cannot put a number on it, it is an opinion, not science']

- Kelly criteria for binomial trades; Optimal-F for N-way position sizing; with the known problem of non-Normality of financial markets 

Apr

20

Francis GaltonI have been looking through the book The Art of Travel by Francis Galton for all its ingenious ways of prospering and surviving in African travel with a view to the pure enjoyment of a genius at work, (about the greatest in history), as well as all the things that can help us understand where we stand today in the markets; for example, how to cache a treasure in a tree, how to sleep with a gun by your privates, how silver may be used to start life afresh, of course the herd like tendency of oxen and humans, and the difficulty of finding a leader, et. al.

Dylan Distasio shares:

For those interested in checking it out as an ebook, it is available from Project Gutenberg and also as a free download from Amazon for those with a Kindle.

Jan

6

 I had a lot of interest in Google's Nexus One phone (the Verizon version) going into their presentation yesterday, but based on the limited T-Mobile pricing plan Google is going with, I'm put off. I would like to be able to get a family plan on this phone without having to buy it unlocked at $500+ a piece. Based on current info, this is not possible, at least at T-Mobile. I have concerns that the same single plan will be offered by Google / Verizon.

Basically, you're getting three things with the Nexus One that you're not with the Droid. A great OLED screen, a much faster processor, and Android 2.1. Motorola has already confirmed the Droid will be getting Android 2.1 shortly, so all of the cool OS features in Nexus One will be hitting the Droid with that. I am considering sacrificing the faster processor and more beautiful screen, and go with a Droid. They are available for $120 each right now with Verizon, so it is a tempting offer.

Fish or cut bait…fish or cut bait…

Jun

30

RingI was hoping some one here may be able to help me out. After four years of dating my girlfriend, I have finally decided to ask her to marry me. I am in the early stages of looking for a ring and am obviously wanting to get her the best ring I can. Unfortunately what she deserves and what I can afford are two different things. Therefore my hope is that someone on this list knows someone that would be able to get me some type of deal on an engagement ring. I'm not looking for a hand out by any means, I just want the best value for my money. I'm also looking to get it pretty soon as I believe both of us would like to get married before I leave for Afghanistan next year.  Thank you in advance to anyone who is able to help me out!

Dylan Distasio replies:

Good luck with the proposal! Unfortunately I don't know someone who can give you a deal on a ring. However, I would highly recommend checking out Blue Nile. They have beautiful diamonds at all price levels, quality levels, cuts, etc. at very low prices compared to retail. I am incredibly happy with them from personal experience. I was able to get a very high quality diamond for an engagement ring that my wife is now wearing. They also offer settings if you want to one stop shop. They ship quickly, and the diamond appraised at approximately 50% higher than what I paid. Most importantly though, it is a beautiful stone. My co-worker also had great luck with them. I'm not a Blue Nile shill, just a satisfied customer.

Charles Pennington weighs in:

T BoxBorsheim's is pretty good. With them I don't think you have to worry you're getting ripped off. You can call them on the phone and just talk with them about how much you're thinking about spending, and they'll provide a host of options for you. If you want, they'll even ship one or two out to you so that you can have a look. If they do rip you off, you can go complain to Warren Buffett at the next Berkshire Hathaway shareholders' meeting!

Caution: She may want a ring from Tiffany, even though you both know the extra money is just for the blue box.

Dan Humbert takes an unconventional view:

Don't waste your money on something so ridiculously overpriced as a diamond (especially since you indicate you are short on funds and are off to Afghanistan, meaning you'll have a lot more important things for you and your fiance to spend your limited funds on). If you and your fiance want an engagement ring, cubic zirconiums are nearly as good, and I understand there are now even better man-made diamonds that a jeweler cannot distinguish from natural diamonds — it takes an expert with sophisticated equipment. Exact types and prices are well-covered in the recent book Spent by Geoffrey Miller. No one else will be able to tell, and you and your fiance have no obligation to confess that you were not so wasteful as to buy in to De Beers's monopoly and ridiculous advertising that you should spend 25% (or whatever obscene portion of your year's salary) on the diamond.

Taking it a step further — this being a libertarian-oriented site, why get married at all? You and your love should set the terms of your own wonderful relationship rather than letting the government, courts and lawyers dictate the terms. It's a lot more romantic to voluntarily win each other's love each day, than to be obligated by the government to stay together unless and until expensive and debilitating proceedings involving lawyers and judges allow you to change the terms.

The dissenting view gets support from Kevin Humbert:

Dan offers excellent diamond advice. After losing a number of "real" diamonds to both women and thieves, I decided to look into synthetic diamonds as an alternative some time ago. At the risk of sounding cynical you don't blow through as many ring-requiring ceremonies & occasions as I have without incurring significant financial loss… and that's before the rings are even factored into the equation. Man made diamonds vary wildly in price & quality. Even so, the discount to comparable high quality diamonds is high enough to make something man made a no-brainer for me. As for whether anyone notices if it is real or not, I can't recall having met anyone outside of the jewelry industry who is impressed with a diamond wedding ring one way or the other, either real or synthetic.

But Laurel Kenner interjects:

Gentlemen! A fake gem sends the wrong message. And relationships without marriage usually turn out to be fakes, too. Just ask a wife whether her marriage is real or not.

An anecdote from Chris Cooper:

I once had an employee who had already made a lot of money from stock options owned by her husband and herself as executives at a big tech company. When they got married he told her she could have a one-carat ring now, or for every year she waited he would increase the size by an additional carat. After several years she caved in, and could be seen flaunting a 5-carat flawless solitaire in important business meetings. A stone of that size does tend to attract the eye.

Legacy Daily sends a specific suggestion:

Congratulations! Engagement and marriage are indeed very special life events. I have jewelers in the family who would be happy to help. I just called them to let them know that they might hear from you. Feel free to contact Artinian Jewelry.

John Lamberg looks back:

A word of advice: When your wife to be picks out a wedding ring, no matter what price, run, do not walk, to the counter and purchase it. Do not repeat the mistake I made many years ago and say, “let’s think about it…”. Some mistakes are never forgotten.

Victor Niederhoffer also reminisces:

I bought mine for 25 cents at Woolworth on 86th and Third Avenue. And as the poker player said after he took his real diamond from her the day of the wedding to throw into pot, "she's still wearing it."

Oct

12

bookWhat is most troubling to me about the current situation in the financial markets is the global backlash against the "free" market and what is perceived as capitalism in general. Your average person is so angry right now, and it seems almost inevitable that anything related to the financial markets is going to be torn down and rebuilt in a nationalized or internationalized shell of its former self. Forget the amount of damage that has been done in dollar terms during this decline (easier said then done for some including myself); the real damage is that the image of America's version of market based economies may have been tarnished beyond repair. I hope this is an overly pessimistic view of where we are headed. I have a six month old that I would like to see prosper as she grows; I just can't help but wonder what damage will be wrought by the powers that be with the backing of an angry mob.

I found the below passage from The Road to Serfdom particularly relevant to the $700 billion package handed to Paulson and the Treasury Dept:

What is promised to us as the Road to Freedom is in fact the Highroad to Servitude. For it is not difficult to see what must be the consequences when democracy embarks upon a course of planning. The goal of the planning will be described by some such vague term as "the general welfare." There will be no real agreement as to the ends to be attained, and the effect of the people's agreeing that there must be central planning, without agreeing on the ends, will be rather as if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all.

Democratic assemblies cannot function as planning agencies. They cannot produce agreement on everything — the whole direction of the resources of the nation-for the number of possible courses of action will be legion. Even if a congress could, by proceeding step by step and compromising at each point, agree on some scheme, it would certainly in the end satisfy nobody.

To draw up an economic plan in this fashion is even less possible than, for instance, successfully to plan a military campaign by democratic procedure. As in strategy it would become inevitable to delegate the task to experts. And even if, by this expedient, a democracy should succeed in planning every sector of economic activity, it would still have to face the problem of integrating these separate plans into a unitary whole. There will be a stronger and stronger demand that some board or some single individual should be given power to act on their own responsibility. The cry for an economic dictator is a characteristic stage in the movement toward planning. Thus the legislative body will be reduced to choosing the persons who are to have practically absolute power. The whole system will tend toward that kind of dictatorship in which the head of the government is position by popular vote, but where he has all the powers at his command to make certain that the vote will go in the direction he desires. Planning leads to dictatorship because dictatorship is the most effective instrument of coercion and, as such, essential if central planning on a large scale is to be possible. There is no justification for the widespread belief that, so long as power is conferred by democratic procedure, it cannot be arbitrary; it is not the source of power which prevents it from being arbitrary; to be free from dictatorial qualities, the power must also be limited. A true "dictatorship of the proletariat," even if democratic in form, if it undertook centrally to direct the economic system, would probably destroy personal freedom as completely as any autocracy has ever done.

Source: Illustrated Road to Serfdom.

Bill Rafter adds:

"I see the Fed, the Treasury, the SEC, long ranks of the new oppressors who have risen on the destruction of the old, perishing by this retributive instrument, before it shall cease out of its present use. I see a beautiful city and a brilliant people rising from this abyss, and, in their struggles to be truly free, in their triumphs and defeats, through long years to come, I see the evil of this time and of the previous time of which this is the natural birth, gradually making expiation for itself and wearing out."

My apologies to Charles Dickens (Tale of Two Cities, last chapter, spoken by Sidney Carton)

Oct

10

You may want to whip yourselves up one of these. I am making my wife and myself one for the first time tonight. My arteries are begging for mercy just looking at the pics. Someone has come up with the idea of using grilled cheese sandwiches as buns for a hamburger. I will be adding bacon, of course.

Aug

31

U BoltI have come across several conflicting ideas about the relation of speed and longevity recently. In Eric Sloane, the idea is that the slowest animals live the longest, but several studies show that that the fastest runners live the longest. I wonder how this would be resolved in the real world of markets. Speed and distance, and lifespan would seem to be helpful concepts to untwine.

Dylan Distasio adds:

Typically, larger animals have longer natural lifespans. This is likely related to their lower base metabolic rates (a smaller mammal is going to have a faster metabolism to offset greater loss of body heat). The most obvious analogy would be market cap and the idea that larger companies are slower to shift course.

Another factor is how prodigious the species is at reproducing. High fecundity usually means a shorter lifespan. Is there an analogy to this in the markets? If we use our imaginations, perhaps. Maybe an area of the market with many competitive companies, and a low barrier for entry like the Internet space.

For those who are gluttons for punishment, there is scientific journal article on body size, metabolism and lifespan that may be worth untangling.

Scott Brooks recalls:

I saw a special on either Discovery Channel about heart rate. They did a comparison between many animals and the number of heart beats they had in a lifetime. The one that stick out in my mind was the difference between some kind of mouse and an elephant. The difference in life expectancy was quite substantial in terms of years, but the average number of total heart beats between birth and death was essentially equal.

This didn't hold up for all species, but there were some striking similarities between mammalian species and heart beats.

If this is true, then am I using up my "lifetime heartbeats" each time I work out?

I know that my family doesn't live particularly long, with most dying at or near average life expectancy. I also know that for my entire life, my resting heart rate has been in the upper 80s or low 90s. I've worked diligently to get it lower, but it doesn't come down. When I exercise, I get my heart rate up into the 160s or 170s — if I'm really working our hard, then I'll get it up into the 180s or 190s.

Am I using up my heartbeats?

Marion Dreyfus reassures:

When I worked for the giant ad agency J Walter Thompson, the physican onstaff, with whom I consulted about all of my copy, used to tell me: "I have grown old walking in the funeral corteges of those more fit than I."

Kim Zussman, on the other hand, enjoys frightening people:

Don't forget, the healthier your heart (and the longer you go without heart attack) — the more likely you are to die of cancer.

Low fat diet, exercise, contol of blood pressure/blood sugar, have much bigger effect in forestalling heart disease than cancer.

Jul

10

I personally believe that the Uptick Rule should be reinstated or large money pools will be created to drive stock prices down on selected companies.

Alex Forshaw replies:

Why do you find it ok that speculators drive prices up, but not down?

Sam Humbert counters:

I will show you an article, the subject of which was how CNBC was unknowingly complicit in the fall of Bear Stearns. You might find it informative. 

Jason Goepfert says:

So one of the largest investment banks and securities traders in the nation was taken down because traders didn't have to wait for an uptick to sell short? It didn't have anything to do with the fact that they had bitten off way more than they could chew and should have been deleted as on ongoing concern? That seems a little fanciful to me.

There were hundreds of stocks that were taken off the uptick rule for a couple of years prior to July 2007, in a trial balloon run by the regs. They studied the trading patterns on those stocks extensively compared to those that were still subject to the rule, and found little difference in trading patterns. The rule was not lifted by whim.

With penny pricing, it doesn't take much to get an uptick in a stock. If a large fund(s) really wanted to take down a company, the uptick rule makes no difference. They would just buy a bunch of shares, get the stock on an uptick, then short the hell out of it again. Or buy puts, or any of the other derivatives they have available.

The stock would go to zero whether the rule was in place or not. See Enron et al.

Blaming the uptick rule is lazy.

Sam Humbert  comes back again:

Marty Whitman of 3rd Ave Value Fund has issued a statement in effect also blaming the elimination of the Uptick Rule as one of the factors that the bear raid on Bear Stearns was successful.

I agree with Marty Whitman.

As to driving prices up versus driving them down, there is a difference. Quickly falling stock prices can cause a panic which could cause money withdrawals from some stocks such as brokerage and banking firms, which in turn can cause bankruptcies and job losses. 

Dylan Distasio recalls:

The fact of the matter is that uptick rule was easily avoided prior to its elimination through the use of married puts aka "bullets." When I traded intraday (before the SEC essentially eliminated this use of them in 2003), we used to use them on a daily basis. 

Gibbons Burke also disagrees with the uptick rule:

If all the artificial barriers [such as the uptick rule] are removed the knowledge that stocks are more susceptible to bear raids will temper the irrational exuberance that lofts stock prices far beyond their real value, which causes them to correct just as dramatically.

Wall Street is institutionally bullish, and it extends even to the press covering the street, so support for the uptick rule is understandable, if not reasonable and rational. For example, I know from personal experience that Dow Jones requires all employees to sign agreements when they're hired on to never ever sell short, or be effectively short with options. No one on the entire staff of the Wall Street Journal has any interest in or ability to benefit from stocks going down. It renders the Journal a tout.

Mr. Albert has the day trader's perspective:

1) the nasdaq 100 had no uptick rule for quite a while before the general repeal

2) S stocks on the Nasdaq, certainly the most subject to bear raids as they have much shakier financials and tend to be story stocks, never had an uptick rule since I began trading in 1996

3) none of the SHO pilot stocks was more volatile than the comparable non Pilot stocks (in need to find the acedemic reference but it is there). IMO the specialist system (not the uptick rule) was a stabilizing force in the markets so now we have more vol

James Lackey has seen it all before:

All you get from more rule making, margins, uptick or program rules etc is bigger gaps at opens and closes. Restrict intra day moves and the energy must be transferred somewhere else. 

Steve Leslie updates:

Yesterday the SEC announced that they were selectively reinstating the uptick rule for Fannie Mae and Freddie Mac. Why just those two stocks? I have no idea what this accomplishes other than a symbolic gesture. Could you imagine commodities having a limit up or limit down rule for just corn or beans? Couldn't they just raise the margin requirements for borrowing stocks ? As usual governments are late to the party. Back in 1987 the Government began looking at computerized trading and the use of collars. Of course this was after Oct 19th debacle. Look at Hurricane Katrina and see the government in action during a crisis situation. And yet there are still those who try to tell the public that the government is the solution to its problems. The bankrupt LA Times had a front page article arguing for government intervention in the financial markets, especially subprime. Politicians' cliches include "we can't drill ourselves out of the oil crisis and it is the speculator who is the cause of the problem." They are the ones who need to be ratted out and summarily chastised and shot. And then they use trite phrases like "We need to send a message to these oil companies and the speculator that they are going to be reined in." And then they hold a hearing in front of cameras, ask mindless, rehearsed questions formulated by their aides and attempt to project themselves as informed. Yet they expose themselves as what they truly are. Robots, empty suits whose prime objective in life is to get re-elected and retain their cushy phoney baloney jobs. And Nero fiddled while Rome burned. I think I will go outside and get a breath of fresh air.

Jun

25

Google strikes again. With its huge computing power it is changing the way science is done, according to The End of Theory: The Data Deluge Makes the Scientific Method Obsolete, an article by Chris Anderson in Wired magazine.

Some excerpts:

"All models are wrong, but some are useful." So proclaimed statistician George Box 30 years ago. […] Speaking at the O'Reilly Emerging Technology Conference this past March, Peter Norvig, Google's research director, offered an update to George Box's maxim: "All models are wrong, and increasingly you can succeed without them."

[…]

Scientists are trained to recognize that correlation is not causation, that no conclusions should be drawn simply on the basis of correlation between X and Y (it could just be a coincidence). Instead, you must understand the underlying mechanisms that connect the two. Once you have a model, you can connect the data sets with confidence. Data without a model is just noise. But faced with massive data, this approach to science — hypothesize, model, test — is becoming obsolete.

[…]

There is now a better way. Petabytes allow us to say: "Correlation is enough." We can stop looking for models. We can analyze the data without hypotheses about what it might show. We can throw the numbers into the biggest computing clusters the world has ever seen and let statistical algorithms find patterns where science cannot.

Dylan Distasio replies:

I didn't see any compelling argument in that article that the scientific method is on the verge of becoming obsolete.

While cloud computing can be a great tool for analyzing protein folding or looking for extraterrestrial signals, I don't see how throwing "the numbers into the biggest computing clusters the world has ever seen and let statistical algorithms find patterns where science cannot" is a viable approach.

This sounds like the ultimate in overfitting data (although I guess there is no model!). Venter may have come up with a brilliant software tool for rapidly sequencing DNA, but it's only useful within the context of a genomic model that was built using the scientific method.

I still see noise without a framework to hang the data on, and a testable (i.e., potentially refutable) hypothesis. 

William Smith relates his experiences:

StatsI work with large amounts of data all the time. Failure to understand the mechanism and specify the model form based on the mechanism leads one to make worthless models that fail miserably.

The noise level is very high in these types of datasets. Many "patterns" are just random but algorithms will treat them as real. The "kitchen sink" approach of throwing many algorithms on a cluster of processors at a large set of data is guaranteed to find something. If all that's there is noise, they fit the noise. When tested on new data it had never been exposed to before, the model won't work. I have seen even the most sophisticated machine learning algorithms fail, support vector machines, for example.

I have worked with many modelers who have tried the automated brute force approach and they have never once managed to solve the problem they were working on.

I have built models in the field of chemometrics that I patented which use only two variables because I understood the mechanism. It was an iterative process, and I certainly didn't get it all correct in the first cycle. In fact, I have had some outstandingly stupid ideas. But the process of testing, refining, discarding, and generating ideas is hypothesis driven science, and that is a process which hypster computer scientists cannot perform. Never seen one of those guys capable of doing it in the last 15 years. If this is where Google is going, they are in deep kimchee and wasting a lot of money. Looking for patterns in the hay does not find the needle.

May

27

The argument can be made that a large portion of the current bull run in nearly all commodities can be explained by a combination of institutional asset allocation in commodities as an alternative asset class (some of it via swaps which allow for unlimited position size regardless of physical availability of commodities due to a loophole in commodity trading regulations) and trend followers, with the sick result of rising prices increasing price further in a positive feedback loop.

I'm generally libertarian and anti-regulation, but the use of swaps to get around position limits on a market that arguably isn't equipped to handle assets of this magnitude doesn't sit well with me. I'm all for speculators in commodities markets creating liquidity and assuming risk, but that's not what this institutional asset class is doing in these markets.

Here is a link to some recent testimony (PDF) before the Senate on the subject:

"In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same five-year period, Index Speculators' demand for petroleum futures has increased by 848 million barrels.9 The increase in demand from Index Speculators is almost equal to the increase in demand from China!"

and some other articles on the subject,

Guardian (UK)
LA Times
Business Week

Stefan Jovanovich notes:

There have been only three periods of six months or longer since 1972 when Americans drove fewer vehicle miles than they did a year earlier: (1) the 3rd and 4th quarters of 1974, (2) the 4th quarter of 1979 and all four quarters of 1980, and (3) the 4th quarter of 2007 and the 1st quarter of this year. Six months into both of the prior periods was a close to ideal time to buy US equities, but that may be the result of coincidence rather than correlation. Most things are.

Mar

29

I recently began playing with Evernote, an application for capturing and organizing information featured in Wired recently:

Evernote wants to be a database for every bit of knowledge in your life. It takes all of the digital data you collect throughout your day, both the important and the inconsequential, and stores them in a centrally-located library that's accessible in an instant whenever you need it. The software, which runs on multiple platforms and exists as a web service, collects whatever you throw at it — photos, web clippings, hand-written notes — and indexes everything for you. The result is that your life instantly becomes annotated and searchable. You can tag items and add comments to remind yourself why you saved something. Evernote can even search text and handwriting within photos, thanks to some awesome text recognition capabilities.

It's currently in limited Beta release; if anyone would like an invite, just shoot me an note:Dylan D

Mar

23

DaHRiFDisasters and Heroic Rescues of Florida by E. Lynn Wright recounts the stories of 22 disasters in Florida starting with the Sinking of the Plate Fleet in 1710 and ending with wildfires in 1998 and a constellation of four hurricanes — Charlie, Francis , Ivan and Jeanne — in 2004. Florida is particularly prone to natural disasters because of its geographical position between the Gulf of Mexico and the Atlantic Ocean and its 12,000 miles of rivers and streams. However, the extent and prevalence of the disasters that have visited it seems to go over and above its geographic and geologic characteristics involving what seems to me a manifestation of the kind of character, promotion, and hopefulness that is engendered by warm weather, and extensive beachfront and recreational activity.

The author believes that a common characteristic of all these disasters is carelessness, ignorance, negligence, and greed. I would add that an aura of utopian thinking that nothing could go wrong as well as a lack of appreciation that the same disaster can strike twice,and a failure to appreciate that many seemingly improbably events are linked and that their conjunction is much more likely than normal multiplication of independent probabilities might suggest.

Take the Veterans Rescue Train Wipe Out of 1935 as an example, where 600 veterans imported to build a highway paralleling the Flagler East Coast Railway were drowned by a tidal wave hurricane in a rescue train. There was the utopian idea of creating work by building a public structure with inexperienced workers without local knowledge at the heart, faulty weather forecasts of a tropical disturbance that turned out to be 200 mile an hour winds, the event occurring on Labor Day, when the holiday caused hours of delay in gathering workers to get the train to the Ismeralda rescue site, usually reliable equipment that this time turned out to need repairs, a torn cable that held them to a standstill, a crane that got entangled with the train that took another hour away, and then finally a 20 foot tidal wave that did them in.

Many of the disasters seem to have signaled the beginning of real estate disasters shortly thereafter. For example the Great Citrus Freeze of 1895 came when central Florida and Daytona were in a boom stage with the orange crops adding revenues to the vacation homes and farms in the area. Developers Deland and Stetson were so sure of the boom that they guaranteed all the real estate buyers their money back. But a freeze came on Christmas Day in 1894 and ruined the citrus crops, and then when the growers relaxed, as they at least still had the trees and had lost only their income for the year. But two months later they were visited with an even worse freeze that destroyed all the fruits and seems to have cast a pall on the area. As the Tampa Time put it, "The Beauty is all gone from Florida. Everything is dead."

Similar declines in real estate followed the Capsize of the Prince Valdemar in 1926 in Miami, which seems to have had a direct causal link with the real estate bust in Florida in 1927 and then the stock market crash in 1929, and subsequent Depression. The chain of events is eerily similar to those playing out today, at least to the extent that the real estate bust caused the stock market crash. Perhaps the flooding of New Orleans will be seen as playing a similar role in the recent chain to that of the closing of the Miami Port caused by the Prince Valdemar.

The 22 disasters that are recounted in this book provides a good caution for all investors. Utopian visions have time and time again been dashed. Disasters that seem totally impossible occur with astonishing frequency.

Sam Marx explains:

HurricaneI lived through hurricanes Jeanne and Francis, that were 2-3 weeks apart and made landfall within eight miles of each other. This was a highly improbable event. The hurricanes were Category 2 when they passed over my house, but may have been a low Category 3 (130 mph) when they made landfall.

Because of the new building requirements of 1992, (Andrew was the motivator), the damage to my house was minor.  Most of the damage was to the trees. Records indicate that the last Category 3 in this area occurred over 50 years ago in Jupiter, 20 miles south and none ever recorded north of here in the last 90 years.

The heavy damage occurs on beachfront property, which Florida Governor Charlie Crist now wants to be paid for by all US taxpayers. I live 14 miles from the shore, and with the hurricane history of the area and the new building code I feel safe, but who knows. You take the great weather with the hurricanes.

The safest type of construction is a round house made of poured reinforced concrete with reinforced glass windows on raised ground. The roof is the most critical part of a house in a hurricane and it should be firmly secured to the reinforcing rods in the poured concrete.

Jeff Watson adds:

Sam makes some excellent points about the new building codes that are required in Florida. On my key, just south of Sarasota, there is strong evidence of the new codes that are being enacted. Builders are tearing down the existing homes and building new McMansions, employing much reinforced concrete, and adding elevation. From a visual perception, it is obvious that 200+ mph winds are factored into the designs. The new housing on this key is built on such a grand scale that it has changed the whole vibe of the place. Meanwhile, our 1926 cypress wood Conch House stands out as the lone reminder of what once was. Our cottage has survived many hurricanes, tropical storms, and fires without missing a beat. The designers did a good job on our cottage 80 years ago. The floors were built with a slight peak in the middle of the rooms, to allow storm surge water to run out of the house. Living at the beach, one must appreciate the grand forces of nature, the temporary aspect of existence, and man's insignificance in the whole scheme of things.

John Tierney marvels:

SurgeVic wrote "Disasters that seem totally impossible occur with astonishing frequency," and someone added "All of this drags down property values in storm prone areas of the USA."

Why is this surprising? By definition, a storm-prone area should have lower property values and higher insurance premia. Storms in areas that have been historically prone to them are neither unusual nor disastrous. "Disaster" is a term we apply to occurrences that result in the loss of human life and, increasingly, the loss of wealth. More properly, these are natural and inevitable phenomena — they are, if you will, part of an unbreakable cycle.The cycle may be ever-changing but it is certain that these periodic maladjustments will continue to occur. And those who are uninsured, under-insured, or who paid too dear a price will be hurt — again and again and again.

As it is in nature, so it is in the market. Bad times are inevitable and as fat tails occur with greater frequency than our probability tables would estimate, we must learn to expect the unexpected. We must also realize that government intervention cannot alter the unalterable. On the contrary, intrusive government in its paternalistic actions, encourages re-building where any building, except by those willing to assume all the risks, is inappropriate; and, in the markets, continued Federal action (reaction?), has encouraged the same groups and individuals to rebuild their castles on sandy soil.

Without this insurance, these occurrences would be just as unexpectedly frequent, but less harmful to the general population: the ultimate guarantors of poor fiscal policy. As Davy Crockett, a noted Tennessean, stated of his fellow  Congressmen: “Money with them is nothing but trash when it is to come out of the people. But it is the one great thing for which most of them are striving, and many of them sacrifice honor, integrity, and justice to obtain it.”

Steve Leslie writes:

HurricaneI moved to Florida 25 years ago and have lived in the same town since. I live on the Space Coast, equidistant between Jacksonville and Miami and 60 miles southeast of Orlando.When I first moved here, our city had swinging bridges that spanned the intracoastal waterway. They have long since been replaced with modern bridges. US1, a major thoroughfare, was two lanes and now is six lanes and cannot be expanded further. Most of the beachfront property has been developed and great restrictions have been imposed to slow down further building directly on the beach.

Commercialization on A1A is unmistakable and is beginning to look more like Daytona Beach than the sleepy town of Indialantic it once was. Beach erosion is a real problem and threatens property that has been around for decades. Laws have been passed to reduce lighting on the beach to avoid confusing loggerhead turtles who come ashore to lay their eggs.Wetlands have been exploited by real estate developers, and the challenge is to protect wildlife and retard the erosion of the Florida wetlands. The Florida panther, crocodile and alligator have been threatened species as are many other wildlife. Clams which used to thrive in the intracoastal have long since disappeared.

Probably the most profound real estate phenomenon in Brevard County is the largest manufactured home community in the state. Over 5,500 people who live in manufactured homes there. Many more manufactured home communities dot the county. This is a striking point considering the fact that Florida is particularly known for its hurricanes and unpredictable weather, especially lightning and tornadoes.

Florida is now the fourth-largest state in terms of population. Along with this come remarkable challenges. By all accounts, the trend will continue and populations will rise especially in the Latino community. Despite of what many think, not everyone in Florida is rich. There are vast pockets of poverty, especially in the Miami, Jacksonville and Tampa, that will continue to expand.

Yes, lessons have been learned, new building codes have been imposed, insurance laws tightened, yet it is like the horizon that one never reaches, it merely continues onward. There is a human cost to all thus that just can't be quantified. Yet I live here and this is my home and I will probably stay for some time. I hope I will adapt with the times and not become an anachronism.

Ken Smith extends:

LightningLightning strikes are another hazard in Florida. Discovery Channel once aired a story on a lightning belt in Florida. Government and university research people have placed structures in that belt to study lightning.

I am always excited by lightning storms, thunderstorms. I thought Florida would be ideal for living under them. Once my wife and I sat in our car — rubber wheels supporting us — on a lake in Glacier National Park, and watched a terrible, terrific, astounding display of lightning. Stayed until the little woman got nervous. I understand a vehicle should have a strap hanging from car frame to ground, although I have not researched this necessity.

The most spectacular storms I've witnessed were out in the deep ocean where only lone sailors are blessed with these visions. To see these lightning strikes accompanied by thunderous blasts of sound in the sky and 100 foot waves crashing into your home on the sea, these are ultimate experiences.

Dylan Distasio responds:

I've always loved lightning storms myself also. I remember watching a spectacular one when I was out in Arizona crackle across the wide open horizon.

Another time, I was actually caught in one while camping with my brother on a peak along the Appalachian Trail in Massachusetts, which while breathtaking, was also terrifying.

By the way, you should be fine in a car hit by lightning without a strap (or rubber tires for that matter). A car basically behaves as a Faraday cage where the charge is spread along the outer surface. I remember learning that in a physics class at some point, although I wouldn't want to test it out myself.

Oct

3

I'm walking in a charity event called Light the Night tomorrow night in the NYC location that goes across the Brooklyn Bridge. The cause is leukemia, lymphoma, and other blood cancers which is very close to my heart. I lost my father to Chronic Myelogenous Leukemia when I was a freshman in college, and 18 some years later it seems to be a wound that will never fully heal.

Jul

13

Symmetry is a basic characteristic of the universe and of the markets. Vic and Laurel have raised this concept in music, Lobogola, bridges. Weyl, in his book Symmetry, talks about symmetry in the history of human civilization, and how groups arise in the the study of symmetry. In Strange Curves, Counting Rabbits, and other Mathematical Explorations by Keith Ball, which Vic and Laurel recommended, is a discussion about the decimalization of fractions and how repetitive groups arise in the sequences. The combinations are endless as is the number of primes. There is a whole branch of math called Group Theory. The peculiarity is that a fraction is exactly stated, but most decimalization never are, and our digital computers never arrive at the proper result, only an approximation or rounding.

Such theory can be profitably applied to the markets, as we return to last week's S&P price after a Lobogola move of stampeding elephants charging down, and right back up over the same ground.

Dylan Distasio writes:

There is also a subset of evolutionary theory that points towards symmetry in nature as a sign of health, resulting in improved chances of mating for more symmetrical males across many species. The idea is that symmetry in living organisms requires a great deal of energy to be achieved, and hence the organism must be healthy if it has a pleasing symmetrical shape. And as an added bonus for symmetrical humans of the male (and by extension female) persuasion:

"Experiments have found that women are more attracted to men who have features that are more symmetrical than other men. One study even found that women have more orgasms during sex with men who were more symmetrical, regardless of their level of romantic attachment or the guys' sexual experience." 

As an aside, I would highly recommend "The Red Queen" as a fascinating primer on why sexual reproduction may have evolved as a means of reproducing.

Part of the theory is that plumage and symmetry in birds evolved as a sign of health, making them more attractive to females. It also deals with sexual reproduction as a panacea against the ebb and flow of parasites evolving in a constant battle across time with their host organisms.

I'm not sure what the equivalent of sexual reproduction would be in the markets, but I can see clear analogies between the parasites and market arbitrageurs (no offense intended) who are constantly in search of chinks in the armor of the market, looking for the fleeting free lunch before the opening is closed, and a new one has to be found.

In any case, the book is a great read with a lot of food for thought. 

Jul

12

 I've often wondered why the epithets Bull and Bear are used to describe the particular directions of market movements.

For instance, I have witnessed firsthand how aggressive the Bear is every day, just to survive. The Bull, on the other hand, is lazy most of the day, grazes when he pleases, and is not often dependable on the one thing he is used for: breeding. In nature it seems to me that the Bear is a much more eccentric, powerful, and aggressive beast than the Bull. If I were to use the same epithets for the markets I think I would choose just the opposite of how they are used now.

Scott Brooks comments:

I have wondered the same thing for years. I agree with your assessment. It seems like it should be the other way around. There has to be some kind of a story as to why "Bulls and Bears" were chosen, but I don't know it.

I have looked deeper into this bull/bear dichotomy and have come up with these conclusions. Bears do hibernate each year for a long time. Contrary to what you see on the Discovery channel, bears aren't all that aggressive all the time and are pretty laid back most of the time. They have to work hard for their food, and there is great competition associated with food, and they never know where their next meal is coming from. Further, the fun activities (such as breeding) are highly competitive.

Bulls, which do lay around a lot, are actually pretty aggressive until they've established a pecking order (similar to bears), but then again once that's established they go about living their lives and get along pretty well. But then when you look at a bulls, you are only really looking at a "successful" bull. You see, most bulls are not successful, they're hamburger in your fridge! The successful ones live long prosperous lives, eating good food, getting pampered (by bovine standards), and their most important job is to propagate the species!

Just think about that! It's every school boy’s dream (and middle-aged guy’s dream)! Spend your life being pampered, being fed good food, and hanging out with the guys! And all we've got to do to keep that job is have copious amounts of sex!

I'll take the job of "successful bull" over being a bear any day!

Reminds me of the joke about a father bull and his son standing on top of a hill looking down at a herd of cows. Son says to dad, "Hey dad, lets run down the hill and have sex with one of those cows!" Dad says, "No son, lets walk down hill and have sex with all of them!"

Dylan Distasio notes:

According to Mortimer's definitions, it would appear that "bull" and "bear" had much more specific meanings in 1785 than they do today. A bull wasn't just someone who thought — and hoped — that the market would go up. He was the equivalent of a modern investor who uses margin, and lots of it! The bull of 1785 bought stocks with no money at all and hoped to sell them at a profit before payment became due.

In Mortimer's day, a bear wasn't just a pessimist — he was a short-seller. Mortimer claimed that you could tell bulls and bears apart just by looking at them. It's been 216 years since Mortimer wrote Every Man His Own Broker. But it sounds to me like he could show up on 21st century Wall Street and find his way around just fine. 

Marlowe Cassetti comments:

I remember reading in one of the Senator's books about the "sport" of staging bull and bear fights for the amusement of the early miners and frontiersmen. The bulls would try to toss the bear with its horns and the bear would claw the bull down. Thus the liking of this contest to the early markets. A grizzly contest indeed, then and now! 

May

25

 Remarkably, each of the four days this week the S&P Index has traded above its previous all time high close of 1527.9, but then failed to set a new closing record.

Day High Low Close
Mon 1534 1526.6 1527.9
Tues 1533 1525 1525
Wed 1535.7 1524.3 1525.5
Thur 1532.5 1507.8 1511.6

Note the artful way that the market was able to be down on the week by a hair, as of Wednesday, setting up the longs to increase their positions, only to decline 25 fast points the following day. It would take a Rommel or a Stonewall Jackson to duplicate such cunning.

Thursday had the highest single day range since March 21st; it was up seven by 10 a.m., but then down 18 by 3.40 p.m. (NY time). This is about two and a half times the average range of last year, and shows the usual ability of the market to do the unusual.

Finally, there have been four serious down afternoons, and these are presumably related to the fake Drs. feelings about China … let us hope he visits there for a second time soon, as the first time he was only there for a day (with Paulsen, just 1 year ago). 

From John Floyd:

I think other contributing factors to the market's retreat are also tied to the cycling of rate expectations, economic data, and "carry trades." The beginning of yesterday's sell-off started not soon after the stronger U.S. economic data and coincided with a sell-off in interest rates and carry.

In addition to the Dr.'s comments, who does seem to be losing some of his "mojo," the directive of the latest comments were towards China and the market has disregarded the comments and moved to new highs since them. The overnight price action in carry and Japanese inflation data continuing to border on deflation should make today interesting.

Also of note, combined with other indicators, is that gold last Memorial Day was at roughly the same level and subsequently fell sharply.

From James Sogi: 

Why three times? It's like the old knock, knock joke. Who's there? Always three times of course. Three is the minimum number to create a pattern. "Knock, knock. Who's there? Orange you glad I didn't say banana?" The three tops were also the three-mountaintop candlestick pattern. Seems like the market likes threes. "On your mark, get set, go!" Seems like something deeper, but what? But it's something to ponder over a three-day weekend.

Speaking of weekends, here's a favorite barbecue: Yakitori.

It's great for sitting on the deck because you can eat holding the little stick and still have a free hand for the beverage and you can gesticulate with the little stick to make your points more emphatic. Serve rice of course, or better yet Musubi. Here's how to make Musibi.

From Dylan Distasio:

If you're in the NYC area, check out Yakitori Totto on the West side for awesome organic yakitori and a great sake selection. They actually have an East side location also. My wife and I have eaten at both fairly often, and the food is delicious. They cook most of it over the long slim charcoal grill on skewers, and you can order any piece of a chicken you can imagine (and then some). It's fun to just order an assortment of small skewers and drink some sake. There's a great atmosphere also. I've never been to Japan but it seems pretty authentic. We're often one of the few Caucasians in there; the rest are usually all Japanese-speaking, including the entire staff. I'd highly recommend it. 

John Floyd adds:

Actually if you want sake and good food the other place to try is Sakagura on East 43rd street, in the basement of an office building. There are several hundred of types of sake to choose from, anywhere from a few dollars to a hundred dollars for a masu (traditional wooden box cup). 

May

20

 One of the best things that I've done in my own speculative career is to realize that I am a loser in various niches and to exit those forever.

I retired relatively gracefully from squash after losing for only a year or two. I did the same with fixed income, and after a loss with foreign currencies. Vis-à-vis the latter, I concluded that whichever way I traded the market would go the other way — It wasn't so much a matter of running my stops and taking advantage of my fixed decision making, it was more a matter of the banks making say 300 billion a year from the markets. How in the world is there going to be enough money left over for me to make?

I shudder at how active and how good one has to be at something just to try to stay above water. I would urge all who trade the markets to periodically stop and think whether they have an edge. They should decide if they've made money, taking into consideration all their bad luck and the rule of ever-changing cycles.

The market loves to let you make money on small capital (like they did with the trend followers and so many hedge funds) just so you invest humongous amounts on 'the system that can't fail', only to take you for billions later on.

But of course the rate of return is still positive, and the manager still has 50% of the fund that he owns, since he takes out the fees monthly — the customer takes the losses on the big capital.

If only managers and customers were more humble, more willing to admit that they are guaranteed to lose in certain niches, the public would lose so much less than they have to. Moreover, the world of markets would be a much healthier place, and we would have fewer poseurs and flimflam artists in our midst.

Mark Goulston comments:

This post makes a great point. Here are a couple reasons why people don't cut their losses.

If as right as you thought you were is as wrong as you turned out to be, the fear is that you could be wrong about lots of things.

People confuse making a mistake with being a loser. If, however, you see every loss as a mistake and learn the lesson it teaches, you never have to view losses as a failures, just as lessons.

A friend of mine, Jason Calacanis, who has made and lost lots of money in Internet ventures, told me that if you make a decision that turns out to be dead wrong, recognize it when it is obvious, change direction, and never make the same mistake again. Then you'll be better off than 90% of people.

Steve Leslie adds: 

One of the great lessons in poker is that it is a game of imperfect information. Therefore you have only so much to go on. And you have a very limited time to make decisions, never more than a minute or two at the very most. Now in no limit hold-em this can be a decision that can end your tournament hopes or advance you to the championship.

Once you make your decision there is no going back. You can call, raise, or fold. That is it. And all decisions are binding. Just like trading.

After playing serious poker for a decade, I have made many incorrect decisions. I have also made plenty of correct decisions. But I think I have made more correct ones that wrong ones.

My goal every time I sit at a table is to try and play each individual hand as correctly as I can. Once I decide to play a hand I try to conjure up energy in my mind to focus exclusively on this event, to attack with laser like focus, eliminate as many distractions as possible, and to play within myself. That is all anyone can expect in the game of poker. The rest is a result of mathematics, statistics, and luck or variance. Sometimes you win; sometimes you lose. But unlike baseball you never get rained out. And you accept the outcome.

Finally, after these many years, I believe that my first impression of the correct play is the best one. After observing, calculating odds and my bet, I go with my initial decision. I do not try to talk myself into something else. It may not be the one, but it is the clearest one, the one that has the best vision, at least in my view. And this is the one that counts.

There are plenty of coulda, woulda, shoulda's, but after all it is all part of the game. If it were easy, then everybody would do it and they would be good at it and there would be no value left, or exploitation, or need to try to get better.

Just like trading.

From Dylan Distasio: 

I firmly believe that there is a meal for a lifetime in this post. Even with an edge, beating any particular market average over the long term is an incredibly difficult proposition. Without an edge, it becomes impossible.

Besides gauging the dynamics of a particular market, and examining your edge through experience, knowledge, or other empirical means, I think it's also critical to examine whether a particular style or timeframe of trading agrees with your personality and psychology.

As an example, some people are able to thrive in an intra-day environment, whereas others due to psychological makeup alone may not be suited for this pace of trading despite having the informational tools available to make a go at it.

There are a myriad of timeframes, markets, and methods of trading out there. Finding one that suits you from both an empirical edge and a psychological edge is your best chance at finding long-term success.

The psychological edge, I believe, becomes extremely important during the inevitable draw downs, mistakes, and bad luck that accompany all trading.

Alan Millhone writes:

Would there be any fund managers who would honestly admit in public that they are not making money? The Chair makes a well-founded point for a person to leave alone areas where they are not familiar. I try to stay with areas where I have some knowledge and familiarity. In construction we have two major hospital additions going up as I type. This type of commercial work is out of my realm. I don't have the crew, equipment, or bonding capability to ever consider undertaking such projects.

As Clint Eastwood says, "Man's got to know his limitations." This holds true in the market and with about any other undertaking we can envision in life. Years back I did a lot of work for a local oil and gas business. It was interesting to watch them pour over a map of an area and decide where to drill and then go out and find investors. I think I could have pinned the map to a wall and thrown darts at it and been just as accurate. The owner once told me the definition of an oil well. He said it was a hole in the ground with a bunch of liars standing around the hole looking down into it! 

Mar

18

A Potential Avenue for Further Exploitation of the Halloween Effect:

Abstract: All US stock market sectors and industries perform better during winter than during summer in our sample from 1926-2005. In more than two-third of all sectors and industries this difference in summer and winter returns, known as the Halloween effect, is statistically significant and in half of all sectors and industries risk premia are negative during summer. However, while all sectors and industries show this effect, there are large differences across sectors and industries. The effect is almost absent in sectors related to consumer consumption but strong in production sectors. We illustrate how these differences between sectors might be used to improve the risk return trade off using sector rotation based on Fidelity sector funds and show how an investor might have benefited from such a trading strategy.

Mar

7

Many Eyes is an Internet-based visualization tool created by a division of IBM that I came across in my travels. It allows users to upload and share datasets and visualizations. Some details from IBM's site:

About Many Eyes

Many Eyes is a bet on the power of human visual intelligence to find patterns. Our goal is to "democratize" visualization and to enable a new social kind of data analysis. Jump right to our visualizations now, take a tour, or read on for a leisurely explanation of the project.

All of us in CUE's Visual Communication Lab are passionate about the potential of data visualization to spark insight. It is that magical moment we live for: an unwieldy, unyielding data set is transformed into an image on the screen, and suddenly the user can perceive an unexpected pattern. As visualization designers we have witnessed and experienced many of those wondrous sparks. But in recent years, we have become acutely aware that the visualizations and the sparks they generate, take on new value in a social setting. Visualization is a catalyst for discussion and collective insight about data.

We all deal with data that we'd like to understand better. It may be as straightforward as a sales spreadsheet or fantasy football stats chart, or as vague as a cluttered email inbox. But a remarkable amount of it has social meaning beyond ourselves. When we share it and discuss it, we understand it in new ways. 

Feb

8

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

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

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

Here are a few interesting articles on the subject:

How Great Traders Make Millions in Up or Down Markets 

Does Trend Following Work On Stocks?

Interviews At RealWorld Trading

Why I Don't Believe in Trends

Briefly Speaking . . . 

Bill Rafter writes: 

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

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

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

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

www.mathinvestdecisions.com/Best_4_of_10.gif

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

www.mathinvestdecisions.com/Worst_6_of_10.gif

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

www.mathinvestdecisions.com/Going_to_24_groups.gif

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

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

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

www.mathinvestdecisions.com/Strategic_diversification.gif

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

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

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

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

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

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

www.mathinvestdecisions.com/about.htm

Charles Pennington writes:

Referring to the MathInvestor's plot:

www.mathinvestdecisions.com/Worst_6_of_10.gif :

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

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

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

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

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

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

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

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

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

Bill Rafter replies:

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

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

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

A comment from Jerry Parker:

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

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

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

Victor Niederhoffer responds:

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

Ronald Weber writes: 

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

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

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

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

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

Jeremy Smith offers:

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

Vincent Andres contributes: 

I would distinguish/disambiguate drift and trend.

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

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

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

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

Dylan Distasio adds:

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

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

Jerry Parker comments again: 

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

Steve Leslie writes:

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

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

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

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

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

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

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

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

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

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

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

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

From "A Student:"

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

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

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

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

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

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

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

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

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

Jason Ruspini adds:

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

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

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

Victor replies:

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

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

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

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

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

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

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

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

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

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

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

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

 Jeff Sasmor writes:

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

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

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

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

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

Dylan Distasio Adds:

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

Michael Marchese writes: 

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

Hanny Saad writes:

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

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

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

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

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

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

Steve Ellison adds:

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

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

Trend Following — Cause, from James Sogi: 

Generate a Brownian motion time series with drift in R

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

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

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

Trend Following v. Buy and Hold, from Yishen Kuik 

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

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

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

Not All Deer are Five-Pointers, from Larry Williams

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

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

From Gregory van Kipnis:

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

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

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

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

Larry Williams adds:

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

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

I anxiously stand to be corrected.

Marlowe Cassetti writes:

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

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

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

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

Kim Zussman writes:

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

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

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

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

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

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

This is also shown by F-test for variance:

Test for Equal Variances: SPY, FUNDX

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

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

Two-sample T for SPY vs FUNDX

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

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

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

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

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

Alex Castaldo writes:

The results provided by Dr. Zussman are fascinating:

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

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

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

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

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

Note the following:

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

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

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

S. Les writes:

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

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

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

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

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

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

Larry Williams adds:

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

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

Craig Cuyler writes:

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

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

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

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

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

Jeff Sasmor adds:

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

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

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

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

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

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

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

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

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

Steve Ellison writes: 

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

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

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

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

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

Anthony Tadlock writes:

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

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

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

From James Sogi:

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

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

From Kim Zussman: 

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

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

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

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

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

Perhaps FUNDX vs a tradeable index is the explanation.

 

Jan

16

I thought those specs with children might be interested in checking out the following economic related comic books for kids that the Federal Reserve will send out for free (no, this isn't some twisted joke). I have no idea what the actual content is, like in terms of accuracy or propaganda; let me know what your thoughts are if anyone actually orders these.

Jan

13

It's a hard life trying to outperform the stock market indexes. Most of the time these traders do not have tested systems or, if they have done some testing, it is likely that the methodology used has some shortfalls. But let's suppose that everything is fine, and that they have managed to find a niche of market inefficiency which can be exploited by a small flexible trader in and out of the market very quickly. The problem is that a part time trader goes to work in the morning, participates in meetings, travels, etc. Sometimes the boss calls him/her right when the setup is there to be traded! When the system gives a buy/sell signal, he/she is not there to trade it. The lack of consistency is the main issue. For a European trader, it is even worse. Markets in the US open 15:30 European time and close at 22:00. The European part time trader goes home when US markets are open and finds the family "requirements" to be met often more demanding than those of the office work. He/she has to help the kids with their homework, the wife/husband with things to do, dinner time, friends after dinner, etc. Being consistent with the trading plan is almost impossible even for the most determined and focused part time trader. Moreover, when they go on holiday, no trading is possible unless they want to divorce. At the end of the day, although their system works fine and they are very disciplined traders, there is no way to outperform the market simply because they were not there to trade their systems.

Maybe the solution is to give up trading, buying an ETF and spend more time with the family.

Kim Zussman comments:

Yes, but there can be advantages to the part-time vantage:

1. Not looking at markets all day reduces over-trading. The more you look at moment-to-moment moves, the more tempting it is to mistake them for opportunities.

2. Long-term patterns and anomalies are generally more profitable because they integrate more risk and less vig.

3. Personal diversification: Necessarily, frequent losing trades are extremely painful, and it is nice to have other concurrent professional activities which are rewarding. Be a portfolio with a mix of risky and low risk assets, balanced to suit your psyche.

3a. Cover: Being ridiculed and berated by family and friends is diluted when the income stream is not at stake, and they can more easily forgive difficulties of a second vocation if the first is intact.

4. You can easily run your own hedge or mutual fund while drastically reducing cost and customizing risk to fit your temperament.

4a. If you are certain there are others who can invest much better than you, get past your ego and use them.

5. The market needs you, especially if you trade a lot and make many mistakes, to provide liquidity and profits for smart guys on the other side of your trades.

6. The golf rule: Investing/trading can be more frustrating than golf, but it is 1.5 million times more interesting and will make you a babe magnet.

George Criparacos adds:

As a part time trader, I identify completely with the problems outlined and with the response of Dr. Z. I would humbly like to add that there should not be a target to outperform the market.

Scott Brooks offers:

This is a great post by Kim! There is wisdom here for everyone, even those who are not part time traders. Everyone, even pros and day traders, should cut this out and put it in their playbook. I know I am!

Thanks for this Kim!

Scott Brooks further adds:

It is important to remember that outperforming the market (usually thought of as the S&P 500 … the cap weighted index) is difficult. Most pros don't beat the index.

Maybe your goal would be to create an income stream of 3%/year to live on with a moderate amount of growth to offset some of the effects of inflation.

Maybe your goal is to beat a composite index of stocks and bonds (pick the indices that you think are appropriate).

Maybe you're good enough as a personal trader to accomplish the return goals your looking for and to receive satisfaction from managing your money (kind of like a hobby … but one that is profitable).

I have several clients that have me run a portion of their portfolio while they run the rest. The reason in many cases is that one spouse has nothing to do with the money (usually the wife) and the other spouse likes to invest and is really into it (usually the husband). The husband realizes that if something happens to him, his wife is not just going to take over the portfolio and all of a sudden become an expert in something that she has no interest in. So he has me run a portion of the money so that he can be comfortable with my competence and the wife can have a relationship with someone that she knows and has come to trust.

People can have many goals in the markets. It is imperative that you:

1. Identify what your goals are
2. Figure out a methodology that can accomplish those goals
3. Figure out if you have the time to work that methodology
4. Make sure that a fail safe is in place (i.e. work with a professional if your spouse is not interested, or work with your spouse)
5. Figure out if you have the competence to accomplish your goals
6. Be able to back test your system in the bad times (everyone was bragging about their genius in the 90's … but seem to have lost half their new found IQ since)
7. Have a playbook for how to handle different scenarios (especially what I call lifeboat drills)
8. Be willing to admit that they may not be able to do it
9. Other things that are important that I'm sure I'm missing
10. Make sure that you're having fun if you meet all the above criteria

Steve B. adds:

The part time trader is not the problem or the issue. The part time trader has at his disposal an arsenal of conditional orders that are set to fire on almost any imaginable market condition. It is the conditions that the part time trader has not taken the time to identify.

The issue in this case is the strategy. A part time trader will trade like "the trend is your friend." In this case the trend is what is hot and what strategy is in vogue. With the ever-changing cycle of trends, there is no possible way to get ahead in this type of trading. I would also argue that the part time trader is price focused - he does not care about volatility, interest rates, currency fluctuations, emerging markets, etc. due to the nature of his game "part time."

The part timer finally is apt to find shortcuts in order to make up the difference in time. The problem with shortcuts is that they run near to the edges of steep cliffs.

Dylan Distasio responds:

The issue in this case is the strategy. A part time trader will trade like "the trend is your friend." In this case the trend is what is hot and what strategy is in vogue. With the ever-changing cycle of trends, there is no possible way to get ahead in this type of trading. 

I would disagree with this statement as someone who has traded both fulltime as an intraday trader, and who now trades part time with a different vocation during business hours (and a longer trading time frame for a number of reasons). The part time trader is not tied to trend following strategies, and is certainly not obligated to follow what is hot and in vogue. They are just as capable of fading the herd as a full time trader or coming up with any other strategy to try within an interday time frame.

I would go on to argue that trend following strategies are capable of making money long term. The No Load Fund X newsletter which combines a relative strength trend following strategy with mutual funds (or more recently ETFs) has consistently beaten the S&P 500 since 1980 as audited by Hulbert Financial Digest.

In any case, they are not tied to the trend. There's nothing preventing them from following whatever strategy they wish. Practical considerations usually exclude the intraday time frame as an option for the part time trader, but they can use their ability to sit on their hands and cherry pick within a longer time frame as a strength.

I would also argue that the part time trader is price focused - he does not care about volatility, interest rates, currency fluctuations, emerging markets, etc. due to the nature of his game "part time."

I would argue that the part time trader should care about all of these things. Speaking for myself, I certainly do.

The part timer finally is apt to find shortcuts in order to make up the difference in time. The problem with shortcuts is that they run near to the edges of steep cliffs.

The part timer who is serious about attempting to beat the market should realize the amount of work required to do so. I think most of the ones who are able to trade part time and consistently beat the market are combining a lot of hard work after hours with their experience, and a willingness to constantly learn.

J. Klein offers:

Respectfully, I would tend to disagree. Part time vs. full time is not a question of strategy. It is, I feel, an acknowledgment of one's limitations.

Many will disagree, but I find that trading is mainly hard work. If you work hard on learning the market and about yourself, eventually you will work out some small strategies that leave you with a few more coconuts in the evening than you had in the morning. I am old enough to have seen more than one dumb young person get decent rewards, if they hung around long enough and are honest and hardworking.

The market is very large and there are many opportunities, but a part timer may take a relaxed view and let most of those golden opportunities flow away. Existing in a less pressurized environment, he may engage in only a few situations, and follow them more carefully. He trades part time, but his mind keeps working full time (how can one avoid it?) so he may be doing more thinking on each trade. More thinking, less pressure, less fear = better results, hopefully.

Jan

3

I was fortunate enough last night to see Eastwood's two films on the Battle of Iwo Jima back to back at the Jacob Burns Film Center in Pleasantville, NY. As an aside to anyone in that area, the Film Center is a fantastic resource for independent, art house, foreign, and classic movies.

It was a very interesting experience watching the two movies back to back. It was great being able to compare the second with the first so fresh in my mind. I enjoyed both movies greatly, and found them both incredibly moving. I found Letters from Iwo Jima, which tells the story of the battle from the Japanese perspective (and is entirely in the Japanese language) to be one of the most powerful anti-war pictures (in my opinion) that I've ever seen. It was also the better movie of the two in my opinion, although the emotional impact of Flags ran much deeper for me.

I suspect that was due to two reasons. The obvious first one is that I'm an American, and we tend to sympathize with our own countrymen. The second is that my deceased grandfather who I was very close to, was a fighter pilot in the European theater of WW II, and the movie brought back memories of him, and imaginings of the incredible sacrifices that must have been required of all during that time.

Anyways back to the movies … I found them to be two very different films for the most part. One thing they do have in common is an examination of the theme that war literally is hell, and that actions on the battlefield are often brutal, and amoral no matter which side claims the moral imperative.

'Flags' which purports to tell the story behind the famous picture of the flag raising over Iwo Jima will inevitably be compared to 'Saving Private Ryan' for its battle sequences. Eastwood manages to capture the randomness and chaos of war vividly in the battle scenes. In particular, the opening assault on the beach near Mount Suribachi (where the flag would eventually be planted) is very impressive.

'Flags' is shot as a series of flashbacks between the battle itself, the present day, and the war bond drive immediately after the battle where the three survivors of the flag raising captured in the photograph are trotted out by the US government to raise money for a near bankrupt US. The movie raises a lot of questions over what it means to be a hero, the reasons behind actions on the battlefield, and their often unthinkable nature, and shines an uncomfortable spotlight on the war propaganda machine. One can't help to have some thoughts of the current situation in Iraq, and Bush's infamous picture on the carrier with 'Mission Accomplished' overhead when watching the spin during the bond drive portions of the film.

Some reviews have complained about the way 'Flags' cuts back and forth between past and present, but it didn't bother me at all. I'm not sure it necessarily adds a great deal to an already powerful film though.

The acting in 'Flags' is generally very good, but I thought the actor who plays one of the flag raisers, a Native American named Ira Hayes, steals the show. His performance is heart wrenching. He is a soldier that has seen and done unthinkable things in the battle. He is literally dragged into the spotlight unwillingly and trotted out as a hero for the flag raising during a series of appearances with the other two survivors during the bond drive.

'Letters' begins in 1944 before the battle, during the early Japanese preparations on the desolate island of Iwo Jima (Sulfur Island in Japanese). Ken Watanabe does an incredible acting job as the general in command of the operation, Tadamichi Kuribayashi.

Kuribayashi had spent time in America before the war, and was against it but was obviously overruled. He knew that the industrial output of the US at the time was unmatched, and would likely be unbeatable. He certainly knew that he and his 20,000 troops were doomed going into battle, but he strategized for maximum impact on the American invasion. He turned a lot of traditional Japanese battle planning on its head, which led to dissension in the ranks of his underlings both before and during the battle, and definitely contributed in some cases to a quicker death for some Japanese units. By the end of the battle, there were around 1000 Japanese left between battle casualties and suicides to avoid surrender.

Watanabe captures a man torn between duty to family and country, and between his love of homeland versus a friendly view towards Americans in general.

The other star of the show is the actor who plays a simple baker with no interest in war, and is forcibly conscripted into the Japanese war effort and sent to Iwo Jima while his pregnant wife watches powerlessly. His performance, at times comedic, always powerful, is very well done.

'Letters' is clearly an anti-war picture. Its emotional impact is different in some ways because you know from the beginning that most if not all of the characters are going to be dead by the end of the film, and they all know it themselves. The island is inhospitable, and hot. There is little food or water, and dysentery everywhere. Yet, they manage to build a series of tunnels and reinforced positions that go so deep, they are eventually immune to American air bombing campaigns. Despite the brilliant strategy of Kuribayashi, the Japanese are far outnumbered, outmatched, and have been essentially abandoned by the Japanese mainland in terms of reinforcements. It is a very difficult movie to watch knowing the ultimate outcome.

It manages to humanize the face of the enemy like few war pictures have done. I would be interested to see the reaction to it in Japan.

Anyways, I would strongly recommend seeing both movies. As movies, they are both very well done, but I feel like 'Letters' is a crowning achievement for Eastwood, while 'Flags' is not quite at that same level. They will definitely give you many things to think about as we begin a new year.

Stefan Jovanovich comments:

I don't do war movies any more so I can't comment on the films that Dylan saw. The last uniform, splatter film I saw was "Saving Private Ryan." Compared to the memoirs and documentary photography made by the people who fought on D-Day and in the weeks after the landings, Spielberg's epic was so completely meretricious that it cured me permanently of any curiosity about what contemporary filmmakers have to say about WW II or any other war.

What I would like to question is the presumption that Americans were destined to win the war because of our material superiority or, as Dylan puts it, "the industrial output of the US at the time was unmatched and would likely be unbeatable." In the actual combat against the Japanese army and navy in the Pacific, the weight of numbers and equipment was rarely a decisive factor for the Americans who did the fighting. The reason for this is painfully simple: until the summer of 1945, the Pacific theater always had last priority. Supplies and reinforcements were first sent to Britain and North Africa and then - after 1944 - the European continent. Even Lend Lease to Russia usually had a greater priority than the Pacific theater.

It is only at the very end of the war, with the arrival of the B-29 and the invasion fleet for Okinawa that material superiority became a significant factor; and that was countered to a large degree by the Japanese use of kamikaze tactics. (The U.S. Navy lost more sailors in one month, off the island of Okinawa, than it had in its entire history before that time.)

The triumph of the Americans over the Japanese Empire came far more from intelligence and courage than it did from having more equipment. That eventual victory began with the neutralization of Japanese naval superiority at the Battle of Midway in 1942. 12 bombs destroyed 4 aircraft carriers and - far more important - the elite cadre of Japanese aviators on those ships.

Both Japanese and American scholars agree that, at Midway, the Japanese had more and better aircraft, ships and torpedoes. Their pilots and sailors had greater technical skills and far greater combat experience. Nevertheless, they lost - because of luck and the willingness of the American commanders, Nimitz and Spruance, to go against the odds. Even after the Japanese lost their absolute air superiority at Midway, they still retained the tactical advantages of being on defense. They assumed - not without cause - that the vast distances of the Pacific would make it impossible for the Americans to defeat them. What destroyed that assumption was the success of the American submarine forces in literally choking off supplies of fuel and other materials to the Japanese.

Like the United States Navy, the Army and Marines were able to capture territory for the establishment of forward bases in the mid and Western Pacific, and the submarine forces were able to reach the shipping lanes that converged in the seas around Luzon. The submariners were able to use the information, which the U.S. Naval Intelligence had gathered by successfully breaking the Japanese Naval cipher, to hunt down the Japanese merchant fleet. (The Japanese naval command cooperated by requiring each merchant ship to report to its position daily.)

By 1945 the naval blockade had been so successful that the only targets left were lighters and other coastal vessels; the entire oceangoing Japanese merchant marine - all 5 million tons - had been sunk.

When the battle of Iwo Jima began, the fuel supply to the entire home islands and the military was 10% of what the fuel requirements for the Japanese Navy alone had been in 1942. To suggest that the Japanese troops on Iwo Jima were "abandoned by the Japanese mainland in terms of reinforcements" is to fail utterly to understand how desperate the situation was for the Japanese. It is also to imply - yet again - that the Americans could have been expected to win because of their material advantage. Iwo Jima was - even more than Okinawa - considered part of Japan itself; and Japan's soldiers, sailors and airmen had sworn to protect the homeland at the cost of their lives. Defeating them required a sacrifice equal to their own.

What should also be remembered is the price paid for American submariners: 52 subs and 3,505 officers and crewmen. One last quibble: if, as the filmmakers imply, the U.S. was "near bankrupt" after the Battle of Iwo Jima, it must have been as part of a previously unreported planetary repo out of the pages of Douglas Adams. The near fatal hubris of post-WW II Federal Reserve and Treasury policy had its origins in 1945 - a time when the U.S. dollar was considered not only as good as gold but better. For the next 2 decades everyone in the world would take our checks without ever asking for ID.

Dylan Distasio responds:

Thanks to Stefan for the informative analysis. The above section in particular got me thinking about the validity of the statements in the movie. I happen to have a copy of Milton Friedman's A Monetary History of the US 1867-1960, which is an interesting tome in its own right. I'll quote some of the section in it on WW II deficits below (with the caveat that access to internal Fed documents from 1940 onwards during the war was apparently limited when Friedman was writing his book).

From A Monetary History:

Period of Wartime Deficits, December 1941-January 1946

…By early 1941, however, the deficit had begun to rise sharply. For calendar 1941, cash operating outgo exceeded cash operating income by $10 billion or nearly half of total expenditures. Pearl Harbor brought a sharp intensification of these tendencies. Government expenditures nearly tripled from calendar 1941 to calendar 1942, and rose a further 50 per cent from 1942 to 1943, reaching a peak of $95 billion in 1944. Tax receipts also rose but more slowly and in no greater ratio. As a result, the cash deficit rose to levels without precedent, either in absolute amount or as a percentage of national income; to nearly $40 billion in calendar 1942, over $50 billion in 1943, over $45 billion in 1944, and over $35 billion in 1945—sums averaging nearly 30 per cent of the contemporary net national product.

From the Atlanta Fed's website, here's another tidbit:

The war whipped Reserve Bank operations out of the doldrums of the late 1930s in a spectacular manner. A great deal of the war financing bypassed the old and suddenly cumbersome system of supplying credit through the Federal Reserve System by allowing member banks to rediscount eligible loans. In stark contrast to World War I and its postwar years, rediscounts dwindled and finally disappeared during World War II. The Atlanta Bank's portfolio of earning assets at the end of 1944, for example, consisted almost entirely of Treasury securities distributed from the System's account. There were no discounted loans from member banks. The Reserve Banks became almost exclusively holders of government debt. Commercial banks financed $95 billion of the $380 billion war debt, as the Fed augmented their asset capacity by supplying ample reserves. The money supply more than tripled between June 1940 and the end of 1945, and U.S. government debt increased from one-fourth to two-thirds of all U.S. debt. Thus a large portion of the banking resources of the nation, which had seemed so plentiful and so neglected in 1938, fueled the war effort, and both the activity as well as the assets of the Atlanta Fed soared.

It's also interesting to note that commercial banks were disallowed from most of the bond drives resulting in banks attempting to buy them from individuals on the black market.

Jim Sogi adds:

Stephan, have you read Embracing Defeat: Japan in the Wake of World War II (Hardcover) by John W. Dower?

It is an amazing, but quite depressing description of utter devastation to the cities, the economy, the industry, and the people and society of Japan during WWII. The fire bombs in Tokyo and in other industrial cities had an even greater capacity to kill and destroy than even those nuclear bombs, which destroyed over 40-80% of all residences and major industrial areas. Japan lost 1/3 of its net worth, and it suffered a 35% decline in urban living standards, and a 65% decline in rural living standards. It also lost 4/5th of all its ships. Furthermore, the feudal system ended. 4% of the entire population of 74 million was killed. In addition, 1/3 of the population of Okinawa was killed.

MacArthur's occupation force of 245,000 would have had great lessons for Iraq. Bremmer totally destroyed any hope and chance of stabilizing the Iraqi government by dismissing the entire bureaucracy and army in Iraq in three days with ill conceived and poorly planned action. In Japan, they kept the bureaucracy with tremendous efficacy.

It's quite amazing how prosperous they became. Now the Nikkei is 17245, which shows that it doubled in the last three years.

Stefan Jovanovich comments:

I share James Sogi's appreciation of Dower's book, Embracing Defeat; it is an extraordinary story. What the people of Japan have accomplished in 60 years is without historical parallel. To understand the extent of the devastation to Japan from the B-25 and B-29 raids at the end of WW II, you would have to take the recent hurricane devastation of Louisiana and Mississippi and multiply it 50-fold. You would then have to kill 3 million people from blast, disease and outright starvation, and leave the country with no fuel or food. Sadaharu Oh, the great baseball player, remembers sheltering with his mother in the canal near their home during one of the firestorms. They considered themselves lucky that the fires from the surrounding homes were not so intense that they raised the water temperature beyond the point of endurance. Others were not so fortunate; their bodies were found boiled to death. Oh was 5 years old at the time.

The blame for the failure of U.S. - Japanese relations in the 20th century has to be placed at the feet of Teddy Roosevelt, Woodrow Wilson and their fellow Social Darwinists (authors of that wonderful contribution to American jurisprudence - Plessey v. Ferguson). Their racism was eventually matched and exceeded by the members of the Kodaha and Tosei-Ha, but the Americans went first. In 1914, Japan was a more genuine democracy than the German Empire. The Emperor's political authority was far closer to that of George V than William II. Nevertheless, none of the Western allies - not the Americans, French, British or Italians - thought that their Japanese counterparts had the right to claim equal status at the conference table at Versailles. When that humiliation was followed by the Asian Exclusion Act of 1920 and the ending of the Anglo-Japanese alliance in 1922, the Socialist and Social Democratic parties in Japan and their policies of "Westernization" were deeply weakened. They might yet have prevailed, but the devastation of the Tokyo Earthquake and Fire created the same loss of faith and desire for a new, "strong" Japan that the Depression did in Germany.

I share James' scorn for the use of a civilian pro-consul instead of a military one in Iraq. Tommy Franks and the U.S. Army would have been a much better choice than Bremer and the State Department. But I think the historical analogy with Vietnam is the more appropriate one with regard to whether the Baathist bureaucracy and military in Iraq should have been left in place. In 1945 the Japanese forces in Indo-China had removed the French from all positions of military and civil authority just as the Germans had taken over in Italy in 1944. Roosevelt had wanted to require the Japanese forces there to formally surrender, as the Germans did in Italy; but he was persuaded to allow the Japanese to continue to govern the country until the French colonial authority could be reestablished. In the eyes of the Vietnamese, the French never overcame the double shame of defeat, followed by outright collaboration with a hated enemy. If the U.S. forces had allowed the Baathists to remain in power, the situation in Iraq would have been a second Indo-China War. I would offer instead the Philippines after the Spanish-American War as a historical comparison. The Spanish authorities were clearly discredited. Rather than leave them in place, the Americans established a joint military and civil authority. To T. Roosevelt's deep frustration, William Howard Taft, who was the pro-consul, committed the United States to granting the country political independence. (One of Roosevelt's strongest motivations for his later 3rd party run for President as a "Bull Moose" was his disdain for Taft's willingness to disestablish the fledging American Empire. He also thought Taft's fondness for baseball and his willingness to be seen throwing out the first pitch at an opening game was "common".) The U.S. Army and the Marines had to battle both the Moro and the Aguinaldo insurgents for nearly a decade after Dewey's dramatic success in Manila Bay. The chapters of General Pershing's memoirs dealing with his negotiations with village chiefs in the Philippine islands are being written again by successor American officers in the field in Afghanistan and the Western Provinces today.

From Roger Arnold: 

 I finally watched Flags of Our Fathers on Saturday at home with my 13-year-old daughter. As the movie was playing I was explaining the background of the story and of the men's lives to her. I knew some of the story because I was a Marine. The non-public parts of the story were told to me by James Bradley, even before he wrote the book. He had a passion for this story and for getting it told. This wasn't just a movie, made from a book, authored by a chop-shop writer.

Jim willed this movie into existence. Without his singular determination to tell the story it would have been lost to history. And that story too is worth hearing. As far as I can tell the movie relates the story pretty much as Jim told it to me 10 years ago, especially as pertains to Ira.

There were some peculiarities and omissions that raise questions for me. But as they pertain to private issues that readers and viewers would otherwise not be aware of, I will not relate them here.

Nov

29

The fossil record of life on earth can be read as sequential ecological dominance. It is interesting how formidable species at the top of then-current food chains often become extinct.

Dunkleosteus terrelli is a fish which bit with 11,000 pounds of force (twice that of great white shark), which along with other big-biters (T. Rex) are dodos of other eons.

When this creature terrorized oceans full of big prey, what were eminent forces that would end his reign? Temperature change? Small prey? Disease?

Species success and dominance appears to require risks of commitment and inertia, which pay off competitively but increase vulnerability to unforeseeable environmental shifts.

Dylan Distasio comments:

An interesting creature for sure … This type of fish (Placoderm) was wiped out in one of Earth’s great mass extinctions in the late Devonian period. It is rather startling to look at just how many species died as a % of the total on Earth during any one of the given recorded mass extinctions.

Oct

26

For anyone interested, I thought I would post a link to a chapter by chapter review of the oft recommended book in these waters, Triumph of the Optimists…

Sep

19

Having previously debunked love as panacea and the Golden Rule as hogwash, I will proceed to explain that humans are as breeds of dogs, and try to make you happy about it. This first step of cooperation may be the only way, outside eugenics, to rescue our faltering world.

My credential for this essay begins as a semi-feral kid living across a northern swath of American states who took behavioral and social cues from animals. Not surprisingly, I became a veterinarian daily walking for a few years lines of hundreds of kennels of cats and dogs and stalls with horses, cows and pigs. I left that calling to travel the world for a decade under a backpack studying and taking notes on the myriad aspects — toes to earlobes and the conduct — of the peoples in 96 countries. I specialized at once on either end of their bell curves thinking that once these border pieces were in place, the rest of the puzzle of humanity and solution to the world falls into place.

For example, I remember trailing in the streets of Maputo, Mozambique an albino black man I silently called Oxymoron until he noticed, stopped and confronted me. I explained forthrightly that I was interested in his anomalous color to which he intoned, 'Follow me.' We went straight to a laundromat where I met his lovely jet black wife and identical twin albino girls. 'The doctors tell me they are probably the only albino twins in this country,' the wife reported.

As certain as we are individuals, each type in the crayon box of humanity has varying capacities for physical and mental performance. White trash like me think slow as February molasses but are thorough, Mexicans talk rapidly as auctioneers, Orientals have heart and beehive minds, Indians bend and multiple faster, if only Jews could drop their Bible and climb as a superior race, Native Americans booze and brawl, and my favorite line on the football field is 'Did you ever try to catch a black guy.' These and other 'tribes' are the world orchestra sections of evolution.

Their symphony today offers the crash of egalitarianism, the belief in the equality of people. My experience is contrary, that different strains of humanity offer varying capabilities. In a sentence, a barnyard version of George Orwell's Animal Farm reads, 'All humans are equal but some are more equal than others'. This is the specificity of evolution. To embrace its truth is to take one giant step forward in your life as well as be entertained.

Suppose an egalitarian physician is called to set the broken toe of a man and instead goes out and breaks a toe each of nine other men, explaining that it will make them feel better. The study is written into the AMA journal and Congress passes a law that everyone must go about on crutches. That's where the world stands now.

Instead, go forth with compassion to look for the relative pluses and minuses of each race that bring greater vitality and color to life. By giving the next person the benefit of doubt when greeting him, you create opportunities that will not be available if you assume the worst in others and act like it. Oxymoron in Mozambique invited me to dinner after the laundromat which I politely accepted, and that led to mutual gain.

Pay attention to this truth, exert your will, and choose happiness for everyone.

Pamela Van Giessen adds:

Beautiful post. We are like dogs, and that is actually a good thing. I can not imagine a life with just one breed of dog any more than a life with just one sort of human.

Some dogs are flushers, some retrievers, some working, some herding, some are ratters, some are for sitting pretty on lovely ladies' laps. Each serves an important function. I do not always want them all but I admire all of them from Affenpinchers to Yorkies and everything between. Each has something amazing to offer though not all are great at all things. Just this weekend I was perusing my dog books, thinking about which breed would make a good companion for my Newfies as a personal trainer, and there was not a one that did not have wonderful strengths but also some shortcomings. I am leaning toward a Petite Basset Griffon Vendeen or a Brittany for the Newfs.

Bo has written a very wise thing. One can take it even further and recognize that you do not train all breeds the same way. Newfies demand training at a young age, but a soft touch. Rotties need a firmer hand. Pointers are super smart but can be skittish if not given purpose. Springers never stop moving, and Goldens are children well into adulthood. All are great if trained according to their disposition and strengths. But at the end of the day, Clumbers just won't do well in obedience competition, St. Bernards rarely excel in agility competition, and a Pomeranian isn't going to a pull a heavily weighted cart . No amount of training or work will ever overcome their physical limitations and DNA. I often gasp when I see people who insist on forcing an issue with a breed where success is most likely outside the realm of possibility and from which there is rarely a good outcome. If you want to excel in agility why wouldn't you get a dog that is physically appropriate for the task instead of forcing a square peg into a round hole?

Dylan Distasio comments:

In contrast to the previous replier that found the parent post a beautiful one, I found a lot of dangerous posturing bandied about with little scientific evidence for most of the assertions made, some borderline if not outright racial slurs, and an incredibly flawed analogy involving crutches. I may be at a disadvantage in this response, if the parent was actually a satirical post, but I have a hard time reading it that way.

I will also try to set aside my bias of disliking most dogs as pets versus work animals as I find their slavish devotion and dependence on their masters an undesirable trait. That, alas, is a topic for another post …

Bo wrote "These and other 'tribes' are the world orchestra sections of evolution" after opining on the traits of various races. Assuming for a moment these generalizations are true (which I don't in general), there are no allowances made for cultural versus genetic transmission of these traits ( i.e. meme versus gene). The word "evolution" carries a connotation of selection pressures on the gene pool. I am not aware of conclusive scientific evidence for any of these assertions.

Culture is a powerful transmission medium for changes. People cut loose from their historical culture who emigrate to the US develop a new one that is often strikingly different from that of their ancestors within a few generations.

The parent's lumping together of races with an enormously broad brush done with sloppy abandon. "Orientals" (who I am not sure enjoy this term for the most part these days) have a wide variety of cultural traits across tribal and state borders. I don't think a Korean or a Chinese person would appreciate being thrown into the same bucket as a Japanese one. The comment on the Native Americans is flat out derogatory and racist, nuff said on that one.

Would the parent also have us believe that the Jews have a special need for religion in their genes that is not present in the genes of other races?

And while I will grant that selection pressures may have created some physical differences in muscle type distributions across races in general, there are exceptions in every pool. I am not sure that there is even conclusive scientific evidence in this realm, but then again, I'm not up on my eugenics reading.

The assertions made about meaningful differences in intelligence across race is spurious at best, and destructive at worst especially considering the difficulties in defining and measuring intelligence in general.

We are also blessed with this gem "All humans are equal but some are more equal than others'. This is the specificity of evolution. To embrace it's truth is to take one giant step forward in your life as well as be entertained." I'm sure Orwell is rolling in his grave seeing a satire used to rally against the Stalinist corruption of socialism used to argue for the inequality of the races based on a eugenic argument.

The physician analogy is flawed and laughable. It left me speechless; I confess to being unable to elaborate on it.

As the parent closes, we get some mixed signals such as "By giving the next person the benefit of doubt when greeting him, you create opportunities that will not be available if you assume the worst in others and act like it." which sounds like a good idea that would argue for recognizing the individual not the stereotype the parent elaborated on earlier.

However, we are left with a closing that sounds like fascist propaganda "Pay attention to this truth, exert your will, and choose happiness for everyone." In other words, embrace a worldview based on perceived genetic differences of races based on broad stereotyping, and exert it on others.

I can almost see that the parent's intent was good here, it is a shame it's wrapped in a message of stereotype, abuse of the scientific method, and at times outright racism.

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