The erudite and esteemed historian of ours raises the question what can we learn from ancient Rome. Richard Epstein [cv ], believes that almost all that is good in our own law comes from Rome. Nock believed that only classics should be taught in college because everything good and bad happened in Rome and Greece and all we have to do is learn from the mistakes. I have always believed with Nock that the stock market will do whatever it has to do to increase agrarian reform, i.e. whatever will create a easier flow for reduction of social power and increase in the palindrome type of state. I often follow that line in my own trading. Do you believe Rome, Caesar, the two wolf men et al the Greeks, have things to help up with our investing?

Stefan Jovanovich writes:

Eddy aka our daughter Nora had the great good fortune to study Art History at Cal Berkeley while doing the requisite training in molecular and cell biology that would enable her to go to the wikipedia school of medicine at UCLA. She had the even greater good fortune to discover Andrew Stewart and make certain that she took every one of his classes. This left Eddy with the handicap of having the closest thing to an Oxbridge education one could get in America; Stewart was a kind, clever and relentless tutor; he even forgave her at graduation for abandoning a career in art history for the dubious privilege of wearing progressively longer white coats.

My apologies for the long-winded preamble; I am attempting to explain where I got my answer to the Chair's question. The "Greeks" of the Hellenistic period, not the classical one, are the people from whom we should take our lessons about finance; for they are the people who established the patterns of trade - grain from Egypt, Crimea and Sicily, manufactures from the Eastern Mediterranean, spices and clothes from West Asia, etc. - that endured in spite of the Roman's preference for military-industrial pillage. 

Dylan Distasio writes: 

 Today marks the 2000th anniversary of the death of the emperor, Augustus.

If our esteemed historian would be so kind, I was hoping he might provide one of his favorite books on either Augustus or ancient Rome in general.

Stefan Jovanovich replies: 

Karl Galinsky's "Augustus: Introduction to the Life of an Emperor"

His discussion of Augustus as a politician is the best description of how "Rome" actually worked politically that I have ever read.

Pete Earle adds: 

Ironically, this was published today as a 'Think Piece' by the Adam Smith Institute: "Currency Reform in Ancient Rome". In it I look at four obscure emperors and their efforts (as well as their fates) with respect to shoring up the denarius as Rome entered its "Age of Inflation".



 Apparently, in the mid 1920s, a washing machine and a Ford Model T both cost around $300.

The ratio of those prices has changed dramatically.

I wonder why?

Shane James writes:

A magnificent relationship to ponder.

Richard Owen adds: 

Another strange example of deflationary monetary flows is that in the 1990s, when Operation Tuxedo stopped the December flow of 120k MDMA tablets, 108kg of amphetamine and 60kg of hash into Liverpool, armed robberies of bookies and posts offices in Merseyside increased by 80% the following Jan and Feb.

Pete Earle writes:

My off the cuff answer: the political machinations surrounding auto manufacturing (labor, corporate and military acquisition, etc.) leads to a large degree of government intervention, price controls, etc., in turn producing distortions, whereas washing machines are (far) less 'corporatistically' engaged. Also, a washing machine is still, for the most part (excepting, I guess, credit cards) an outright purchase, where rarely if ever is a car purchased without some sort of long-term financing. (Although the latter may be effect, and not cause.)



 The earth is going to run out of natural resources starting in 2030 according to certain flexions. Hasn't that been the mantra for a many years? But the politicians are coming up with a plan (they are always coming up with a plan.) One suspects that whatever initiative they come up will involve more government control and less personal freedom. Free markets will have nothing to do with the solution.

Pete Earle writes: 

It's funny you mention that, as I'm currently reading The Bet by Paul Sabin, which chronicles the growth of the neo-Malthusian 'population apocalypse' movement in the late '60s under Paul Erhlich and the long, subsequent battle with the economist Julian Simon (who argued that innovation and markets would blunt the unrealistic projections of the doomsayers). I recommend it.



 The fact that the Dax was up 3 ratio points against the US markets shows that the largesse of the flexions on our numbers is not withheld from those who make recipes for the bernaise and bechamel sauces in Brussels .

Alan Millhone writes: 

Dear Chair,

Am afraid the bernaisacky sauce might upset my stomach.

Note Dow was below 15. That is upsetting enough to many without adding any sauces.



Kim Zussman writes:

It was dyspepsia from absence of Bernanke sauce.

Peter St. Andre writes: 

I really need to write a little poem that starts with "Ben Bernanke makes me cranky"…

Gary Rogan contributes: 

There once was a man named Bernanke

Engaged in some bad hanky panky 

But he went AWOL

and skipped Jackson Hole 

And now the markets are cranky.

Craig Mee adds: 

Bernanke the captain of Fed
Resembles Titanic's, Smith Ed
Evades all bergs, engines full out
Bond infinity, no damnable doubt
"Untapered, untwisted, now screwed", he said.



I came across this interesting graph, which isn't likely much of a surprise given where the market is these days–no fear and all is well in the world. What I don't get is that absent 1987, there are few drops in the trendline, and it's been a notable feast and famine starting in 1997 or so. Question from the ignorant: what happened in 1997? There was LTM in 1998, but the upswing seems to precede that.

Jordan Neumann writes: 

Asian currency crisis. Some on this site could tell you more about it.

Pete Earle writes: 

Currency hi-jinks which began in Thailand, spread to Indonesia, South Korea, the Philippines, Malaysia, Singapore, Hong Kong, and resulted in a number of short, sharp recessions. 

Gary Rogan writes: 

I read something about that series of recessions a few months ago that seemed quite instructive to me. While there were a small number of countries that had what could be described as hi-jinks, most of them did not. The way global investors reacted was indiscriminate though, and they pulled out capital from anything that remotely resembled a dangerous Asian duck, whether or not it walked or quacked like one. This fear response can probably be generalized to how different panics start. 



 If the average welfare recipient receives something on the order of $43,000/yr, and the average American's salary is $46,000/yr, the personal discount rate is approximately 6.52%.

There's no initial capital laid out to get on welfare, just a lot of forms and standing in line; But many welfare recipients don't really forgo income to stand in line, so I'm using $0.

Given that the Presidential term is 4 years, the total welfare benefit over those 4 years is $172,000; applying the simple NPV, is a single vote "worth" approximately $156K?

Gary Rogan writes: 

A single vote, for some specific person, is worth ANY amount of money to that person if they aren't the ones paying for it. The now violent riots in Spain and the free phone lady and the $16 trillion deficit are all consequences of that one simple fact.



Pete Earle wrote a magnificent article: "Of Krugman and Diocletian"



 Enoch Powell predicted in the 1970's exactly what would happen to the Euro when a individual country's interests were opposite to the greater good of the European community as a whole. It is amazing to see it playing out. I predicted that Brussels would be the best real estate market in the world when I visited in 2002.

I predicted this because of the expected build up in the European community infrastructure, and the associated NGO's and lobbyists and purveyors. I felt that this build up would be even greater than Washington DC, which has never had a down real estate market, because there would be less countervailing force for economy from the heterogeneous and distant countries that make up the E.U. as compared to the individual states in the U.S.

It would be interesting to see if that prediction turned out to be true.

Peter C. Earle comments:

It was sheerly utopian in the Marxist sense to expect that nations as diverse as found in Europe might be corralled into a single currency unit, a classic conflation of proximity with uniformity. Sic semper alvei.

Here's my hoping, but not expecting, that in Greece the forces of Gresham will be brought to bear in the selection of a new currency.

An anonymous contributor adds:

It is debatable whether having a common currency is adverse to a country's interests — if there is labor mobility and free trade. In fact, Hayek free market/hard money theory might? argue the opposite. But this is predicated on certain RULES being followed. The reality is that Greece etc. decided to break the rules and follow short-sighted expedient policies. A skeptic would argue that this was inevitable….

Uncle Milton (Friedman) was also negative/skeptical on the Euro, but (like me) was surprised that they were able to put it together in 1999. (One recalls that part of LTCM's implosion were the Eurozone convergence trades that blew up when Russian defaulted in 1998. I was on the right side of that trade for entirely wrong reasons.)

Here is a nice Cato institute essay that quotes Uncle Milton.

"Not only are member countries unable to finance government
spending through inflation, they are bound by the Stability Pact to
keep their deficit at less than 3 percent of GDP. Except under
unusual recessionary circumstances, violators would face automatic
or semi-automatic and massive fines (The Economist 1996). As long
as these rules are respected, discretionary fiscal policy on the part of
national governments will disappear. Finally, the adoption of a single
European currency would mean the end of arbitrary manipulations
of the exchange rate-"exchange rate policy," as it was called, would
vanish. In its intentions at least, the Maastricht world is one of strict
and impartial rules, a living monument to the market-liberal wisdom."
Can the euro be considered an application of the lessons we have
learned from Milton Friedman? In a sense yes, in a sense no, and in
yet another maybe. Yes, the monetary constitution embedded in the
euro construction is Friedmanian in that it aims at price stability,rules out debt monetization, and helps prevent exchange rate manipulation. No, because the European Central Bank's accountability is
very weak and because the monetary rule is not made explicit.
Nothing is said about how price stability will be achieved. Maybe,
because the monetary authorities could pursue a stable course,
avoiding both stagnation and inflation (yes, in this case), but they also
have the power to destabilize the entire European economy (obviously no, if this happens).
Also, the construct is still based on the rule of man rather than the
rule of law: if things go wrong, there is no provision for remedying the
situation. Milton would not have approved this particular facet. He was
well aware that the unrestrained power to do good is also the
unchecked possibility to do harm. The liberal wisdom, at least since
David Hume, has always assumed that, since it is possible that knaves
could end up ruling, we should draw constitutions on that assumption.
Not because that scenario is inevitable but because it is possible.
So far the ECB has behaved acceptably and it has succeeded in
resisting pressures from national governments, but we have no guarantee that this is going to be the rule in the future. As Milton often
said: "Money is too important to be entrusted to central bankers." He
may prove to be right once more. 

John Floyd writes: 

Those are pretty big "IFS". While Greece is the headline culprit du jour remember both France and Germany also "excused" themselves from following the rules. I don't have the exact number on hand but I believe various Maastricht or other rule violations would number in the dozens. The economics and politics speak for themselves currently as to the validity of the system working. Remember this currency was borne almost entirely of political will.

The interesting questions to me going forward are:

Does the Greek election even matter anymore?

How large are the feedback loops and knock on impact from future European developments?

Is the market too sanguine given firepower of monetary, fiscal, and bailout money is perhaps largely exhausted?

If the actions of a butterfly flapping its wings in a place like Iceland was a contributing cause to much turmoil how might Europe be viewed?

Who else has positions and exposure similar to JPM?

What about US money market fund exposure to Europe?

What about the size of Spanish private sector non-financial debt?

Why can't the Euro trade at .50?

I would also posit that well beyond current events there will be future attempts at a New Euro of some sort.



The trophy

The awarding of the trophy to The Artist shows how 100% of voters are tilted towards the "change man". The trophy had to go to the show that had the least attendance during the season to keep man small, and to show how the public is stupid, and how the arbiters in the academy are on a higher plane of significance, a higher aesthetic than you and I.

How long before they all get invited to the Oval, and how consistent with the idea that has the world in its grip, and how bearish for the long term market.

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

Considering much of Hollywood's output, it's surprising The Artist didn't also capture Best Screen Play….

Victor Niederhoffer adds: 

That's funny, Mr. President. But The Academy Awards is in the main a profit making deal which must cost 1.5 million a picture to enter, considering the perks and costs. The 1.5 million for the lowest budget film, The Artist representing a 10% capital contribution has the higher return to that input and is show in to win if it shows how deficient and low brow the public is in its taste. How beautiful to give it to one without talking that went out of style 100 years ago to show how we need redistribution and a raising of the capital gains rate as a solution to our problems.

Vince Fulco writes:

I was discussing a similar matter with someone this weekend re: Gingrich's plan for $2.50 gas. While not focusing on any one political party, what is it about the US citizenry that keeps them accepting (broken) promise after (broken) promise? Thereby guaranteeing they'll stay small.

Pete Earle writes: 

I suspect that the GAP's ability, and willingness, to get snookered by political actors and parasitical systems time and time again is the dark side of what, turned over again, is an exceptional ability and willingness to imagine enterprises and undertakings which in many other places would be cast off as unrealistic, insurmountable, or unnecessary.

Essentially, I believe that productive/entrepreneurial optimism is yin to political optimism's yang.



 I am often asked what ten steps one should take to become a successful speculator.

I would start by reading the books of the 19th century speculators, 50 Years in Wall Street, The Reminiscences of a Stock Operator by Markman, and others.

Next I would read the papers of Alfred Cowles in the 1920s and try to compute similar statistics on runs and expectations for 5 or 10 markets.

Third I would get or write a program to pick out random dates from an array of prices, and see what regularities you find in it compared to picking out actual event or market based events.

Fourth, I would read Malkiel's book A Random Walk Down Wall Street and update his findings with the last 2 years of data.

Fifth, I would look at the work of Sam Eisenstadt of Value Line and see if you could replicate it in real life with updated results.

Sixth, I would start to keep daily prices, open, high, low, and close for 20 of so markets and individual stocks and go back a few years.

Seventh, I would go to a good business library and look at the old Investor Statistical Laboratory records of prices to see whether it gave you any insights.

Eighth, I would look for times when panic was in the air, and see if there were opportunities to bring out the canes on a systematic basis.

Ninth, I would apprentice myself to a good speculator and ask if I could be a helpful assistant without pay for a period.

Tenth, I would become adept at a field I knew and then try to apply some of the insights from that field into the market.

Eleventh, I would get a good book on Statistics like Snedecor or Anderson and be able to compute the usual measures of mean, variance, and regression in it.

Twelfth, I would read all the good financial papers on SSRN or Financial Analysts Journal to see what anomalies are still open.

Thirteenth, of course would be to read Bacon, Ben Green, and Atlas Shrugged.

I guess there are many other steps that should be taken that I have left out especially for the speculation in individual stocks. What additional steps would you recommend? Which of mine seem too narrow or specialized or wrong?

Rocky Humbert writes:

 All the activities mentioned are educational, however, notably missing is a precise definition of a "successful speculator." I think providing a clear, rigorous definition of both of these terms would be illuminating and a necessary first step — and the definition itself will reveal much truth.

Anatoly Veltman adds: 

I think with individual stocks: one would have to really understand the sector, the company's niche and be able to monitor inside activity for possible impropriety. Individual stocks can wipe out: Bear Stearns deflated from $60 to $2 in no time at all. In my opinion: there is no bullet-proof technical approach, applicable to an individual enterprise situation.

A widely-held index, currency cross or commodity is an entirely different arena. And where the instrument can freely move around the clock: there will be a lot of arbitrage opportunities arising out of the fact that a high percentage of participation is inefficient, limited in both the hours that they commit and the capital they commit between time-zone changes. Small inefficiencies can snowball into huge trends and turns; and given the leverage allowed in those markets - live or die financial opportunities are ever present. So technicals overpower fundamentals. So far so good.

Comes the tricky part: to adopt statistics to the fact of unprecedented centralized meddling and thievery around the very political tops. Some of the individual market decrees may be painfully random: after all, pols are just humans with their families, lovers, ills and foibles. No statistical precedent may duly incorporate such. Plus, I suspect most centralized economies of current decade may be guilty of dual-bookeeping. Those things may also blow up in more random fashion than many decades worth of statistics might dictate. Don't tell me that leveraged shorting and flexionic interventions existed even before the Great Depression. Today's globalization, money creation at a stroke of a keyboard key, abominable trends in income/education disparity and demographics, coupled with general new low in societal conscience and ethics - all combine to create a more volatile cocktail than historical market stats bear out. 2001 brought the first foreign act of war to the American soil in centuries. I know that chair and others were critical of any a money manager strategizing around such an event. But was it a fluke, or a clue: that a wrong trend in place for some time will invariably produce an unexpected event? Why can't an unprecedented event hit the world's financial domain? In the aftermath of DSK Sofitel set-up, some may begin imagining the coming bank headquarter bombing, banker shooting or other domestic terrorism. I for one envision a further off-beat scenario: that contrary to expectations, the current debt spiral will be stopped dead. Can you imagine next market moves without the printing press? Will you find statistical precedent of zooming from 2 trillion deficit to 14 trillion and suddenly stopping one day?

Craig Mee comments:

 Very generous post, thanks Victor…

I would add, in this day and age, learn tough typing and keyboard skills for execution and your way around a keyboard, so you don't wipe off a months profit in the heat of battle. I would also add, learn ways of speed reading and information absorption, though these two may be more "what to do before you start out". 

Gary Rogan writes: 

Anatoly, I don't think really understanding the sector and and the niche is all that useful unless one knows what's going on as well as the CEO of the company, which means that in general understanding quite a bit about the company isn't useful to anyone without access to enormous amount of information. It's the subtle, little, invisible things that often make all the difference. There are a lot of people who know a lot about pretty much any company, so to out-compete them based on knowledge is usually pretty hopeless. It is nevertheless sometimes possible to out-compete those with even better knowledge by sticking with longer horizons or by being a better processor of information, but it's rare.

That said, it has been shown repeatedly that some combination of buying stocks that are out of favor by some objective measure, possibly combined with some positive value-creation characteristics, such as return on invested capital, do result in market-beating return. Certainly, just about any equity can go to essentially zero, but that's what diversification is for.

Jeff Watson adds: 

 In the commodities markets it's essential to cultivate commercials who trade the same markets as you(especially in the grains.) One can glean much information from a commercial, information like who's buying. who's selling, who's bidding up the front month, who's spreading what, who's buying one commodity market and selling another, etc. When dealing with a commercial, be sure to not waste his time and have some valuable information to offer as a quid pro. Also, one necessary skill to develop is to determine how much of a particular commodity is for sale at any given time…. That skill takes a lot of experience to adequately gauge the market. Also, in addition to finding a good mentor, listen to your elders, the guys who have been successful speculators for decades, the guys who have seen and experienced it all. Avoid the clerks, brokers, backroom guys, analysts, touts, hoodoos etc. Learn to be cold blooded and be willing to take a hit, even if you think the market might turn around in the future. Learn to avoid hope, as hope will ultimately kill your bankroll. When engaged in speculation, find one on one games like sports, cards, chess, etc that pit you against another person. Play these games aggressively, and learn to find an edge. That edge might translate to the markets. Still, while being aggressive in the games, play a thinking man's game, play smart, and learn to play a strong defensive game……a respect for the defense will carry over to the way you approach the markets and defend your bankroll. Stay in good physical shape, get lots of exercise, eat well, avoid excesses.

Leo Jia comments:

Given that manipulation is still prevalent in some Asian markets, I would add that, for individual stocks in particular, one needs to  understand manipulators' tactics well and learn to survive and thrive under their toes.

Bruno Ombreux writes:

Just to support what Jeff said, you really have to define which market you are talking about. Because they are all different. On one hand you have stuff like S&P futures with robots trading by the nanosecond, in which algorithms and IT would be the main skill nowadays, I guess. On the other hand, you have more sedate markets with only a few big players. This article from zerohedge was really excellent. It describes the credit market, but some commodity markets are exactly the same. There the skill is more akin to high stake poker, figuring out each of your limited number of counterparts position, intentions and psychology.

Rocky Humbert adds:

I note that the Chair ignored my request to precisely define the term "successful speculator," perhaps because avoiding such rigorousness allows him to define success and speculation in a manner as to avoid acknowledging his own biases. I'd further suggest that his list of educational materials, although interesting and undoubtedly useful for all students of markets, seems biased towards an attempt to make people to be "like him."

If gold is up a gazillion percent over the past decade, and you're up 20%, are you a successful speculator?If the stock market is down 20% over a six month period, and you're down 2%, are you a successful speculator?If you have beaten the S&P by 20 basis points/year, ever year, for the past decade, without any meaningful drawdowns, are you a successful speculator?If you trade once every year or two, and every trade that you do makes some money, are you a successful speculator?

If you never trade, can you be a successful speculator?

If you dollar cost average, and are disciplined, are you a successful speculator?

If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?

If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?

If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?

If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?

If you think you are a successful speculator, can you really be a successful speculator?

If you think you are not a successful speculator, can you be a successful speculator?

Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years? 

An anonymous contributor adds:

 In conjunction with the chair's mention of valuable books and histories, I would append Fred Schwed's Where are the Customers' Yachts?.

While ostensibly written with a tongue-in-cheek hapless outsider view of 1920s and 1930s Wall Street, it has provided as many lessons and illustrations as anything by Henry Clews. In this case, I am reminded of the chapter in which Schwed wonders if such a thing as superior investment advice actually exists.

Pete Earle writes:

It is my opinion that the first thing that the would-be speculator should do, even before undertaking the courses of actions described by our Chair, is to open a small brokerage account and begin plunking around in small size, getting a feel for the market, the vagaries of execution quality, time delays, and the like. That may serve to either increase the appetite for such knowledge, or nip in the bud what could otherwise be a long and frustrating journey.

Kim Zussman adds: 

The obligatory Wikipedia* definition of speculation is investment with higher risk:

Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.

There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing

By this definition one must define risk and decide what comprises high and low risk — which may be simple in extreme cases but (as we have seen repeatedly) is not very straightforward in financial markets

*Chair is quoted in the link 

Alston Mabry writes in:

I'm successful when I achieve the goals I set for myself. And rather than a target in dollars or basis points or relative to any index or ex-post wish list, those goals may simply be to act with discipline in implementing a plan and then accepting the results, modifying the plan, etc.

Anatoly Veltman adds: 

And don't forget Ed Seykota: "Everyone gets out of the market what they want". I find that everyone gets out of life what they want.

Plenty a market participant is not in it to make money. Fantastic news for those who are!

Bruno Ombreux writes:

This will actually bring me back to the question of what is a successful speculator.

In my opinion success in life is defined in having enough to eat, a roof, friendships and a happy family (as an aside, after near-death experiences, people tend to report family first). You can forget stuff like being famous, leaving a legacy or being remembered in history books. If you are interested in these things, you have chosen the wrong business. Nobody remembers traders or businessmen after their death except close family and friends. People who make history are military and political leaders, great artists, writers…

So you are limited to food, roof, friends and family. Therefore my definition of a successful speculator is a speculator that has enough of these, so that he doesn't feel he needs to speculate. I repeat, "a successful speculator does not need to speculate."

Paolo Pezzutti adds:

I simply think that a successful speculator is one who makes money trading. Among soccer players Messi, Ibrahimovic are considered very successful. They consistently score. They experience short periods without scoring. Similarly, traders should have an equity line which consistently prints new highs with low volatility and a short time between new highs. Like soccer players and other athletes it is their mental characteristics the main edge rather than knowledge of statistics. One can learn how to speculate but without talent cannot play the champions league of traders and will print an equity line with high drawdowns struggling losing too much when wrong and winning too little when right. Before dedicating time to find a statistical edge in markets one should assess his own talent and train psychologically. In this regard I like Dr Steenbarger work. In sports as in trading you very soon know yourself: your strengths and weakness. There is no mercy. You are exposed and naked. This is the greatness and cruelty of markets and competition. This is the area where one should really focus in my opinion.

Steve Ellison writes:

To elaborate a bit on Commander Pezzutti's definition, I would consider a successful speculator one who has outperformed a relevant benchmark for annual returns over a period of five years or more. Ideally, the outperformance should be statistically significant, but market returns can be so noisy that it might take much of a career to attain statistical significance.

Jeff Rollert writes:

I propose a successful speculator dies wealthy, with many friends. Wealth is not measured just in liquid terms.

Should a statistical method be preferred, I suggest he is the last speculator, with capital, from all the speculators of his college class.

In both cases, I suggest the Chair and Senator are deemed successful, each in their own way.

Leo Jia adds:

If I may wager my 2 cents here.

I would define a successful speculator as someone who has achieved a record that is substantially above the average record of all speculators in percentage terms during an extended period of time. The success here means more of a caliber that one has acquired which is manifested by the long-term record. Similarly regarded are the martial artists. One is considered successful when he has demonstrated the ability to beat substantially more than half of the people who practice martial arts, regardless of their styles, during an extended period of time. It doesn't mean that he should have encountered no failures during that time - everyone has failures. So, even if that successful one was beaten to death at one fight, he is still regarded as a successful martial artist because his past achievements are well revered.

With this view, I will try to answer Rocky's questions to illustrate.

Julian Rowberry writes:

An important step is to get some money. Preferably someone else's. [LOL ]



 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).





Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.














Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.



 1. There is a critical point in the market, a critical decision that the market gods weigh on a scale like Zeus with his balance scale deciding whether Achilles or Hector will win, that determines the market fate, and it is key and should be the focus of all news stories and market considerations but never is.

Never trust anyone but your family and best friend because everyone is disloyal in a pinch. Peleus was left for dead by his father in law after killing his brother in law to become ruler and this led to the Trojan war. Caesar trusted his best friends but they turned on him when an opportunity for power, money, and romance reared its ugly head.

3. Deception is key. The most successful Greek was the Deceiver Odysseus, and he tricked everyone he dealt with as the market tries to trick you with Odyssean power.

4. The goal is always to come home. Odysseus went home, as does the market. The only loyal ones were the wife and son and the best servant. The market retraces and comes home to break even an inordinate number of times.

5. Never mix romance with business or the market. The Trojan was was started by Paris intervening in romance and being swept off his feet by Aphrodite, and Achilles killed tens of thousands and prolonged the war by 10 years when Menelaus stole his mistress.

6. Don't try to walk with the Gods. Peleus married a half God and married her the last time the Gods and mortals mingled at a celebration and it caused him to be the most distressful of men. Trying to emulate Soros or the other greats is the seed of destruction.

7. Okay, give me the rest. And correct and tighten the above. I'm out of my depth but wanted to get the gist across.

Ken Drees comments:

 Like using a mirror against Medusa, one must plan against the adversary and sometimes use their expected attacks to beat them. Like shielding oneself from the siren song, one must be totally prepared, seek council before the journey (the trade) about what dangers are expected.

Also, it seems every entity in mythology had a weak spot. It's probably best to note these weaknesses in your thinking and in your emotions, not how can I beat the market, but how can the market beat me today?

Bill Rafter writes:

The greatest two rules:

(1) nothing to excess and (2) know yourself.

Pete Earle writes:

One lesson from mythology which resonates with me is the oracles/prophets/predictors almost always forecast correctly, but rarely in an obvious or immediately relevant way. The predictions made are usually realized, but not before taking extremely circuitous, and usually counterintuitive ways to reach fulfillment.

In my experience, predictions regarding the direction of equities or commodities inferred from option markets so often prove accurate…but only after traveling in the most wrong, most unanticipated ways.

Alston Mabry responds: 

 Pete, I think of that as "shaking the tree", i.e., we're gonna get there, but we're gonna shake out as many weak hands as we can along the way.

Peter Earle replies: 

Absolutely. Stop-running and the like as the "gods" way of seeing who's "worthy"; who can withstand the flood, the fire, the sturm und drang.

Jim Lackey writes: 

In 2008 I learned from Ryan Carlson– Sisyphus. There is a little useless book Wit and Wisdom from Wallstreet. So many of the quotes are the exact opposite from 3 pages ago… yet for a day they are seemingly sage advice. Worse for the long term. It's all good advice, yet in the mean time we must eat, and in the long term we all end up dust in the wind.

Traders lament when we miss profits. We are miserable when we lose. If we are not careful we are never happy. I have the habit of having to work myself up into a fury to win a race, pass a test or trade. My wife calls it "business mode" everyone else calls it being a jerk. Finally this year I have the ability to take a loss and this week miss a glorious rally and profit… yet at 4:20 PM its over. I am done pushing the boulder back up the hill for the day. I will return at 1:30am or by 7am, all but two business days a year. It can be torture if you do not like to trade, but if you love it…

Here is a quote from my kids music, "This is Our Science" by Astronautalis: "Our work is never done/ We are Sisyphus".

p.s I notice that if I don't like the rap beats I miss quite a bit of new poetry. I hear my teenagers say random lines and say what! That is amazing. Then I hear the song and say no wonder I never heard that line before. Damn drum machines.

Jack Tierney adds: 

Recently I've been reading up on complexity, system dynamics, and the unpredictable consequences that occur when tinkering with non-linear systems. The markets seems subject to all and, if I'm even remotely correct in interpreting the literature, there's only one certainty: expecting linear consequences (e.g, provide banks with more liquidity, bringing about an increase in business borrowing, resulting in a resurgent economy) is rarely, if ever, realized.

Instead, the unseen effects on unimagined factors, almost always derails the logic train. A source I've referred to on occasion is "Cassandra's legacy." Appropriately enough, the custodian of that site provides an interesting historical allegory, in the form of Goth Princess/Roman Empress, Galla Placidia, and her part in the demise of the Roman Empire. It's a very lengthy read and, unless history like this interests you, tough going. So, a few highlights:

"Managing any large structure is difficult and we tend to do it badly; a whole empire may be an especially difficult case. To do it well, we would need to use a method what I mentioned before: system dynamics; which is a way to describe systems and the relation of the various elements that compose them.

"…every time that the Romans fought the Barbarians, they could win or lose, but each battle made the Empire a little poorer and a little weaker. The empire was using resources that could not be replaced; non-renewable resources, as we would say today….the solution was not more troops but less troops. It was not more imperial bureaucracy but less imperial bureaucracy, not more taxes but less taxes.

"In the end, the solution was right there and it was simple: it was Middle Ages. Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages.

"What Placidia could do as an Empress was, mainly, to enact laws….It seems that Placidia was acting according to her style; ease the unavoidable, don't fight it….Placidia forbade the coloni, the peasants bound to the land, to enlist in the army. That deprived the army of one of its sources of manpower and we may imagine that it greatly weakened it. Another law enacted by Placidia, allowed the great landowners to tax their subjects themselves. This deprived the Imperial Court of its main source of revenues."

Stefan Jovanovich comments:

As much as King George's scribbler Edmund Gibbon despised Christianity, he had the Middle Ages even more because its bureaucracies were the worst of all — local and mean and stupid.

Professor Bard should revise his history. What he wrote here — "Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages." - is nonsense.

The Roman Empire's tax collections were always "local"; that is why Roman politicians were willing to pay such enormous bribes to be appointed provincial governors. The legions were also "local"; the Empire's expansion came from granting "foreigners" - i.e. the people we would today call Spaniards, French and Syrians - the privileges of citizenship, which meant they were also qualified to serve in the local legions. This was equally true under the Republic; "crossing the Rubicon" would not persist as a bad metaphor if Rome's soldiery had been centralized.

As for economics, whatever the "terrible expenses of the imperial court", they were nothing compared to the ravages of coin clipping. The solidus of the Eastern Empire maintained an unchanged weight and measure for 4+ centuries - a record that is likely never to be broken. (It exceeds the span of sound money for the British Empire and the United States of America put together.) After Princess Placida's day coinage, under the wonderful decentralization of the Middle Ages, effectively disappeared.

"Dearth of provisions, too, increased by degrees, and the scarcity of good money was so great, from its being counterfeited, that, sometimes out of ten or more shillings, hardly a dozen pence would be received. The king himself was reported to have ordered the weight of the penny, as established in King Henry's time, to be reduced, because, having exhausted the vast treasures of his predecessor, he was unable to provide for the expense of so many soldiers. All things, then, became venal in England; and churches and abbeys were no longer secretly, but even publicly exposed to sale." - William of Malmsbury wrote this in 1140 AD - the period that Professor Bard praises so highly for its progress over the degeneracies of the Empire.

Hume deserves the last word on this and most other subjects that interested him.

"Mankind are so much the same, in all times and places, that history informs us of nothing new or strange in this particular. Its chief use is only to discover the constant and universal principles of human nature."

Easan Katir adds: 

The Greeks have fooled people since the Bronze Age. Instead of a horse, they now have Trojan bonds.

Steve Ellison comments: 

Jack, the Atlantic had an article about why projects that had successful pilots often failed when rolled out to the general population.

Why Pilot Projects Fail– Here are some excerpts:

Promising pilot projects often don't scale … Rolling something out across an existing system is substantially different from even a well run test, and often, it simply doesn't translate.
Sometimes the 'success' of the earlier project was simply a result of random chance …

Sometimes the success was due to what you might call a 'hidden parameter', something that researchers don't realize is affecting their test. Remember the New Coke debacle? …

Sometimes the success was due to the high quality, fully committed staff. …

Sometimes the program becomes unmanageable as it gets larger. You can think about all sorts of technical issues, where architectures that work for a few nodes completely break down when too many connections or users are added. …

Sometimes the results are survivor bias. This is an especially big problem with studying health care, and the poor. Health care, because compliance rates are quite low (by one estimate I heard, something like 3/4 of the blood pressure medication prescribed is not being taken 9 months in) and the poor, because their lives are chaotic and they tend to move around a lot … In the end, you've got a study of unusually compliant and stable people (who may be different in all sorts of ways) and oops! that's not what the general population looks like.



 I view the adoration of the folksy and simplistic in finance as yin to the yang of irrational fear and hatred of allegedly "sophisticated"/"rocket science" instruments such as credit default swaps (which are, fundamentally, quite simple) and fundamentally mundane — while ostensibly terrifying — strategies and technology such as algorithmic trading.

It's a form of comforting primitivism, in my opinion.



Pete Earle wrote a very good article over at

The Aksumite civilization began coalescing approximately 400 years before the birth of Christ, with the aggregation of a number of tribes and clans in present-day Ethiopia.

Personally, I feel my heart swell knowing that I have friends as smart as Pete and the rest of the contributors to Dailyspeculations for that matter.



 Let us augment the Zacharian situation which I used to call a Finnegan where you look at the screen and a price is too terrible to contemplate because it's ruinous to you, and then you realize to your utter delight that the price was a misprint on the screen, and you're whole, and not losing at all, but …. by the end of the day or week, the price you feared actually turns out to be worse than you feared and you lose even more. Such a situation occurred in conjunction with the flash crash of May 6 when the price of 1060, which was ruinous for individual stocks and S&P was there for a second, but then it rose 8% in a day, and then Zachar predicted it would go bak there after it rose 100 points.

Okay, two other situations deserve a name.

You look at the screen, and you smile. Your market or stock is way up you think. But then– "Oh no," you were looking at the wrong market. And your thing is the only one that's not good or up if your long. That happened to me with my Rimm and Vix today. I see a market way up. I smile. Oh no. It's not Rimm, it's Vix that's way up.

What should this be called. And what about the variant where you have a price in mind to get out, and then you go to shave or take a call from a non-agenarian, and the price is realized, but by the time you can enter the order it's not there any more. And it never gets back.

A related situation is that you're out of office for a second, and you hear an announcement. The economy is very strong. However, bonds are down because of the crazy idea that a strong economy is inflationary. But that's causing stocks to go down. Okay, you're losing money on your longs. The market is crazy right? You grit your teeth and go back to take a look. Amazingly the bonds are way up however. WHY? Because stocks are way down. In other words, you lost on stocks because bonds were going to be down, but they actually went up when stocks went down, so you lost for an opposite reason.

What are the proper names for all these? And what variants of these type of things deserve a name?

Peter Earle writes:

The one where you look at the screen and smile– perhaps that moment is best termed an "Eastwood", a "Harry", or a "Dirty Harry", or being struck with/by (a) "Sudden Impact", as demonstrated by the relevant portion of this scene: first from 0:18 to 0:51…and then from approximately 1:05 to 1:13.

Chris Tucker writes: 

The last situation could be referred to as a "Cyclone", not for the storm, but in honor of the Chair and the iconic roller coaster of his youthful digs at Coney Island. The Cyclone is terrifying, filled with thrills, dips, lunges and jerks. And people keep coming back to plunk down there hard earned cash for more.

Very nice short history of the park at Coney Island here.

Vince Fulco writes: 

The Cyclone seems most apropos. What is it about Mr. Market's ability, esp. with these leveraged ETFs to give you a nice gain but not hit your target price and then revert back to your cost in an instant (many multiple percent away and seemingly not to be seen again in the near future with the new info) then turn within pennies and return you back to profit mode testing your temperament so mightily? The silver ETFs have acted like scalded dogs the last few days.

George Zachar comments: 

The Coney Island Cyclone was the signature thrill ride of my youth. I've ridden it well over 100 times.

What's always fascinated me about it, is how the experience varied with one's position in the 12 rows of seats.

In the very front, with the center of gravity many feet behind you, the visual danger signs led the acceleration by a couple of seconds, giving you the sensation of hanging over a cliff.

In the very back, my favorite spot, the acceleration came before you could see the rails dip, so it would catch you unawares and whip you sooner/faster than your mind anticipated.

Also, at the start of the right turn off the NW corner, the right-front wheels would leave the track for an instant, making first-time riders wonder if they were destined to die on Surf Avenue, in the shadow of the D train.

Alston Mabry writes:

The one where you're out of the office for a second, and hear an announcement– It's called "duck season".

The followup is too good to leave out: "Pronoun trouble".

Craig Mee writes:

About the one where "it's even worse than the mistaken price you mistakenly thought was your" :

I thought you were going to say, Victor, if after getting heart palpitations at the first incorrect reading, just by the fact you had done this, it's better to get out of your said stock now anyway, as you've brought bad karma to the trade.



I posted this some months back:

"Considering the nature of governments, markets and timing, I find it instructive to contrast the timing of the British government's sale of gold in 1998 (which came at, or at least very near, the lowest prices of a decade-plus time frame) against the timing of Blackstone's IPO, which came within several hundred points of the highest levels the DJIA had ever seen.

It seems to me that the perfectly logical, state hostility toward markets (begrudging their existence for purposes of fruitful taxation) would suggest that unique issuance events and decisions associated with them are likely to coincide with market bottoms, but that study has a very small 'n'."

I wonder if the government's sale of GM stock– moreover, and consistently, at a loss– is a logical, perhaps generational, buying opportunity. Alternately, one wonders if the multiple factors of unions under siege, radioactive Japanese suppliers, and the like are inspiring Barry & Co. to leave a bad situation badly before bad gets worse.



Is this NYT editorial by David Brooks not merely a modern restatement of the beliefs which [were popular for a while in the 1930s,] then essentially spawned Dr. Terborgh's refutation of productivity end-times in "The Bogey of Economic Maturity" (1945)…

…which is to say, a reiteration of the assertion that, with the plains and frontiers having been occupied (circa 1920), that no economic growth was left to be had?

90 years of industrial, manufacturing, biotech, internet, financial, and etc. growth says otherwise.



 There's probably no better comment on the state of "capitalism" in this country than that the pivotal issue and the sturm-und-drang slowly mounting around the NYSE being taken over by Deutsche Bourse seems to center upon a "bastion of American capitalism falling into foreign hands" (Aside: A business that essentially operates as a monopoly is a bastion of American capitalism? On second thought, perhaps.) and not, as it should be, what price is being paid vs. the current share price, and if/how shareholders stand to benefit in terms of economies of scale, marketing benefits, etc.

T.K Marks writes:

Regarding the foreign acquistion of the New York Stock Exchange, should there be any dissenters on the Board of such they should insist on writing into the contractual terms that any deal include an agreement in principle that the aquiring party should dig even deeper into their pockets and buy another New York namesake of note, the Mets.

That should be enough of a poison pill.

Should the terms of a such an arrangement not seem at first blush to be entirely above board, the irony lost upon them would be understable to those who have never toiled on an exchange floor.

To those who have worked on the floor and still don't get the above, a closer reading of Dante's Inferno may be in order.

Most specifically, the Fourth, Eight, and Ninth circles.

Those boys out there in Chicago are already saddled with the Cubs. They've suffered enough. Given the circumstances, throwing the Mets in as a rider to any Big Board deal would be cruel and unusual gamesmanship.

A compromise should be in order: Should the Germans in fact be serious about buying the NYSE, as a goodwill gesture they should agree to take Mike D'Antonio off New York's hands as well.

The Germans in turn could unload him to the Dallas Mavericks and get Dirk Nowitzki back.

Sounds like a complicated international negotiation, but then again only a coach with as little regard for fundamentals as Mike D'Antonio could somehow get The Hague involved.




 I took closing prices for the 30 DJIA constituents for each day in January 2011 (20 days) and tested 1st and 2nd digits of closing prices for Benford's Law compliance, which is to say I separately compared the 1st and 2nd digit actual distributions vs. Benford-predicted frequencies of 1st and 2nd digits for Chi-Square significance (p=0.05).

On each trading day of January 2011, the actual distribution of the first digit of the combined 30 Dow constituents was NS different than predicted by BL.

On January 5, 6, and 13, the actual distribution of the second digit of the combined 30 Dow constituents was significantly different than predicted by BL.

Ran the following simple linear regressions:

1. p-value of 1st digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day DIA return;

y = -0.0021x + 0.0018
R² = 0.0014

2. p-value of 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day DIA return;

y = -0.0049x + 0.0019
R² = 0.0471

3. sum of p-values of 1st and 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day DIA return;

y = -0.0033x + 0.0035
R² = 0.0336  

4. sum of p-values of 1st and 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day QQQQ return;

y = -0.0041x + 0.004
R² = 0.0144

5. sum of p-values of 1st and 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day SPY return.

y = -0.003x + 0.0028
R² = 0.0163

Not much to see here, thus far.

A mildly interesting aside is that on the three dates in which the distribution of 2nd digits was significantly different than predicted by BL, the number of which there appeared a superfluity was the same, 4; there appeared three times as many as predicted on Jan 5th and 6th, twice as many on the 13th.

As for those underrepresented in the actual distribution of 2nd digits, on Jan 5th and 6th the 2's disappeared. On Jan 13th (an "unlucky" day, at least superstitiously), no 7s (a "lucky" number, again superstitiously) appeared.



UPDATE 1/31/2011:

Contestants Summary:

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

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

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

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

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

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

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

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

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

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

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

Contracts Summary:

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

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

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

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

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

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

Victor Niederhoffer wrote:

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

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

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

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

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

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

David Hillman writes: 

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

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

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

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

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

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

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

Market direction picks are wanted:

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

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

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

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

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

Bill Rafter adds: 

Suggestion for contest:

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

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

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

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

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

Ralph Vince writes:

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

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

I'm going to sit and do nothing.

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

Gordon Haave writes: 

 My three predictions:

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

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

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

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

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

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

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

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

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

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

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

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

Jan-Petter Janssen writes: 

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

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

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

Vince Fulco predicts:

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

Additional points/guesstimates are:

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

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

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

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

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

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

Potential negatives:

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

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

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

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

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

Mr. Albert enters: 

 Single pick stock ticker is REFR

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

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

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

Dan Grossman writes:

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

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

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

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

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

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

Best to all for the New Year,


Gary Rogan writes:

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

Wildcard: Short Netflix.

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

Equal Amounts in:

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

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

12/30 closing prices (in order):


Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

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

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



Ken Drees writes:

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

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

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

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


Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

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

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

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

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

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

Scott Brooks picks: 


Evenly between the 4 (25% each)

Sushil Kedia predicts:


1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

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

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

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

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

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

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

Tim Melvin writes:

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

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

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

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

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

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

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

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

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

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

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

Other than that I am clueless.

Kim Zussman comments: 

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

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

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

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

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

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

Alan Millhone writes:

 Hello everyone,

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

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

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

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

Happy New Year and good health,



Jay Pasch predicts: 

2010 will close below SP futures 1255.

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

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

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

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

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

Chris Tucker enters: 

Buy and Hold


Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

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

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

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.



John Floyd writes:

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

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

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

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

A Mr. Krisrock predicts: 

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

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

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

4…commodities are peaking ….

Laurel Kenner predicts: 

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

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

Pete Earle writes:

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

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

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

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

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

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

J.T Holley contributes: 


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

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

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


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

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


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

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

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


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

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

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

Sex and Speculation:

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


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


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

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

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

Long - Common Sense.

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

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

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

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

I had to end on a Long note.

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

Russ Sears writes:

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

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

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

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

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

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

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

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

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

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

Yanki Onen writes:

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

Now the ideas;

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

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

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

-Sell contango Buy backwardation

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

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

- Leveraged ETFs suckers play!

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

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

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


Yanki Onen

Phil McDonnell writes: 

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

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

SLV closed at 30.18 on Friday.

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

Net debit is .50.

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

George Parkanyi entered:

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

BUY SILVER at open

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

SELL and then SHORT SILVER at open

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

COVER and then BUY SILVER at open

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

3 JAN BUY PLATINUM and hold to end of year.


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

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

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

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

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

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

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

Marlowe Cassetti enters:

FXE - Currency Shares Euro Trust

XLE - Energy Select

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

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:


VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

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



 Let's not forget the existence of many other distinct possibilities when dealing with microcap, possibly shell stock issues; the two currently being discussed here– simply 'going to zero'' vs. 'shooting up to $100/share'– are not, by any means, the only two possibilities, and in my experience traipsing about the world of Bulletin Board, Pink Sheet and letter/Restricted stock trading, I'd actually deem those the least likely outcomes. Adding to those:

Possibility #3: "The Yawn of Death". Company trades sideways for years - literally years - within a one or two cent range from the current price. (#3A: This, but periodically mgmt issues a few million/hundred million shares, expanding the float and ensuring little or no movement in the price other than possibly slipping agonizingly down towards 'bid wanted'.)

Possibility #4: "The Roach Motel". Company rises from, say, 4 cent per share present price to trading @ 10, even 15 cents per share (or drops to, say, 2 cents per share) - then volume drops to nothing and the bid/offered spread explodes; in former scenario, to 3 bid/20 offered or in latter 1 bid/5 offered, with only a scant bit trading daily.

Possibility #5: "The Long Goodbye". Company rises to, say, 15 cents per share (or $4 per share, for that matter), is suddenly and unexpectedly halted by a regulatory body, and either (#5A) never reopens for trading, leaving you with your sole 'return' reading regulatory proceedings concerning your dead money, or (#5B) reopens to trade 0.0001 bid, offered at 0.0003 for years.

Possibility #6: "The Shapeshifter". Company, with nary a hint of warning, issues a Press Release one day saying it is changing its business from stem cell research to researching and eventually opening the world's first chain of cold-fusion powered laundromats.

The world of corporate finance fairly bristles with avenues and options for locating and funding good ideas and talented entrepreneurs. Scant few - none, that I can recall - have ever come through the drillbit equity markets.

Jeff Watson writes:

Speaking of penny stocks…..are there any good studies out there comparing the vig in penny stocks vs regular exchange listed and NASDAQ stocks? Although beyond the scope of my limited intelligence, I would suspect the vig in penny stocks to be the highest of them all, as high or higher than a game of keno.

Kim Zussman adds:

It is hard enough to find something to buy which will one day go up. But after you buy at 0.05, what will you do when:

1. It doubles? (On the way to 10X or 0?)

2. Stays at 0.04-0.06 for 5 years– giving you plenty of time to get discouraged and sell– only you check back at year 7 and it is now trading over $1?3. You have enough guts to hold until 10X, and realizing this was a miracle, sell. Only to find it was the next MSFT

All hugely successful long-term investments will, along the way, ask what you are made of. For most of us this information is carefully concealed and thus the path is non-navigable.

Vince Fulco comments:

Moreover I would argue the energy required to follow the situation will exhaust the h-ll out of you and absorb the precious time you can use to find vastly more profitable situations. In the mid-2000s, way past the Net burst, a colleague who should know better bot converts and common in a new age company (prefer not to mention the industry to protect the innocent), participating with a top tier Greenwich HF in financing rounds. For the HF, the position was de minimis but whose participation was a great selling point to other investors. The technology underlying the company was patented but time was wasting on it and it faced much bigger competitors. It took only a few days of fact checking and looking through the SEC filings by me to realize something wasn't right. While the company surrounded itself with all the buzzwords of the day and had a great marketing effort, its cash burn was always way too high relative to its size and it was obvious existing shareholders would be diluted ad nauseum if the company were ever to gather sufficient resources to really grow. Deals booked were always tiny relative to the market potential and industry installed base. Bottom line: the red flags were all over the place but you had to be willing to listen and not drink the kool-aid. The majority of penny stocks are simply fool's gold surrounded by a sub-culture whose sole purpose is to tout by any means necessary. Suffice it to say, my Pal is still nursing this POS (piece of %^&*) as we call it in the industry. 

George Parkanyi writes:

Back in 1980-82 I was a stockbroker. One of the guys in the office, Paul C, connected with some guys out in Vancouver who were promoting/pumping a junior coal company. Paul had his clients buying the stock, and some of the guys in the office, including myself bought a little as well. I had about 5 or 6 people in it– some friends and relatives, and for a few weeks it rose nicely and I averaged up the positions.From what I heard of Paul's end of the conversations, you could tell these Vancouver guys had a certain amount of money they were using to work the stock, and the rise was carefully choreographed with orders placed just so and press release this and press release that timed just so. I wasn't paying a lot of attention, but Paul was constantly on the line with the promoters and with his clients. At some point, I forget the reason, my mother wanted to sell her position, so thinking nothing of it, I sold her out at the market at a good profit somewhere in the $5 or $6 range. Not 30 seconds later, some guy is on the phone chewing out Paul about "market orders coming in from his office". Paul looked really uncomfortable and came over to talk to me about it. I remember saying to him, "Are you *^&%$# serious? My mother's rinky-dink order is "messing up their market"? I'm outta here, and you should be too." So as quickly as I could call everyone in the stock, I blew out all the positions– at the market. Within days the whole thing collapsed. I personally got out already on the way down, only because I had to get all my clients out first. Paul and his clients never got out. I can still picture him sitting leaning back in his chair, staring out the window with that blown-up look, absentmindedly swinging his telephone around in circles beside his chair. He took it like a man though, and never held any of it against me.

As a general rule, unless you REALLY know something, never get into these things on the buy side. You need to assume that they are all pump-and-dump operations, no matter what the story. In fact, I remember doing a study at the time and concluded that a great strategy would be take a pool of money and short every Vancouver stock that popped its head over $5. When these things go, they collapse like a house of cards. Sure, a couple would have burned you, but if you did them all you would have made a killing.



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

Jeff Sasmor adds:

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

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

Peter Earle writes:

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



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.



 Took my daughter to Cleveland and the Browns game last night.

I told her cell phones are an epidemic observing from my seat all the texting etc. and noticed all the fans around us covered in tattoos.

Inking is expensive. Makes me ponder if the economy is really so bad.

Fireworks show after the game were unreal and made the evening complete.



Peter Earle writes:

Actually, like the market for shoes, the skin inking enterprise is a great example of the economic possibilities of a virtually unregulated market.

Typically relegated to prisons, the backs of bars/liquor stores, and other venues which the political parasites aren't wont to enter or be concerned with, the market for tattooing has seen explosive growth over the past 15 years; I personally attribute the growth to both (a) the social acceptance, later encouragement, of women to get tattoos, at least doubling the size of the market; and (b) the growth of musical and sports "gangsterism", in which an arms race for flesh adornment has led to "sleeves" and neck/head/facial tattoos to grow in prominence and, again, broadening acceptance of the undertaking.

With that explosive demand, from a fairly small number of parlors and side-venues I note the arrival of small entrepreneurs, ranging from affordable, storefront tattoo shops in malls to artist partnerships offering extremely high level quality and service: a virtually unfettered capitalism resulting in a wide range of various (sometimes bundled) services across a gamut of specialties and levels of talent, availability and differentiation resulting in a lowering of cost and huge product diversity.

Thus has arisen the inarguable ubiquity of the illustrated populace.

Marion Dreyfus comments:

My friends and I personally find tattoos artistic, executed in the main with extraordinary skill, and yet horrendous on a human being. I would not date a man with tattoos, and I avoid females who have indulged.

One always muses: What will happen in 10 years? How hideous will you find what you have done?

I surmise the followers of this unfortunate craft will subscribe to that existential philosophy: Live fast, leave a pretty corpse.

Peter Earle replies:

But from a broader perspective– the growth of tattooing is not only, in a market or business sense, a great example of the potential of free markets, but also illustrative of the social effects of what this country is in fact evolving into economically -hampered, intervention belabored, highly-regulated and increasingly socialist.

The social consequences arising of a credit-inflated, saving-disinclined, personal responsibility-defenestrated environment is/tends to be an immense high-time preference inclination of society; people thinking of the next 10 minutes, ten weeks or four years, and less of the long term picture.

In 60 years, elderly women with sagging, blotchy lower-back tattoos will crowd shorelines, and men's biceps/forearms/backs will murkily herald rock bands, songs, products and memes long since discredited and in any case extinct.

Pitt T. Maner writes:

Temporary tattoos made with henna were seen available near Manhattan east side docks where tour boats to Statue of Liberty are located. Advertised as an approximate 2-week tattoo experience. You could get the vicarious sailor tatoos around Halloween time as a good addition to your costume. Some might be allergic to henna though.

Indian bridal henna tatoos can quite elaborate and beautiful in some cases.

But I'll pass on anything permanent.

I also thought the 3-D photo images available at the docks where they holographically put your image in a block of plastic were kinda of neat if not a bit touristy. Good for a paperweight. Sort of dates the old photo booths. Evidently you can spend more on a real portrait. What tourists are being sold and what they buy is an interesting study in itself. It has to be a highly studied field.

I couldn't resist the Mexican jumping beans at JFK. Hadn't seen them in 40 years. You end up paying about a $1 a bean if you count only the alive ones! A nice markup there.

Gordon Haave writes:

A friend of mine who had tattoos and now is getting them removed says there is big competition and the laser removal guys are quick to cut rates. Apparently GE financed the purchase of the lasers the last few years and now people have defaulted and the lasers have hit the market cheap.

Just one date point, I don't know this firsthand.



 Considering the nature of governments, markets and timing, I find it instructive to contrast the timing of the British government's sale of gold in 1998 (which came at, or at least very near, the lowest prices of a decade-plus time frame) against the timing of Blackstone's IPO, which came within several hundred points of the highest levels the DJIA had ever seen.

It seems to me that the perfectly logical, state hostility toward markets (begrudging their existence for purposes of fruitful taxation) would suggest that unique issuance events and decisions associated with them are likely to coincide with market bottoms, but that study has a very small 'n'.



zombiesThe seemingly resurgent interest in vampire ("Twilight", Yarborough's "Ste. Germain" series, the "Vampire Diaries", others) and zombie ("Pride and Prejudice and Zombies", "World War Z", etc.) fiction may point to the interest in both the overall notion and particular fixtures of an 'undead' class.

Whatever the causal relationship, the concept of entities that exist in an unliving-yet-undying state– often having to survive by parasitic or cannibalistic means– drearily lasting for years, decades, and centuries in an ambiguous condition, seems to me to reflect/hint at expectations of/connote acceptance of, a prolonged period of economic and thus social stagnation.

Gibbons Burke writes:

Fr. Robert Barron has some interesting insights [6 minute video]  about the recurrent vampire craze from a Catholic perspective.



 It is curious that in the last week or two we've seen the sudden redemption of long-held doers of bad/evil/wrong: "The Boss" by death, a flexion-laden firm by settlement, BP by capping the well, central bankers harvesting more power even as the economy crumbles in the shadow of their initiatives; a cosmic whitewashing seems afoot. Meanwhile, those who could long seem do no wrong: AAPL, a former community-organizing law professor *cum* agrarian politico, gold, LeBron James (at least in terms of public sentiment) etc. are facing reversals of fortune and downward revision of their overall estimation.

I will be looking to see if, among the handful of strategies I employ, those which have been underperforming revive while those which have thus far been adding value stumble.

David Wren-Hardin writes:

So you're saying I should take Tiger to win the Open?

Peter Earle responds:

Not at all; I would say, though, that Tiger's (self-inflicted, albeit with media and feminist help) extremely short-term transformation from cherished, model athlete to one-stop scourge of mankind is precisely the sort of inversion which seems to be occurring in cluster form over the last few days.

Also, [i]inconvenient[ly], the public perception of a particular ([n]oble) pseudo-climatologist.



Trojan horse in Canakkale, TurkeyIn the last week or so, I've been tricked on several occasions into opening junk mail that I'd ordinarily have detected and discarded unblinkingly.

The ruse? The advertisements/solicitations/etc. arrived in my mailbox in pen scrawled, hand-addressed, regularly-stamped envelopes. Inside, though, was the full come-on.

Not bad.



 The variations in prices during the day is a source of wonderment to all who study them. For example the price of 1 comes up so frequently as to excite the admiration for its fortitude and staying power. Of 26 markets on my screen with a total of 81 digits among them, 30 of them have/are the digit one. Indeed, the proverbial battle during the day between the ensemble of markets and the bulls and the bears might well be considered as a battle among the prices themselves for replication and survivability.

From similar observations in the field of evolution Richard Dawkins came up with the theory of Selfish Genes. He pointed out that evolution works by copying genes. The genes themselves, without any motivation on their part, are in a battle to be passed on. They don't care about the interests of the organism that they are part of. His book based on this theory is considered one of the two most influential books of science of the last 50 years, and has sold more than 1 million copies. It explains and illuminates many phenomena that the traditional view of organisms competing at the level of the phenotype in a struggle for survival of the fittest find hard to explain — particularly altruism, deception, kinship, acting against interest, vivid and startling coloration (green beards).

The time has come to apply this theory to prices themselves. They are the units of variation that try to reproduce that control markets, not the other way around as is so frequently posited. Let's start with the battle of the price 0 to extend itself. Using daily prices, we see the Dow crossing from above 10000 to below 10000 three times during the last two years and crossing from below 10000 to above 10000 on two occasions. The 0 in 10000 gets to express itself four times while in all other prices of recent vintage it is only expressed three times so that 10000 is a particularly noteworthy price to achieve.

In addition, it's a green beard that attracts other prices at 0. When the Dow hits 10000 every financial media is likely to have a headline that the magic number has been broken. Other zeroes in other markets such as the Nikkei at 10000, gold at 10000, oil at 100, the yen at 1000, and the S&P at  1000, soybeans at $10.00 are sure to note the price and copy it. The zeroes in 10000 while acting essentially selfishly benefit other zeroes in other market that have the intellect to recognize what is happening in the Dow. The transmission of these effects in the media magnifies what has been called "green bearding" by Dawkins in the concept of the selfish gene.

a green beardOf course, if recognition plays a part in the propagation of prices, so does deceit. The same way that butterflies mimic wasps, markets may pretend to be going to a recognized number like 10000 but stop right before it as fast moving operations like the specialists or the high frequency traders step in to beat out those who have been deceived by the path. Such activities lead to the well known phenomena that highs below the round number and lows just above it happen much too frequently to be explained by chance in individual stocks and the major market averages.   

As a first crack at systematizing the theory of the selfish price, I calculated the closing 10 digit of the S&P unadjusted futures for the last three years, 743 observations in all.

Battle of selfish opening and closing prices

             opening price        closing price
0                  71                  88
1                  76                  69
2                  64                  55
3                  74                  79
4                  77                  70
5                  84                  79
6                  77                  76
7                  68                  65
8                  68                  76
9                  84                  70

One notes that the digit of 2 is losing the investment table, some 5 standard errors away from expectation, while the old faithful of 0 is winning the ultimate battle closing 88 times, 3 standard errors above expectation from its 74 expectancy. There are other wonderful and noteworthy phenomena revealed in this table, and its extensions, and many beautiful aspects of the struggle for existence, the mutualism, and antagonism of the prices for one another, and always their tendency to be in a positive feedback system with the growth of the market organism itself, which I will not gainsay the reader the jubilation of ascertaining for himself.

It is well known that genes often work together with each for the greater good of each other. For example, there could be a gene to make disease less likely under certain circumstances, and a gene for long life. A typical example of a gene that is beneficial to other genes but not to itself is a gene in birds for calling out loudly and clearly in situations of danger. The gene helps all the other genes survive in its kin, but not necessarily itself as it calls attention to itself. Genes tend to  work together to make for a greater likelihood that the whole organism and all its genes will survive and reproduce. The cost benefit function of a given gene may be y expressed as pb  versus c  where b is the benefit a gene gives to another gene, c is the cost, and p is the increase in probability that the other gene will provide to it.

The cost benefit function creates a situation where the genes come to be represented according to their net contribution to their ability to be reproduced in successive generations, including their cumulative impact on all other genes in the genome. The opposite situation which occurs must less frequently is called intragenomic conflict, and the classic example is referred to as segregation distorter genes which act to crowd out other genes that are beneficial to fertility. Egbert Leigh expresses this unlikelihood as follows: The genes act as "a parliament of genes, each acting in its own interests, but if it acts hurt the others, they will combine together to suppress it."                            

Apparently the price units of selection in markets do not act to suppress their neighbors. During the last 2600 days for example in the  S&P, 2530 days in the S&P 24 hour futures, 2412 of them have allowed each of the ten separate 10 digits, 0 to 9 to appear. In other words the 24 hour range has been more than 10 on more than 95% of all days. Apparently it keeps all the individual prices healthy to exercise each of its competitors on almost all days.

Here is a good reference on this Selfish Price theory which I posit in all seriousity.

Rocky Humbert notes:

The paucity of "2" as described by the Chair is a persistent phenomenon. For the 12,143 trading days between 1955 to 2003 (when the S&P first went over 1,000), the digit "2" occurred (as a tens) only 5.1% of the time.

Perhaps some of this may be explained by number theory — i.e. index calculation effects due to stocks trading in eighths and quarters, and that may also explain the increase in the "2" in the Chair's data post decimalization. (He found "2" rose to 8% from the 5.1% over the longer period.)

One further notes that on most QWERTY keyboards, the lowly "@" sits above the "2". Prior to email, the @ was slowly facing extinction– only to be resurrected to prominence contemporaneous with AAPL stock. Hence I believe it's premature to put the "2" in the Peabody Museum diorama that also houses the Dodo Bird and Pig-footed Bandicoot. 

Marion Dreyfus comments:

There is apparently a marker gene for how many times a person sneezes when he or she sneezes daily–This might be a signal to alert noticers of the individual patterning of investment thinking or individual behavior. As some people always sneeze thrice, and only thrice, or twice if the gene for twice is embedded in the coding ''parliament'' of the genome sequencing, perhaps we also have an idiosyncratic pattern of investing that has hitherto gone unnoticed. Can this be mapped, one wonders. And if so, can one be thus invested with more knowledge of the other's "hand," as in playing poker with someone whose "tell" you know, so you can conserve bets for when a hand/bet/risk is most propitious…

Pete Earle writes:

morpholinoOne of the tools used in determining genetic action– or, more aptly, interaction– is the morpholino, a short, targeted nucleotide sequence which blocks ("knocks down") expression of one gene among two or more to see if, or how, the ultimate expression of said genes changes. My partner is involved in exactly this sort of research daily. Once she targets a gene– in this example, trying to determine the interaction of two genes in producing a specified outcome (gene A + gene B = expression C)–she then conducts subsequent experiments in which she varies the amount of the morpholino between 0% (no morpholino, the control group) and increments up to and including full strength (complete knock-down of gene A, 100%). This is to determine which gene, if any, is more important to a given expression than the other; and to see if a gene interaction is of the simply "on/off" type or if expressions take place along a spectrum of outcomes.

I suspect that with respect to Vic's Selfish Price Theory, we might look at morpholino-equivalent testing with a comparison of periods within which a given market approached a certain number-expressing level, and compare those with others, looking for volume superlatives; one would expect the day or week of the arrival of Dow 8888, 10000, and 11111 to be of higher volumes to a statistically more significant extent than, say, those when Dow hit 12345 or 9876. This could be broadened to look at random snapshots of days where, across a number of indices or index-constituting stocks– even, and perhaps especially, in the absence of such aesthetically pleasing prices as 10,000 or 55 and such– we would look for higher-than-expected volumes when and where there noteworthy appearances by a particular number across a spate of closing prices. 

Pitt Maner III writes:

My dentist last week mentioned to me that he was studying the latest papers (within one day of publication) on gene "crosstalk" so as to help his daughter in college who is doing an honors thesis on the subject (and how it relates to drug interactions with cancer cells). Cancer cells evidently have a means of (and this is over my head—cell experts please jump in) of dampening the effects of anti-cancer drugs through cellular cross-talk genes. Therefore drug manufacturer have a need to knock out the cancer cells through a series of steps to weaken these defense/signaling channel mechanisms.

Any underlying, as yet undefined, step-like mechanisms and pathways would seem to skew number distributions.

Henrik Andersson comments:

Benford's lawThis seems somewhat related to Benford's law which predicts the probability of digits, for example the probability that a stock index of stock price will start with a '1' is slightly above 30%. A funny side note is that this theory of frequency of numbers in nature can be checked using Google searches.

Victor Niederhoffer responds:

I don't think it applies here, especially for the second, third and fourth digits.

Henrik Andersson replies:

Yes, it probably only over powers other forces in the market for the first digit.

Kim Zussman writes in:

The SP500 is Benfordian:

Using daily closes SP500 1950-present, counted days which closed with the first digit = 1. eg, {1XXX.XX, 1XX.XX, 1X.XX} (there were no 1.XX yet}.

Of 15135 total days, 5514 had 1 as the first digit.

Alston Mabry writes:

And to relate that chart to genetics: If volatility = selection pressure, then when volatility/selection pressure is low, variability in digit frequency/phenotype expression is high; but when volatility/selection pressure is high, variability in digit frequency/phenotype expression is low.

And different species have different time intervals, i.e., lifespans.

Peter Earle responds to Henrik Andersson's comment:

At risk of torturing the analogy a bit– but worth mentioning: "Yes it probably only 'over powers' other forces in the market for the first digit. "Let's discuss those "other powers", as they are germane to Vic's theory. It's appropriate to at this point bring up one of the hot topics that my partner, again, is working on: epigenetics. In short, it's the imposition of hard-coding changes on DNA (via methylation) by environmental effects. While still not fully understood, one example is depicted by rat experiments in which the pups of profoundly overweight mothers (exposed to high levels of interuterine glucose) switched at birth with skinnier rat mothers show a statistically significant greater chance, thereafter, of becoming obese, even setting aside "lifestyle" and dietary settings. (See the "Barker Hypothesis" for another example of this phenomenon.)

With respect to Vic's Selfish Price theory, we might quantitatively express these variations from expected (Benford's Law) vs. actually expressed frequencies of prices/digits as an epigenetic effect: 'environmental' effects whereby the impact of market participants and economic influences -forces and memes - push toward or away from predicted, anticipated baselines.To that end, tracking the ebb and flow in expressed, realized prices from what which the Law predicts over time could provide one way– no doubt an incomplete way, but a way nonetheless - of quantifying the ever-changing cycles. 

Alston Mabry says:

Back to the tens digit, this time in the S&P cash. Starting with January, 2004, I calculated a 250-tday rolling total for each digit, e.g., in the past 250 tdays, how many times has the tens digit of the S&P Close been 0 or 1 or 2, etc. Then calculated the gap between the most frequent and least frequent digit, e.g., if 6 was the most frequent in a given 250-tday period, occurring 48 times, and 3 was the least frequent, occurring 21 times, then the max-min gap would be 48-21 = 27.

Then for I calculated the SD for each 250-tday period, too, as a measure of volatility. The attached graph shows the two series. What can be seen is how the max-min gap is higher when volatility is low, but compresses into a narrow range when volatility increases. This seems intuitively sensible if one thinks of a more volatile S&P moving quickly through various values and thus being more "random" at the tens digit. Whereas, when volatility is low, the S&P would be "stickier", hanging around longer at certain tens digits, thus creating a wider max-min gap.

Of course, an underlying factor is the arbitrary nature of choosing a unit of time such as a trading day. If one zoomed in and out, using different lengths of time to create ecah "Close", then one would probably see a clear relationship between volatility and digits on different time scales.

One more take (esoteric, but I really like the chart): For each S&P day from 1990 to present, calculate the distribution of the tens digit in the S&P for the 250-tday period ending that day: 41 zeros, 24 ones, 23 twos, etc. Then get the SD for this distribution. Example:

41 0's
24 1's
23 2's
17 3's
26 4's
20 5's
20 6's
21 7's
19 8's
39 9's

SD: 8.33

Then calculate for the same 250-tday period the SD of the daily change in points of the S&P - points rather than percent because we are relating index point movement to digit distribution.

So, for each 250-tday period, we have a measure of the volatility of the index and the variability of the tens digit. Sort all the 250-tday periods by the S&P volatility value, high to low, and graph the result - see attached graph .

Nice inverse relationship between the S&P point volatility and the variability in the tens digit.



Brain Basics: Brain Damaged Investor from Inside the Investor's Brain by Richard L. Peterson

According to a 2005 Wall Street Journal article, "Lessons from the Brain-Damaged Investor," brain-damaged traders may have an advantage in the markets (1). Study participants who had a brain lesion that eliminated their ability to emotionally "feel" were compared against "normals" in an investment game. The chief researcher, Professor Baba Shiv (now at Stanford University), used a mixed sample of patients with damage in emotional centers including either the orbitofrontal cortex, the amygdala, or the insula.

In Shiv's experiment, each participant was given $20 to start. Participants were told that they would be making 20 rounds of investment decisions. In each round, they could decide to "invest" or "not invest." If they chose not to invest then they kept their dollar and proceeded to the next round. If they chose to invest, then the experimenter would first take the dollar bill from their hand and then flip a coin in plain view. If the coin landed heads, then the subject lost the dollar, but if it were tails, then $2.50 was awarded. On each round, participants had to decide first whether to invest. The expected gain of each dollar "investment" was $1.25 (average of $0 and $2.50), while each "not invest" decision led to a guaranteed $1. The expected value of the gamble being higher, it was always the most rational choice. Thus, one might assume that subjects always "invested" in order to make more money.

In fact, the results are not uniform. Normals (without brain damage) invested in 57.6 percent of the total rounds, while brain-damaged subjects invested 83.7 percent of the time. Many normal subjects (42.4 percent) were "irrationally" avoiding the investment option. Following an investment loss in the prior round, 40.7 percent of the normals and 85.2 percent of the patients invested in the subsequent round. After recent losses, normals invested 27 percent less often. They became even more "irrationally risk avoidant" after a loss.

Of the patients with different brain lesions, the insula-lesion patients showed the leas sensitivity to risk, investing in 91.3 percent of all the rounds and in 96.8 percent of the rounds following a loss. As a result, it appears that the insula is one of the most important drivers of risk aversion. Without an insula, brain-damaged patients were more likely to "invest."

On the lighter side, neurologist Antoine Bechara ventured that investors must be like "functional psychopaths" to avoid emotional influences in the markets. These individuals are either much better at controlling their emotions or perhaps don't experience emotions with the same intensity as others. According to Professor Shiv, many CEOs and top lawyers might also share this trait: "Being less emotional can help you in certain situations." (2)

1. "Lessons from the Brain-Damaged Investor" Wall Street Journal, July 21, 2005.
2. Chang, H.K. 2005. "Emotions can Negatively Impact Investment Decisions" (September). Stanford GSB.

Newton Linchen replies:

Larry Williams teaches that we shouldn't try to "improve" our personality regarding trading and emotions. There are "emotional guys" and there are "cold guys". Being an emotional type and trying to become cooler is another problem to solve, and the markets gives us already much trouble to work with. So, he says in his books that we should only recognize "what type" of people we are, and develop our trading style accordingly.

Pitt T. Maner III comments:

With the availability of more and more powerful software programs for the average Joe, will the human element eventually be less of a factor? One for instance can play a very mean game of chess without being a grandmaster by using a powerful program to suggest moves. There are tournaments where this is allowed—man/computer chess. So could it be that there will be a move towards very advanced "cyborgian" arrangements in the future. Not necessarily more profitable but less emotional–more algorithmic. It seems the younger generations are more trusting of technology to solve all problems, and as costs come down on the technology and software, will there be a pull to use methods similar to those now employed by professionals? Can one become competitive by using a "crutch"? Mr. Schnytzer noted a couple of years ago, " My guess is that with Deep Blue at your disposal, you'll beat Nigel easily at chess, but won't improve on your options trading profitability." Of course there is a company, however, using the Cyborg name that promises (for a small fee) to bring all this to the common investor…but does it work, or with increasingly advanced software can it work in the future?

Kim Zussman comments:

'We should only recognize "what type" of people we are, and develop our trading style accordingly.' Up to and including not trading. The idea that anyone can learn to trade successfully can be checked by asking yourself: 

1. Could you learn to play competitively right now in the NBA , NFL, or national league?

2. How long could you stay conscious in the boxing ring for your weight class, or with an opponent twice your size (SEC says no guns allowed)?

3. If trading can be taught, why do most fail?

4. If a scientist, by definition shouldn't you be too quick to abandon convictions, and therefore vig-out with overly-tight stops?

Rocky Humbert responds:

The answer to Kim's question #1 and #2, as posed, is self-evident.But there may be flaws in the question. No one can just walk onto a field and play pro ball. Likewise, no one can walk into an operating room and perform open heart surgery. However, must people can (assuming they are able-bodied and mentally capable) invest thousands of hours and achieve some reasonable level of proficiency in most activities. A reasonable level of proficiency, does not mean being Derek Jeter, Tiger Woods, Christian Barnard, Buffett, Soros, Steinhardt and Robertson. Fortunately, one does not have to be in the 99.999999% percentile to be deemed a non-failure — or almost every reader (myself included) of this email would be over-dosing on anti-depressants! On #3, Why is there any reason to think that the percentage of traders who fail is any more than the percentage of entrepreneurs who fail (90%), or the number of people who drop out of the 36-week Navy SEAL class (70+%)? Competitive, high-risk activities always have a high drop-out rate. But, most of these people find their calling and are productive members of society…even if they can't throw a 100mph fast ball.

Jeff Watson comments:

I've often wondered where that meme of a 90% failure rate in trading originated. I see it in the literature, and hear it repeated all the time, accepted as gospel. Has anyone actually done a study to quantify this, or is the number just one of those numbers like Mitch Snyder pulled out when he quipped that "10,000 homeless people die a day".. And, what constitutes success in trading, what time parameter. Is success measured by return, by amount made, or by the ability of someone to grind out a small profit for 30-40 years, solidly in the black but never making a fortune?

Rocky Humbert replies:

Jeff's statement: "Is success measured by return, by amount made, or by the ability of someone to grind out a small profit for 30-40 years, solidly in the black but never making a fortune?" are great first questions. Regarding traders "failing," one should also consider a related data point: According to the BLS, the "average" baby boomer held 10.8 jobs from ages 18 to 42. 23 percent held 15+ jobs, and only 14% held fewer than 4 jobs. So, the "average" person changes jobs every 2 years. If one defines trading as a "job," then someone who does this, sitting in the same chair, for a long time is quite unusual compared with the population. see :

Kim Zussman comments:

No one can just walk onto a field and play pro ball. Likewise, no one can walk into an operating room and perform open heart surgery. However, must people can (assuming they are able-bodied and mentally capable) invest thousands of hours and achieve some reasonable level of proficiency in most activities.> My question is based on evidence like the article; supporting geneticaspects to behaviour, ability, gifts, and handicaps. Not everyone canbe trained to reasonable proficiency in the big leagues - and marketsare by definition among the biggest. Shouldn't traders ask themselves whether the reward/risk compensates the opportunity cost of thousands of hours of (potentially pointless)learning, if one may be (unknowingly) missing abilities needed toexceed results of buy and hold?

Peter C. Earle comments:

I am quite sure that this particular figure - 90%, sometimes shifted to 95%or even 99% - originated firmly in the late 1990s, when the SEC went afterthe SOES shops. They took, as their core example of the dangers, the exampleof one office of a particular firm which in a short amount of time morphedinto a general representation of the daytrading business (e.g., even the'prop shops' which were less focused on commissions than profitable trading)and was ultimately extended through word of mouth and the nascentblogosphere (e.g. message board jabbering) to cover any intraday tradingdone (online brokerage accounts, the occasional one day open/close, etc),and has since grasped the received wisdom of the collective mind at thispoint to an extent that it goes unquestioned. The fact is, the SOES traders/daytraders (as my man Lack will no doubtattest to) were mostly undercapitalized, out-of-work accountants andconstruction workers being sold 'maps to the gold mine', as it were. A better statistic, to start with, would be: with an $X account, after twelve months, how many remained?

Kim Zussman comments:

Interestingly, the author was as irrational as his subjects byfollowing the academic herd, making a low-risk, incorrect conclusion: "This study is especially relevant because of a concept called the"equity premium puzzle" that has long bemused financial experts. Theterm refers to the large number of individuals who prefer to invest inbonds rather than stocks, even though stocks have historicallyprovided a much higher rate of return. According to Shiv, there iswidespread evidence that when the stock market starts to decline,people shift their retirement savings—that is, their long-term, notshort-term, investments—from stocks to bonds. "Whereas all researchsuggests that, even after taking into account fluctuations in themarket, overall people are better off investing in stocks in the longterm," said Shiv. "Investors are not behaving in their own bestfinancial interest. Something is going on that can't be explainedlogically." This study, 2005, was in the middle of a decade where bondsout-performed stocks, and the irrationally risk-averse were punishedby missing out on ruin.



 One is always amazed at how useful and insightful the customs of the British Navy are. It was equivalent to mutiny there when a captain proferred a dinner at his table to a junior officer and the junior officer declined (except when a matter of gallantry was involved). How often I've invited a junior officer to dinner and it was declined and a month later I found the junior officer had performed or was about to perform an activity punishable by death by the articles of war. What other nautical or martial customs can you think of that would truly be useful to incorporte in everyday life?

I am writing a review of Nigel Davies' new book. It's so good, it's unbelievable. He's distilled the wisdom of markets, martial arts, psychology and chess into a lesson for all of life and boards.

Pete Earle writes:

What better place to start than the naval tradition of keeping a (Captain's) log book, of course. Recording the events of the day, successes, failures, incidents and accidents in such a way that one — or their successor — can peruse them at will, and in so doing be better prepared for the future. I don't know a single serious, professional trader who doesn't do this, and the practice extends far beyond financial markets.

Tom Marks jokes:

Who amongst us hasn't at some point over the years sailed past a woman or two on whom they they'd love to apply a cajoling variant of this old British nautical custom.

George Parkanyi lends a hand:

Here's a useful summary of such Royal Navy customs and traditions.

Apparently one of the traditions for a warship entering a foreign port was to fire all their guns, shoot their wad as it were, to show that they were coming in unarmed. (I wonder if this analogy ports to dating?) Also, when two foreign warships met the custom was to sail at each other and fire off a broadside volley before coming abreast, basically for the same reason "Hi, how are you, I'm unarmed". But I'm wondering about those warships that had three rows of cannon. OK, you fire your first row "Hi, how are you? I'm good too", and then once broadside you empty the other two rows into the passing ship. Surely some sorry captain has the dubious distinction of having been the first to learn that lesson the hard way. "Oh, you didn't get the memo? We're at war."



The most amazing thing about markets to me is that no matter how many previous instances I have, I can never find days that are anywhere near the ones we are currently having. The S&P is moving from x day highs to y day lows with impunity and alacrity and then hanging on the balance scale at the end of day when Zeus decides who will win.

Peter Earle replies:

I remember reading a book several years ago about Roger Bannister and his breaking of the four minute mile in 1954. At the time there were any number of physicians who predicted that the record was physically impossible to break; one predicted that Bannister's heart would explode in accomplishing such a feat.

I was reminded of this in both watching (and hearing) that, once again, in a seemingly inexorable march of highs (and lows), world records were broken throughout the Olympics in Beijing.

It bears mentioning that the events themselves have changed greatly from year to year: not only in the rise of professional Olympians, undistracted from a training (indeed, a living) regimen by employment, formal education or social duties, but as well in the structure of the events themselves. Engineered swimsuits, deeper pools, vacated end lanes, and other such changes in swimming events alone have contributed to the aforementioned increase of extremes.

So too, in the markets: that the year-over-year outdoing of previous records in extremes have as much, if not more, to do with the character, fragmentation and specialization of market venues; the "democratization" of access to various markets, bringing millions of additional opinions and hundreds of billions more dollars in; the rise of electronic, in particular algorithmic trading; better/faster processing speeds in technology; and the like, ad infinitum — than of any intrinsic quality of markets.

Kim Zussman ponders:

Like global warming, it is hard to measure whether the market becomes progressively and durably more efficient, or just temporarily stations in an efficient regime. Presumably the proportion of outperforming trader/investors who persist over long periods must go down if markets get more efficient, but that number ought to be hard to get, in that widespread knowledge could discourage the hopeful machine.

Anatoly Veltman adds:

I'll give you another factoid: TY (10-y Treasury futures) lost 10% of Open Interest on the Fri, Aug 22 drop. We just found out that FV (5-y Treasury futures) gained almost 10% of Open Interest in Tue, Aug 26 slow trade. Any connection to the recent abandonment of 10-y as the benchmark?



Hedge Funds and Private Equity Alter Career Calculus

“I don’t think you will see M.B.A.’s less represented in executive suites, but you may see M.B.A.’s less represented in the lists of the world’s richest people,” Professor Schmalensee says.

So is business school a waste of time, or worth it for a young person starting out in a career in finance?

Peter Earle replies:

Getting an MBA was helpful for me as my academic background was in Comp Sci and History and, despite having read every book I could get my hands on, there were many gaps I needed to fill. Plus — although far less than 10 or 15 years ago — I'm told that for a sizeable number of finance/economics/business positions it remains one of the criteria used by HR professionals to screen a large stack of resumes on a "first pass" before digging deeper.
I wouldn't describe it as a waste of time, but in retrospect my career wouldn't have been much different without it. Your mileage may vary.

James Lackey asks:

What is the outcome you desire? If you want to work for Goldman you'd better start early to get into Harvard. If you want to work for the government, make connections early, be a clerk. The military, do ROTC. If you intend on working for yourself, it's best to get started early.

Without Vic and Laurel and their circle of influence, many of us would have missed out on the contacts we have made. To find a circle of erudite benevolent friends, perhaps again the Ivy League is the place to be. I was very lucky to be at the right place at the right time to meet Vic and Laurel.

What is the point of business school or being a businessman? What is your definition of success? Mine is the ability to do exactly what I love to do as a career, profit from meaningful work. Yet the huge catch: I do not want to answer to anyone.

Alston Mabry writes:

These days one must also be wary of the University of Phoenix effect. The Apollo Group has made a pile of money offering distance learning courses and degrees, and now nearly every traditional higher-ed institution is trying to compete. Distance learning wasn't invented by Phoenix, but they have used it to change the industry.

One upshot of this is the lowering of standards in many situations, especially when a degree program can be offered online and/or at night, to working professionals whose employers are willing to foot the bill. There is an incentive for the students to just "get the degree," and a big incentive for the institution to just collect the fees and definitely not to flunk anybody. Actual education, learning takes a back seat.

Henry Gifford writes:

A few years ago I spent some time at the business school at Columbia University. I was studying math for a few years, in a different building, but when my classmates wanted to study together, they usually wanted to meet in the library at the business school, thus we spent a lot of time there. The male students said they wanted to study there because the females there were better looking than elsewhere on campus. The female students said they wanted to study there because the library was the nicest on campus, and the male students said the females wanted to be there to meet a male who had high earning potential.

I sometimes read the student newspaper for the business school, and attended a lecture or two, which I think gave me some sense of what was going on. My clearest memory was of an article about a business school trip to an African country. The first day the students met with an economics minister, the next day they went on a tour of a coffee roasting facility, and the third day they went on a tour of the local Coca-Cola bottling plant, where their van got stuck in the mud. The reporter was skillful in vividly describing the complicated interactions and various stregnths and weaknesses of the different people involved with pushing the van. Then they spent the next five days at a resort on the coast, and the article ended with a request for donations to send money to help the country out of its endless cycle of corruption and poverty.
AfriqueI wrote in suggesting the best way to help the country out of poverty would be for someone to write a business school newspaper column analyzing the various stocks offered for sale in that coutry's stock market. The column could discourage buying stock of companies run by less honest management, and encourage each student to buy five or ten dollars worth of other stocks, thereby creating a source of income that the local corrupt politicians had little power over, and a source of experience and possible profit for the business school students. For some reason my letter went unpublished.
The newspaper also made it clear that students in each class were put into small groups, to encourage stronger connections between students during school, and after, when they could help each other get hired or promoted. There was also a lot of mention of the positions held by graduates, implying the purpose of the school was to have alumni provide a leg up for recent graduates. I saw little or no mention in the newspaper of actual business principles, theory, strategy, management, or sources of information on these topics.
I was left with the feeling that it was a large fraternity house subdivided into smaller clubs, which served mainly to prepare people for corporate culture — the right way to act, how to talk without saying anything, when it was neither appropriate to be silent, how to maneuver through the office/group politics, whom to challenge and whom to back down from, etc. All the skills nescessary to survive in a large organization, obtain connections that would be useful there, and have a chance to start at a level significantly above the bottom. I thought the school would be very worthwhile for anyone interested in those things.

Albert remarks:

For me B-school has provided an invaluable education. Whether it helps with job searches in the future I can't say. But I'm coming out understanding so much more of why the world works the way that it does than I did when I started.
I will say too that for a person who goes to a good school full time, the recruiting benifits are enormous in the industries that respect an MBA degree. But it is critical for a person going full time to go in knowing where they want to go afterwards as summer internship recruitment starts in the first few weeks of the first year and typically the summer internship leads to an industry job the following year.
So, like everything, it depend what you want to do with the degree.

Vin Humbert writes:

I've just started a Masters in Financial Economics programme at Oxford. I think the curriculum (as well as the physical surroundings, which are lovely) will be a good backdrop for my current stage as a student of the markets — after several years of balancing a law career with studying the markets, I'm moving towards being a full-time trader.

Orientation started today so I can't really say too much yet about the extent to which the programme is meeting my expectations. It's a pity they use MATLAB instead of R — but just as musical training in one instrument can have benefits on another instrument, I think the MATLAB finger exercises will be useful.

And, indeed, just as Albert says, classes haven't even properly begun yet and I am already supposed to be looking for a job for after my graduation in July!



 Reading the Bond Guru's August 2007 Investment Outlook, I'm forced to consider the psychological condition known as Stockholm Syndrome, whereby individuals in close proximity with those exerting power over them come to not only sympathize with but in some cases actively defend and endorse their captors.

Peppered with class warfare ("private equity and hedge fund managers.. aided and abetted.. at the expense of labor") and the politics of envy ("trust funds," "inheritances," "ego-rich donations" described as "egregious and wasteful"), one wonders: does years of contact with Treasury officials, central bankers, federal/state/municipal politicians, perhaps coupled with immersion in the detailed study of government statistics and the consideration of various parties' policies, inevitably lead one to an appreciation for, or embracing of, statism?

East Sider adds:

I think the Bond Guru is positioning himself to take Sage's spot as the "own man" cited by the press as promoting pernicious state activity despite seemingly capitalist credentials.

When I read the Bond Guru's article, I thought of my many track friends that bad-mouthed the sprinters. The sprinters were often headed for big bucks in the NFL. They were blessed with the right talent to make big money. You see the same thing with the old guys in three major sports complaining about the youngsters now getting the big dollars. These complainers think that they where in the "athletic" business. That they got paid for their competitiveness. What they miss is that they are in the entertainment business. Their game just is not as entertaining as the major sports games have become.

Russ Sears adds:

He thinks he is in the investment business, just like them. What Gross misses is he is in the risk-taking business. No doubt his is a good investor, perhaps better than the guys pulling down the bigger bucks. But he is not a good risk taker.

But what else it reminded me of was when I first married my wife. We would go visit some friends, farmer daughters. The farmer wife would join us staying up late, playing card or talking. While the farmer sat in the back of the house flipping channels to find the most depressing newscast available. As only tired but intoxicated with life young girls in front of a young guy can, they would giggles and laugh in such fits till the old farmer would yell, "stop that laughing out there! You girls are driving me crazy!" Then I would hear latter that the girls got a stern lecture on being so unproductive and frivolous. It was probably the most productive night of the month on that farm.

In short he forgot how to enjoy life, enjoyment’s infinite value, and forgotten how motivating that can be.

Ronald Weber writes: 

I believe one should just see him as a good salesman doing his job, in his case: selling bond funds! And for people to buy his funds he needs of course to spread negative news flows.

Actually, he does a pretty good job at sales; but somehow most of the investor’s community take him way too seriously as a "financial prophet"! I like to think of him as a good "dramatic" entertainer before Leno’s Tonight Show and after a noisy day from the "neo-comic" NBC/Bloomi/Analysts crowd! 



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

Jeff Sasmor adds:

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

Scott Brooks remarks: 

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

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

Stefan Jovanovich writes:

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

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

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

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

Alex Forshaw writes:

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

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

Stefan Jovanovich adds:

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

Scott Brooks responds: 

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

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

Alex Forshaw replies: 

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

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

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

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

Stefan Jovanovich writes:

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

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

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

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

Gordon Haave remarks: 

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

George Zachar writes: 

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

Peter Earle comments:

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

Stefan Jovanovich continues:

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

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

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

Gordon Haave adds: 

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

J T Holley asks:

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

Gabriel Ivan writes:

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

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

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

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



 My boss had an intimate friend who was formerly in the cordage business. I used to hear them talking about how he had sold out his plant for about four times its worth of stock of the National Cordage Co., and how this trust would absorb everyone in the cordage trade, and soon have a monopoly. One day I heard my bosses friend say "when the whole thing is rounded up, that common stock will double in value and pay ten percent a year."

This was good enough for me. Here was an insider who knew all about the stock, giving his intimate friend this rare piece of information. That my boss was himself  convinced was evidenced by a check which I saw the next day, made payable to a firm of stock brokers and for an amount just equal to the value of 500 shares at the opening price for th National Cordage Co..

All hesitancy on my part now vanished, and at the noon hour I hustled up to my brokers office, sold out every share I owned, and put my last dollar in to Cordage. I was staking everything on this venture, and thought of all the things I would do with the money I was going to make. So carried away was I with the proposition, that I departed from my heretofore inflexible rule, and asked my broker on what margin he would carry the stock. His very conservatism saved me perhaps from what might have been a worse fiasco, as he refused to buy it except for cash.

After I bought cordage, it didn't seem to have so much resilience as I hoped, but I thought of the vast negotiations which were going on, and how the value was being added to daily, unknown to the outside public. But there's no use going over the details, everyone knows what happened to me and my cordage. It went from 90 after I bought it, to one, in the panic of '83. It went to pot along with General Electric and a lot of others.

To cap the climax, my firm was so crippled by the loss of capital sustained through the senior's investments in Cordage (shades of Imclone), that it was obliged to go into liquidation, and I lost my job … It was at that time that I changed my ways, and I became a specialist in panics.

– The Ticker, August 1908.

After this loss, the author realized that when they wanted him to buy, and the price was high, they never showed any of the bad points. When they wanted him to sell, they never showed any of the good points. He became a specialist in panics, a cane investor if you will, and became a millionaire in a few years, which he documents in the subsequent two issues of the Ticker.

I find that cane investing still works. Indeed, whenever the fake Doctor or his ilk try to bear things down, there is a scare about interest rates or plague or war, and the market reacts: it's time to hobble down to Broad street again.

Peter Earle contributes:

These are great accounts to follow. In the building of my own collection, which I hope to either auction off on the 100th anniversary of the Big Wind (about October 25 - 28, 2029) or perhaps donate to a free market economic research institution (The Von Mises Institute, most likely), I recently scored a great coup. I purchased, from the Dayton Public Library, the entire run of the Magazine of Wall Street from 1920 to 1972. I'm reinforced in my assessment of their great value in your citing of them. 



 Imagine if you will a very bad year in the stock market with a substantial rise in interest rates. Imagine, too, the elders of the stock market having to go to the Palindrome en masse to beg him to buy back his tremendous line of shorts stock, and begging the bearish insurance company, conglomerate hard landing guy, or media forensic accountant, to say a few bullish things to prevent stock from falling to zero.

That situation sounds somewhat similar to the present except it was 1907 not 2007. In 1907 the S&P fell 40%, from ten to six, and the elders went to Boy Wonder, Jesse Livermore to buy back his shorts. Also, interest rates went to 200% rather than the five percent inversion of today.

I felt that a study of the backdrop and concerns and intricacies of how investors tried to make money in the aftermath of that environment might teach us some lessons about how to navigate 2007. It also might provide some food for thought on what we've learned in 100 years. I turned for guidance, therefore, to the Ticker Magazine of 1908. It was a 50-page monthly edited by Richard Wyckoff, similar in its concerns, articles, and advertisers to many we have today, like Stocks and Commodities, Active Trader, or Futures.

The first issue could have been written today. Except that like most things written 100 years ago, it seems to be focused on a much higher common denominator, i.e., the literate investor population of their day. I find all their articles just as timely today as when they were written, and often their insights seem much more useful than comparable journals of today.

The first issue starts out with an excellent article, Mistakes of Investors. The mistakes are divided into excusable mistakes and inexcusable ones. The excusable ones are what we would call those that occur from the vagaries of change, where the investor has taken all precautions and done his due diligence. "If his reasoning has been wrong, or if unforeseen events bring disaster, it is a misfortune. Not so, however, with "willful mistakes."

Here's Cushing's classification of of willful mistakes to avoid.

  1. Avoid inside information.
  2. Never make an investment on enthusiasm or excitement.
  3. Use your own judgment.
  4. Pay for info rather than getting it for free.
  5. Consider earning value and market value. The man who buys real estate looks to the enhancement of value more than to earnings.
  6. Don't lose confidence. The investor hears rumors of impending disaster, which, if he would reflect upon, he would see would have no effect on his security. This applies to bank runs.
  7. Stay away from names. (Even then there were touts and promoters.) No high sounding titles can make it a success if it lacks the true qualities of success itself.
  8. Don't put too much reliance on advertisements, especially red paints.
  9. The losses through mining investments (not tech) are greatest. Beware of promoters who have no reputation to lose.
  10. The greatest mistake is one of pessimism and doubt. Never let your mind fall into that chasm. Do not think because you have lost money in one investment that all are unsafe.

The most interesting article to me in the first issue was by our old friend Roger Babson, written in 1908 about bank loans. He says that when the proportion of loans to investments gets too high it's bearish and when it's too low, it's bullish, but on a time series basis for all banks, and cross-sectionally between banks within a year. He gives yearly figures from 1860 to 1906 to verify his point and then shows how the panics of 1873, 1894, 1890, 1893, 1898, and 1903, were accurately forecast by the ratio.

The key ratio he uses is 50% loans to assets, which was "In 1873, the ratio of loans to resources first exceeded 50%. Consequently a panic occurred by the spring. Another panic occurred in 1903. Again the western farmer came to the rescue and owing to bountiful crops, the recovery continued until 1897 when interest rates exceeded 2200% a year."

Thus, Babson preceded Boltan Tremblay, Colonel Ayres, the bank credit analyst, the fake doctor, and many other greats in relying upon these credit ratios more than 100 years ago. It's overdue for a test again today.

A final article in the first issue is archetypical of articles of today. A retired engineer has a mathematical way of predicting swings in markets, and shows with a chart how his method caught "the immediate trend of each market, and the beginning and end of the longer price movements, and whether stocks are being accumulated or distributed based on a balance between the volume of price movements and volume of transactions."

He catches the full movement by "eschewing selling on strong rally, and bucking an upward trend, but instead waits until the rally has run its course and the downward movement has actually begun." In that modality, let your profits run. He seems to have captured in 1907, exactly the essence of the main methods of trading futures of today, including the methods used by most CTAs and most of the books written about trading.

In addition to these articles, an excellent article on bucket shops, the harms of short selling restrictions, how a floor trader makes money, and ticker talk rounds out the issue.

I'll augment this with further insights from the subsequent issues, as they're too good to miss.

Peter Earle writes:

After a couple of years (1907 - 1911 or so), Richard Wyckoff's Ticker became the Magazine of Wall Street, which was published until 1970. In all fairness, and perhaps unsurprisingly, in its last 20 or 30 years it was but a shadow of its former self.

Wyckoff lost control of the Magazine of Wall Street in the midst of a messy divorce from his former secretary (and by that time editor of the MoWS), Cecelia, in the late 1920s. After moping about and writing for a few years, he started a small bi-monthly magazine called Stock Market Technique which ran for the last three years of his life, ending in 1935.

They are extremely rare in their original unbound format.

Bruno Ombreux writes:

The inventory at Global Investor Bookshop offers a good flavor of the market in the early 20th century, and it's true it has not changed. Some articles and some books have been reprinted.



Ephemera from a Famous Wall Street Haunt.

…The first printed American bill of fare is issued by New York's 5-year-old Delmonico's Restaurant at 494 Pearl Street and lists as one of its most expensive dishes 'hamburger steak.'

The bill of fare (the word menu will not be coined until next year) offers a 'regular dinner' at 12 cents and lists hamburger steak at 10 cents (the same price as roast chicken or ham and eggs; regular beef steak is only 4 cents, as are pork chops, corn beef and cabbage, pigs head and cabbage, and fried fish. Roast beef or veal, roast mutton, veal cutlet, or chicken stew are 5 cents)…



When you start out in a game, a fight, a competition or a trade and right off the bat make a mistake or two, it puts you “on the wrong foot”. It’s a stumble coming out of the gate. You are in bad frame of mind because of making errors. You are fighting to catch up. These two factors set you off balance, not on the right foot, not leaning forward into the trade, off balance slightly, unable to attack strongly at the prime opportune time to attack when the opponent is weak and also off balance. These problems are compounded by distance and time. In longer term events this balance issue is critical in maintaining the correct mental attitude. Then at the end of the trade, you are so glad to be past the trouble caused by the original errors, you end badly as well. Champs don’t make mistakes right off the bat, or if they do, can overcome them and put them behind, make the extra effort and come from behind. That’s what makes them champs. How do you fight back, when you are weak, and behind?

In everyday endeavors, a regular discipline can help avoid the occasional errors. Errors are going to be part of every human endeavor, so it is important to be able to work with the situation and come out productively in the end, especially in areas that require judgment calls. Perfection is not possible. Admission of the error is important. Denial can cause further, irreparable damage.

Peter Earle responds:

With respect to preparation, and since you mention fighting — an apt field, indeed, for cultivating trading metaphors — I am reminded of an old boxing truism revolving around coming in dry: part of the informal intelligence casually gathered by cornermen (and sometimes fighters themselves) on the way to the ring and while waiting for a fight to start is whether the man across the ring is perspiring or not. This can sometimes give a clue as to how seriously he is taking the match/his opponent, how adequately he has warmed up, and even his level of anxiety.

If one’s opponent appears to be dry, sometimes — depending upon how he is known to perform under pressure — the game plan can suddenly shift; not, as may have been planned, to engage in a multi-round chess game, applying increasing pressure, but instead to come in with guns blazing at the open.

Though examples are numerous, I’m reminded of the mid-1990s undercard fight between John Ruiz, who would eventually become WBA heavyweight champ, and David Tua. Tua’s corner, noting Ruiz’s stiffness and lack of perspiration, urged Tua to jump on Ruiz right at the open… with resounding success.

David Lamb replies:

Frederick the Great started off on the wrong foot, but he never thought so. He just retreated for a few weeks, came back after doing some readjustment at home in Berlin, and accomplished what he first set out to do.

During his first campaign (at the ripe old age of 29) he led (very literally) a part of a two-columned Prussian army toward Neisse, the strongest Austrian fortress in Silesia. I now quote from the book on Frederick the Great I am reading (written by David Fraser):

“Both wings of the Prussian army ultimately converged on Neisse, where they found an Austrian garrison prepared to resist. There could be no question of exposing the troops to methodical siege operations in the conditions of winter and after trying, without success, intimidation by a ferocious ten-day bombardment, Frederick decided to leave Neisse… to return to Berlin, which he reached on 26 January. He had lost only twenty men in all.”

While back in Berlin he acted as if all was going as planned. In other words, he seemed not to worry too much about momentary setbacks. He acted as if they were the undesirable fatty parts of a great T-bone steak: He wouldn’t eat it, but regularly expected it upon ordering a steak. He even wrote all the neighboring Kings and Emperors that everything was going great and they could back him up or not. He acted alone, acted first, and never hesitated. But he never gave up once all his homework was done and all the data was aligned his way.

Furthermore, perhaps Frederick never felt he was fighting back, or on the wrong foot, or playing catch up. Perhaps the feeling of vulnerability and weakness and initial loss is what places the competitor at a disadvantage, not necessarily his actual numeric disadvantage.

Stefan Jovanovich responds:

Christopher Duffy, an exceptional scholar, wrote a fine book on Frederick the Great. I have not yet read Duffy’s new book on the Somme, but the people I trust think it is the most important book on WW I in decades.


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