Some back of the envelope numbers on S&P500  futures daily changes last 10years for your perusal:

Year       %up       Max       Min        SDev

2003      55%       28           -29         10

2004      57%       18           -21         8

2005      54%       21           -21         8

2006      53%       26           -25         8

2007      52%       44           -57         14

2008      50%       127         -100         27

2009      56%       54           -42         14

2010      58%       48           -41         12

2011      51%       59           -85         18

2012      51%       42           -35         12

2013      65%       25           -38         11

Alex Castaldo ponders:

The standard deviation for a binomial is the famous sqrt(N p q) and the standard deviation for a proportion is sqrt(p q / N).  Assume p=0.54 q=0.46 and N=252 days per year. Then sd= 3.1%. The proportions for 2003 through 2012 are within usual confidence intervals.

But for the year 2013 we have only N=95 trading days so far. In that case sd= 5.1%.  So the observed 65% is about 2.16 standard deviations above the expected.  Yes, it is statistically significant but not hugely so.





 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.



 New and old technology can coexist well together. For example, I had a ground water monitor installed recently which has a wireless feature that seamlessly deactivates a related irrigation system. Sounds complex, but the key element in the system is cork. When the cork in the device expands due to rain it triggers the cutoff. Cork is very useful in other areas too. The modern fishing reels use exotic metals and arbor designs to get the best performance. But cork is still used for the drags. This sets the tension on the line when fighting a fish which is the main purpose of a reel. In wine cork is preferred sealer especially for the purpose of aging. In trading the older methods of going against the panics and the crowds can coexist and profit in the post HFT world.



I used drift adjusted time series data, but I realize when one is trading against the drift (never a good idea) drift adjusted data will inflate the trade expectation. For example, using the difference method of subtracting the average move over the time series, X expectation will become X-drift. In a rising market, X-drift will be more negative than X, given a higher expectation to go against the drift. X are real points one might have made or lost; X-drift, I suppose, is for statistical significance test reasons. In a rising market if you are trading with the drift, using drift adjusted data gives you more conservative results, which is probably a good thing. But what about trading against the drift? Any comments appreciated to help me get the drift.



 In reading Scorecasting, well reviewed and recommended by the chair, I came across a point that hits home when looking for statistical causal relationships. When x variable appears to be related to y variable, it is very possible that an undiscovered variable z has a much larger effect, perhaps on both variables. There are examples of this in the book, mostly thoroughly explained in the home field advantage. This is empirically shown to be true across, time, cultures and sports, running at an advantage of 55% to 70% in favor of the home team. Controlling for other things, crowd size does correlate very highly with the home team advantage. But changes is crowd size are shown to have no effect on players performance. Rather crowd size influences officials, but it is secondary affect. The primary affect is officials themselves who have a in bias (most likely unknown to themselves prior to this book) to favor home teams regardless of the fans. Crowd size amplifies or dims this already existing bias. Had the authors not researched deeper this point would have been lost.

Pitt T. Maner III writes: 

It is interesting that there are sites that keep statistics on the refs now too.

The held ball call near the end of the Louisville-Wichita St. Final 4 game by Karl Hess appeared particularly bad but you wonder what the factors and influences are that might have led to it. The game finish would have been much more enjoyable if the Shockers had had at least one last attempt at a 3-pointer to tie the game.

Was it the nearby presence of the Louisville coach Rick Pitino? An ego issue where the ref felt the need to decide the contest? Crowd influence? TV audience thoughts? Subconscious need to end the game and prevent possibility of overtime (desire to get off the court,)? Something a player said (need to payback for perceived questioning of previous call)? A whistle blown by mistake in a hurry with no means to take back (I never make a bad call in an important contest). Lots of possibilities.

Russ Sears writes: 

When watching a game, I have often thought that the bias in the ref could be spotted by whether or not they avenge a bad or close call on one side by giving the next close call to the opposing team. After a moment of reflection, the ref probably realizes he blew the whistle too soon or did not blow the whistle when he should have. However, it appears to me that the avenged even handed blown calls are often one sided. Yet when watching a game, my own biases would prevent me from "counting" this fair.

Perhaps the broadcasters in a national game could be counted on, but it appears to me they have a vested interest to give the losing team something to complain about. If I recall correctly, the tie-up was initially called a great defensive play by Louisville, but then changed to blown call.



Back in the pre crisis era (before negative real rates) hardly a day went by when the carry trade wasn't mentioned in some form or another. If the carry boys are still around they must be enjoying the BOJ policy. For example, AUD up 17% versus yen plus a 3% rate kicker, without leverage. It is roughly the same for NZD. I was told they never hedge the currency risk and put on at maximum leverage so returns could be many multiples higher, but I may be misinformed on that part.

Anatoly Veltman writes: 

Of course, a funny BOJ announcement comes out right after your query– which may pretty soon invert the carry trade! Yen may soon become the highest yielding G-7 currency.



 I played guitar for many years, but recently I've been taking to practicing scales which in my younger days I rejected as too boring. Now, far from tedious, I find it relaxing, challenging, helpful to develop dexterity skills and better timing. Musical theorists will know that every major scale has a relative minor scale (I just learned this, so never too late). The notes are exactly the same, the scale simply starts from a different root note. But that root note makes all the difference since the tonality of the scales are like day and night. The concept of a relative minor should have a place in the markets, the darker side of the optimistic (major) equity markets with the same notes, just played in a different order.



Despite what I have read I am not convinced the HFT in aggregate are profitable. Buying High, Selling low, and making it up on volume just does not seem like a good business model to me. The research on HFT seems unadjusted for survival bias. They study the biggest and most profitable firms to see how big and profitable they are. I personally know an HFT firm that made money 3 years in a row, then after 4 months of bad performance they realized their edge was gone and they closed shop. I am sure they were never included in HFT research. I use limit order so I suppose HFT is taking the other side and the jury is still out.

Jim Lackey writes: 

Of course, Dunc, it should be like all things sports MX. Top 10 sleep in the Hilton and ride in the Factory rig and the next 10 best in the world sleep in their trailer in the pits 20-99 are part timers and lose money racing. 



No doubt that any cuts next month will be targeted to inconvenience the public most directly like travel, preferably during school breaks. After all if no one noticed what's to stop them from making, horrors, additional cuts.



 It is remarkable they found remains

Of Richard Three, the King that none could tame.

The discovery of the body of Richard III this week could be a hoax. However, I think not given the carbon dating, the matching historical features of the body, and the evidence of DNA linked to known descendants. It is history and legend transported to the present. Richard is made famous by Shakespeare who depicted him as one of history's greatest tyrants. True or not, I believe the Bard was most concerned with universal truths ahead of historical accuracy.

Along those lines, I am reading an interesting book on the forms of poetry. All the Fun's in How You Say a Thing, by Timothy Steele. Poetry of 14th and 15th century England was evolving from Old English to a newer form. Word accent, syllable-count, and rhyming pattern were the essential features. Most popular was an alternating accent (iambic), with 5 segments or feet per line (pentameter). The works of Chaucer, Shakespeare, Milton, Johnson and Pope were written in iambic pentameter. Modern poets like Robert Frost use it as well. Close to me, I can recall my Grandfather teaching me poems. He kept his favorite works by Samuel Johnson and Walt Whitman near at all times. It is relevant still, and learning the forms of verse makes poetry more meaningful.

I think of rhythm when generalizing about prosody, as I do in sports, music and even markets. The early markets in England were developing along with the Great Poets and perhaps there were mutual influences. The patterns in verse are made interesting by exceptions and variation, not unlike markets. On this stormy Northeast weekend, dust off the books of poems from university days.

It's true that time's well spent with poetry.

For snowy days and children full with glee.



I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

 Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.



There are many headline numbers on the horizon. SP500 cash crossed 1500 yesterday, Dow is a just a couple of good days from 14000 and all time high of 14165, same is true for the DAX 8000 and all time high shortly after. Nikkei admittedly has a little way to go to get back to 38916 ( in 1989), but some impressive moves of late.

Headline numbers usually are a contrary indicator. But one of the worst feelings I found in trading is having to read constantly news that goes against ones position, making shorting stocks now all the more perilous. Also a good reason not to read what is touted as financial news.



If there is an annual pinnacle of flexionic activity, Davos is it. It is good however to have such a meeting in a mountain location and in winter. The bracing air and ruggedness of the mountains does bring out the better qualities of human nature. So perhaps those forces will balance out the other less admirable features of the conference. I am taking the kids skiing today to a local hill in as a pre-commencement.



Japan, from Duncan Coker

January 14, 2013 | 1 Comment

Even a forex novice like me could not help but notice a 25% increase in the value of the Euro vs the Yen, over the last 6 months. At the same time a record $155 million yen paid for a single Bluefin tuna at auction in Tokyo. Nikkea 225 up 27% last year, most I believe of any developed economy. Not to be dismissed also, the 150 inch snow base at Niseko ski resort, more than any in lower 48 states or the Chamonix valley. Japan seems more relevant than ever recently.



Here's something for the guaranteed to happen file. When asking a futures brokers for rates on treasury bills for margin collateral, I am informed the 9 basis points of interest will no longer cover the new monthly carrying charges and execution fee for their trouble. So I can look forward to excess cash getting a negative nominal return along with negative real return. I decided on an alternative plan.



 One of the more encouraging statistics I have heard recently is that the rate of movement within the US by county is now back above 2007 levels of 4%. For a variety of reasons roughly 11m people per year are moving again for opportunities. The constraints to moving, be it housing, jobs or some other factor, are less. Tyler Cowen has sited lack of movement as one of the frictions slowing economic growth.

Movement is essential to health on a macro-economic level, and in other areas. On a river, I cannot fly-fish without movement in the water. It provides oxygen for fish to breath and transports food for them to eat. Without wave movement, Sogi and Watson cannot surf. Einstein is quoted, "Life is like riding a bicycle. To keep your balance you must keep moving." In his realm everything is always moving, though we may not be aware of it. In trading, there must be movement to find more favorable prices. Studies show physical movement beneficial in avoiding chronic disease (D. Agus, End of Illness). Sitting too much during the day is harmful. The frontier men of the West were at their best when on the move. When at rest in the saloon, brothel or poker table trouble always ensued. Gretsky said and demonstrated: "I skate to where the puck will be, not where it is now". Fred McDowell sums it up well in the second verse of his song You Gotta Move, covered by the Rolling Stones

"You may be high
You may be low
You may be rich, child
You may be poor
But when the lord gets ready
You gotta move"



 A lesson I learned from Einstein is the benefit of being able and willing to changes one's mind. At times a pacifist, he changed after witnessing the rearmament in Europe. In physics and science in general when presented with new evidence it is quite normal to revise theories and mathematical proofs, or even to reverse a position entirely. Putting ego aside, he did this many times, most famously dropping his famous Constant variable regarding a static universe when through experiment it was proved no longer necessary. This is skill which comes more naturally at a younger age, but is quite possible for the post 40 crowd as he demonstrated in his long career.

Russ Sears writes: 

It seems to be increasingly clear that part of Einstein's long term productivity was due to his long walks often with Godel. It makes me think of this article: "Exercise Grows Brain Cells".

Dr. Brett S. maybe able to clarify, but it is my understanding that some of the latest ground breaking research shows that "changing your mind" is more than just a figure of speech. It appears that meditation can reroute the neuron wiring especially between the regions of the brain. This may also produce new brain cells. Or perhaps it uses the new cells produced to strengthen the bridges between regions.

Brett Steenbarger adds: 

There's also interesting research on brain changes following successful behavior therapies, such as treatments for phobias. And, yes, a good amount of research on brain changes related to meditation practice. What's most interesting is that the brain changes following effective medication are nearly identical to those following effective talk therapy:




 Jeff's coin proposition bet illustrates a nice lesson for me when applied to trading. That is, even if probability is favorable, there can and will be streaks against. So, there needs sufficient N and staying power for probability to work in trading. So all the seasonal or studies that trade once or twice a year probably don't have a statistical edge.

The inverse lesson is that sometimes it is good not to trade when the probability is not in favorable, as in never take a proposition bet against a Florida surfer with a low handicap, (humor intended).

Jim Sogi writes: 

I read that in a sample of 10^10 binomial chances, there can be a run of a 1 million 1's.

The idea that in an infinite random time series every possibility will occur, such as the history of the earth, kind of worries me. There seem to be laws of nature, but are they? Will they change? Do they?

Ralph Vince writes:


Yes, and it is man's innate ability to asses such probabilities (and hence, the fallacy of Huygens and Pascal — that risks should be assessed based on mathematical expectation) that is the most fascinating thing about the entire story of evolution (again, to me).

Why do you get on an airplane when it can crash? Why do you get in your car and go out to buy a quart of milk? We have evolved over eons to pursue often time-critical rewards on a risk-laden planet — it IS how we operate or we would be still cowering agoraphobically in the shadows of a primeval world. This notion fascinated me (and the reason I wrote a book on it in 2011), and the more I dove into it, the more I saw that the answer to it — i.e . the fundamental equations we posses innately for assessing risk, pertains to all other mathematical decision (game theory is rife with concepts that are tuned to the Huygens/Pascal model, not our innate model) and ought to be reassessed under the lens of our superior, realistic model (and yes, it is superior, or we would all be looking for termites to eat up in a tree some place.

Leo Jia writes: 


Your notion about man's innate ability to assess probabilities is fascinating to me. I hope to read your new book soon (I presume it is Risk-Opportunity Analysis.)

It is clearly phenomenal that the human species was able to advance over other species. It is not as clear though whether it was man's special innate ability that made man evolve or it was the evolution process that gave man the innate abilities. Regardless of whatever came first, I think many of man's innate abilities that exist today were largely fostered by the evolution process. While this was wonderful, it is perhaps also very discomforting to learn that many of our innate abilities were more meant for the environment of the wild, not really for the modern times as the modern couple hundred years is far too short in evolution terms. It begs the question of what of the very innate abilities are really useful and what are not. Whether we realize what abilities we have or not perhaps is not a big issue as we naturally use them in life. It does become more important for us to know what of our innate abilities are actually harmful to ourselves today.

Leo Jia adds: 

I did a test. It went like this:

1) toss a coin 10 times,
2) if there is 5 heads then add 1 to a record do the above 2 steps 1 million times.

The chance that in ten tosses one gets exactly 5 heads and 5 tails is 24.5539%. 

To be more comprehensive with the test results:

4 heads and 6 tails: 20.4194%

6 heads and 4 tails: 20.5125%

3 heads and 7 tails: 11.7019%

7 heads and 3 tails: 11.7010%

2 heads and 8 tails: 4.4018%

8 heads and 2 tails: 4.4145%

1 heads and 9 tails: 0.9783%

9 heads and 1 tails: 0.9830%

0 heads and 10 tails: 0.1004%

10 heads and 0 tails: 0.0968%

Easan Katir writes:

Thank you, gentlemen. This is good info to ponder and apply to trading. For my part, I found a shiny Lincoln-cent and spun it 10 times. Result: 7 heads.

Jeff Watson writes: 

But there is also another trick of spinning a coin very fast, get down to coin level on the table and observe carefully, and if you get a blurring image of tails, call tails…same thing if you see heads, call heads. Since the coin spins at a slight angle, the side that you can see the image will be what lands.

Ralph Vince adds: 


As far as coin tosses and trading — and this may be redundant information to many of you — to me, personally (in my sciatica and failing vision nowadays) I find the largest implication pertains to the nature of the equity curve and expectations, and the deceiving nature of randomness.

We know if we plot out the equity curve of consecutive coin tosses (with heads +1, and tails, -1, say) and we plot this out, we can then draw bands around the mean expected value (0 in this case) of standard deviations. Thus, we can draw a one standard deviation band above and below.

Such a band will be parabolic, like a parabola resting on its side, rightward-facing, opeining up as time or trades or plays go by. That is, the upper band will always be ever increasing albeit at an ever decreasing rate. Thus. to be ahead of the expectation by play number X to the tune of 1 standard deviation, is below being ahead of the expectation by play X+1 or X + N where N is any positive number.

Couple this now with the Second Arc Sine Law*, which pertains to such randomly-generated equity streams and tells us (the essence of The Second Arc Sine Law) that we would expect both the peak and nadir of equity stream to occur least likely towards the center (time-wise) and most likely near the start or finish of such a stream.

These two principles, take together, warn us that in a stream of randomly-generated outcomes (coin tosses, or trading if/when the outcomes occur with randomness) we should expect the rightmost endpoint to be at or near the very top (or bottom) of the entire equity run, deluding us into conclusions, "This works!" or "This fails," that have no basis in a causal existence, but are merely the artefacts of randomness.

*The First Arc Sine Law buttresses this further, this law being that we should expect the ratio of the cumulative equity line (comprised of X number of plays) least likely to be above the expectation X/2 number of times, and most likely to be above or below X or ) number of times — the same Arc Sine distribution as the Second Law. Thus, say, if I toss a coin ten times, it has an expectation of 0 (given the caveats mentioned in this thread!) and I would expect with highest probability that ten of those tosses see the cumulative equity line above (or below) the expectation line of 0 and with the least probability, see 50% of them above and below the expectation (0) line.



Light, from Duncan Coker

November 18, 2012 | 1 Comment

 I am reading Isaacson's biography of Einstein and I promise a review in another 400 pages. But in the meantime, there a few ideas I found interesting from one of his early papers on light. He presented light as a mixture of physical particles and waves. Up to that point, no one thought light had physical quanta. Light, he theorized, has discontinuous particles as well as continuous wave properties. He was also very interested in the field through light moves, the "ether" from classical physics. He did not take for granted that space was made up of unspecified ether, but rather the space had very important properties of its own. It is similar to the study of water in understanding the waves which move through it. I tend to view markets as discontinuous quanta. Each day represents a discrete event. Others see markets as continuous moving waves. The field for markets was once a physical floor. Now it is much different. The field itself must have properties which affect movements.



 "Professional Fisherman? I didn't even know there WAS such a thing!"

There are many niches in the fishing world for a man to make a living.

There are:

Professional angers who compete in international fishing tournaments where the prize money can be $100k, plus side bets

Professional fishing captains who run the boats to fish for big game fish

Commercial fishermen who fish to sell to stores and restaurants

Professional guides who guide clients on rivers and streams to fish

People who own fishing stores, sell lures and info

Subsistence fishermen

Crabbers, lobstermen, oyster farmers

Farm fish in aquaculture.

Duncan Coker writes: 

I have a friend who has carved a nice life for himself as professional fishing river guide. His home water is the S. Platt in Colorado where he guides and teaches. Fishing and writing complement each other well. He has written several books on fly-fishing and is an editor at large for Field and Stream. They send him all over the world for stories which he dreams up, salmon in Scotland, rooster fish in Baha, tiger sharks off San Diego. Fishing and writing by fisherman have a long history. Some of the favorites on my bookshelf are by Hemmingway, Norman Maclean, MacQuarrie of the Old Duck Hunters, James Duncan's The River Why. It is good to have a backup plan. So if the fish aren't biting perhaps you can craft a good story about the day your fly box floated away on the first cast, or secretly borrowing your friends waders for two years, or instinctively yelling "save the rod" just as your wife slips into the rapids holding a brand new 6 weight.



 Should you find yourself in need of a kite for kite flying this weekend, I highly recommend a foil kite over traditional framed kites. A foil kite has a stitched honey comb design which inflates expanding the canvass to catch wind. They require no cross bars or frame. They are lighter, pack much smaller, require less wind to fly and can be stored in a backpack to be near when the kiting urge takes over. Premier is a good brand. Find a field, some wind, a small child, or child-like mood and enjoy the day.

Jeff Watson writes: 

I fly a lot of kites and use this purveyor Into the Wind. They have my good seal of housekeeping. 

Craig Mee adds:

The Tao of Kiteflying: the dynamics of the tethered flight by Harm van Veenmuch is quite a good little book with a great foreword: "dedicated to all those who have not yet unlearned their sense of wonder about reality in general and the phenomena of kites in particular". 

Easy enjoyment and also market lessons for all.



With all the sampling being done in at least two areas of recent hot debate, employment data and election polls, it brings to my mind the issue of sampling bias.

How many samples is optimal? I believe too many samples and the risk of Type 1 errors (accepting a false prediction or causation) goes up.

I use this approach towards the markets, so this is relevant to me. Is there an optimal number to avoid "water boarding" the data? 10 seems about right based on practice but statistical justification would be appreciated.



 My first job out of college was working for the World Bank in DC, the sister organization of the IMF so much in the news these days. I was a temp living with my parents who were in DC at the time. I was basically just doing Word documents, organizing supply rooms and running errands at an hourly rate for about three months. I remember though the offices being very subdued, beige, and heavily carpeted. The main activity would be the occasional meetings when dignitaries would arrive in which case things would temporarily spring to life. Without summits meetings there would be very little to do there.

One anecdote: I was helping an official who had a very thick accent. He handed my some papers and said what I thought was "..two coffees please". I brought this right up but what he actually he wanted was "two copies". I slinked out of the office, but my level of performance in this case was not at all unusual there.

My second job was working as a scheduler for a manufacturing plant that ran three productions lines 24/7. My office was the nerve center, phones never stopped, people coming and going constantly. JIT was new then and the theme of the day. I started getting line production updates calls at 6am from my apartment and it never stopped all day. Quite a contrast.



We might need a newer new normal or perhaps just the old normal given year-to-date returns: equity 13%, commodity (1.4%) , dollar (1.6%), and bonds 3.1%, impressive equity premium like the old days.



 I think Lacker is the most important Fed member next to Big B, not for his support, but rather for his dissent. (Aside: Can anyone name another member without checking?).

They need Lacker to the help maintain the appearance of objectivity. So the opposition can be duly noted then duly rejected. I heard Lacker interviewed recently and he is very smart, articulate and I am glad he is there for whatever reason.



We watched the 1993 Kenneth Branagh produced version of Much Ado About Nothing on Netflix this weekend and give it high praise. It is worthy of a view and a feast for the eye and ears. It is all the set in sunny epicurean Tuscany, with a young Kate Beckensale as fair Hero, a brilliant Kenneth Branagh as Benedick and a spicy Emma Thompson as Beatrice. More than a few lascivious moments to keep the audience interested then (circa Shakespeare) , just as now. There are skillful word plays and delicious ironies. Ultimately the women educate their seemingly honorable soldiers who, save Benedick, commit one gaff after another. As in other plays there is artful deception and false identity, clever vicars, a faked death, and much lamenting and obsessing over that inescapable condition which is young love. Fine end of summer viewing. And may all life's deceptions end so comically.



The effects of the mountains are sanguine. The vast open spaces and the scale that the West provides will give our policy makers the temper to make grandiose and bold statements. Freed from the confines of offices and committee rooms, let the liquidity flow like the big Snake river itself. Why would they want to spoil the mood in such an inspired setting. It must be the one of the reason these meetings take place in the mountains rather than seaside resorts.



 Very European that Draghi would make some vague heroic comments to save the Euro sending the market up 20 points, mid-day on Thursday. Most on the continent take off Friday and the August vacation soon approaches so the timing in retrospect seems obvious.

Paolo Pezzutti writes:

Quite impressive how markets are reacting to Draghi's remarks. Assuming that it is hard to believe that effective actions will follow his statements. I wonder if this another opportunity to short the Euro. Unless actually they are counting more on the US printing presses getting ready…..

Anatoly Veltman writes: 

One absolutely should have a long-term EUR shorting program. The European experiment was flawed at its core. The result will be eventual technical breach of the currently defended 6-7 year low. It happens to coincide with the same price area, from where the just-introduced EUR slid non-stop in 1999-2000, until it landed near 83.00. This time, the matching of the initial 1.6->1.2 leg will again target 1.2->.8 straight slide. Being involved in the world's most liquid trade is a must for every spec!



I did a quick look at real GDP vs. SP500 quarterly changes to see if there is any relationship. Regarding GPD there are numerous revisions and this study uses the final revision. Using the first estimate for GDP would have been better, but I don't have that data. So there is a retrospective bias. Here are the correlations with lags of up to 5 quarters since 2004:

GDP to predict SP500

0   .55

1   .16

2  -.17

3  -.21

4  -.11

5  -.09

Even given all the shortcomings of the study I would not have expected correlations to go negative after 1 quarter lag 

SP500 to predict GDP

0  .55

1  .51

2  .35

3  .37

4  .15

5  -.04

 Correlation is stronger in this direction and fits with the adage that the market it looking ahead 3-9 months.

Here is the same using the change of change for real GDP(1st derivative) vs SP500:

Rate of GDP Change to predict SP500

0  .47

1  .39

2  .06

3  .-15

4  -.01

5  -.01

This is somewhat interest with lag1, but not actionable since all the revisions for GDP usually take a full quarter.

SP500 to predict Rate of change of GDP

0  .47

1  -.05

2  -.20

3  -.02

4  -.26

5  -.23

Some relationship a year away, but seem suspect as not stationary.




 I am at a loss why seemingly great athletes — those you would expect to have the keenest kinesthetic awareness — seemingly struggle on the dancefloor (I am not referring to ballroom-type dancing here…..not just shaking around on some club floor). I used to think that they were merely overly-self conscious, and this was causing their seeming stiffness. Yet, these very athletes excel precisely because they do NOT stiffen up and understand perfectly well the necessity of avoiding that, as well as preventing adrenalin surge, or coping with it in beneficial ways.

Peculiarly, the only atheletes-turned-dancers I have seen who can perform the dancing aspect gracefully are those who are boxers or very good standup fighters.

And the more I have watch this, the more evident it has become to me why (this is my hypothesis, which I am seeking feedback on here). A great ballroom dancer, like a great boxer or stand up fighter, has to have his feet under him such that if he were wearing a belt buckle, it would be slightly pointed upwards. In all other sports, be it playing shortstop, returning a tennis serve, a hockey player…..there is a certain, crouched position where the belt buckle is pointed downwards.

Yes, the best boxers, the best standup fighters almost invariably have tremendous footwork, where even their punches come from the balls of their feet (watch a slow right cross from Ali, how the ball of his right foot pivots, the heel up and turning outward, allowing that complete extension through his target). Many of these guys are often even built much like Fred Astaire, light not just in bodyweight, but seemingly light on their feet as well (though, not to the extent of Astaire, who must have been filled half with helium, the man was truly superhuman). Yet, footwork aside, it seems the angle of the belt buckle, in a range of, say, ten degrees, is a hugely discriminating factor in what permits an athlete to go from his game to the dance floor.

Russ Sears adds: 

In my opinion, there are at least 2 reasons "great athletes" are not dancers both stemming from your definiton of "great". Most of the highest paid athletes need 2 things extra-ordinary size and extremely high levels of fast twitch mucles.

The size comes at a considerable price to "grace". Extra ordinary increase in growth during teen years happen with increase muscular strength often very awkward years for even more normal sized men. It takes much more to control a large body to make delicate movements. Those needing the speed spend considerable time training for raw speed, to go with that size, not necessarily intricate steps and bends. Those needing delicate touch, likewise spend considerable time to get the hand/arms to move just so.
But perhaps more important is the fast twitch need in most of the highest paying sports leaving the "great" athlete with little endurance. Endurance comes with a more balanced slow twitch combination. A cardio taxing dance last several minutes long.

Dancers have considerable cardiovascular fitness, as do boxers. The middle distance runners I have known often are great dancers and often make great boxers and vice a versa. In the olympics note the events that last 2-5 minutes at a hard pace with no rest and you probably have some great dancers. The longer events suffer the opposite, slow twitchers can't jump but have great endurance but lack the explosive movements ability.

Anecdotally, didn't Apolo Ohno win "Dancing With The Stars" one season? 

Duncan Coker writes: 

I used to take lessons and compete in some pro/ams back in the 90s in New York, and also got to know a lot of the professionals at that time, mostly British and Russian. Ralph is right about the position of the man's belt buckle as it is quite important. The center helps create a floating style important in ballroom. Also interesting, the term swing as it applies to ballroom dance is not really about 1940s swing dancing. Rather it means to mimic the swing of a pendulum in fox trot and waltz. As the dancers are moving laterally across the floor they are also gliding up and down. Another position technique that was taught was contra body movement (CBM). It means to move the feet and legs in one direction while maintaining contact with a partner in another direction. Most professional couples start dancing in childhood, so the steps and physical attributes are ingrained early. I can see how many of these techniques would be hard to learn by even accomplished athletes in other sports later in life.

Ballroom is a strange and wonderful world. It still amazes me the tv shows are so popular, but I think it is great.

Ralph Vince writes: 


Once, in working with a biochemist-turned-programmer, and talking about my pathetically slow running, the Chinaman, the biochemist (who was no runner, not the slightest athletic propensity whatsoever) told me that age, weight, and cellular mitochondria were the limiting factors. The only one I could really change was my weight, in order to get faster.

Now, I don't believe that entirely, because that would mean that whatever training I did only benefited by whatever weight I took off, and clearly there are 02 factors that you can train for, etc. But he did point out that I am not going to cut my average mile time in half — a valid point. He then mentioned that in all creatures, speed is a function of how much mitochondria is in one's cells, with, say, a cheetah having a great deal of it, human beings, in differing degrees, of course, possessing far less.

Now, this has nothing to do with Fred Astaire's ability to beat the living daylight's out of most thugs (I am convinced a man with his feet and coordination could have done that handily, and I say that based on the little thugs I knew in my youth who were physically disposed in similar though far less amazing ways) but I would like to know your take on that given your background in the world of running.

Russ Sears replies: 

Despite the popular assertion to the contrary you can not "be anything you want to be." relative to others. No amount of training will get a sprinter to turn into a distance runner and vice versa. I believe it was Flo Jo that after retiring from sprinting tried to become a distance runner. She was very dedicated, hired smart coaches and believed she was going to be great… but never ran a 5k faster than about 21 minutes. Now this is a decent time for the general population. Competitively this would only get her onto most high school girls cross country teams. In most teams even small schools this time would not be the best on the team. In evaluating kids to guide them into the right event to try out for in track in field I have tested for the following.

Sprinters- Fast twitch explosiveness- standing and running vertical jump relative to size. Muscle size relative to strength is important, lean muscles verses bigger more explosive. Bone size is also important.

Stalky - bigger muscles large bones, built for sprinting and short middle distance.

Lanky - Small bones, lean muscles for distance and longer middle distance. Middle distance - repeat 200 meter and 400's times. Distance VO2, max heart rate, and recovery time - Push-up and pull-up counts coordination for most field events - timed box steps up and down in patterns. Weight /Size and arm and leg strength with fairly good fast twitch relative to size for throwing. Small bones but explosive for high jumpers. Pole vaulters - coordination, explosive, stalky, fearlessness- look for trampoline and diving craziness.

You can be good at an event simply by loving it, training for it, have some core athlete talent and being in shape, but to be great you have to have several genetic factors in your favor.

Some of these factors can be changed by type of training, eating and lifestyle while young etc. But you can not completely reverse them by nurture. Most people that run regularly will see their times drop for many years. It takes about 10 years of hard cardio training to fully develop your cardio system. But your body will break down due to training before it could develop someone without the core body type and muscle types into a distance runner.

Peter Saint-Andre writes: 

Lessons for traders and investors here? Probably some folks are built for short term trading, others for long-term investing, others for building companies directly, etc…



 Entitlement in a good sense is not talked about much but is the effect of consumer surplus. Loosely defined, most of the gains from productivity over the last decade, generation, century, accrue to the consumer in the form of much lower prices, higher quality and often products and services that were not even available before.

The split is about 70-30%. The 30% goes to the capitalist who took the risk and deployed resources. But the other 70% of the value goes to the consumers.

For example, laptops cost a fraction of the cost 10 or 20 years ago. Sure, Dell deservedly gets rich. But with the surplus, millions of consumers can buy iPhones, something not even available a decade ago at any prices. Food cost as a percentage of income has declined steadily for decades. With that surplus consumers buy other things to better their lives.

It's a pretty good deal all thanks to competition, which drives down their returns on capital for suppliers. In growing open societies consumers take this entitlement almost without acknowledging it is there.



 It is often the case that I prefer position fishing to position trading, though the two are not mutually exclusive. Regarding the prior, I enjoy fly fishing on rivers and streams. Current relates closely to positioning on a river. The ideal is directly across from the trout, but not too close. From there I cast upstream at a 45 degree angle allowing the fly to sweep with the current to the fish. If the line is tight, drag free and natural a nice trout might take the fly. When the current is slow I add even greater stealth.

When the fish are rising, there is a huge advantage for the angler. A trout has chosen to reveal his position for what must be a considerably appealing meal. This is very useful information. If I can match this insect and cast well, while concealing my own position, I may catch fish. I have heard of anglers who crawl on hands and knees to the river to avoid detection, but I have never been this disciplined. Once at Henry's Fork I worked as part of a team with a friend. One of us would act as lookout on the cliffs above yelling to the other positions of the otherwise undetectable trout.

That aside, it is never good to fish with a noisy friend. And though I love an amiable labrador, they do not make good fishing companions and always give away your position. As a rule, the largest fish will always be in the places that require the most effort to get in position. They will be in the deep pools on the wrong side of the river, in slow water just next to fast water, under limbs and fallen trees or in eddies that are impossible to row or wade to. The more effort you put in climbing over boulders, fording deep streams or running to get ahead of your fishing buddy, the better your chances.



 There has been much guitar news in the financial world of late, one good, one bad. Fender is planning an IPO in the near future and Gibson was recently raided by feds under the Lacey act for breaking imports rules. Though never charged with anything, this will still hurt Gibson production. I've owned at least one Fender since I was 16 years old, but not a Gibson, though I have always wanted a Les Paul. With respective production issues Fender guitars will pro ably go down in value and Gibson up. Given I am long one 1970 Fender Stratocaster and short one unbought Gibson Les Paul, the spread will widen against me. The only sensible trade is to cover the short side and buy a Les Paul at the next opportunity. This way I can play my Texas blues along with my Texas hedge.



 In an effort to prove or disprove Keynesian notions I looked at two data series since 1971 for predictive relationships, federal spending and GDP annual changes adjusted to 2005 dollars from CBO data. With lags of 1 to 5 years I found nothing of significance for federal spending affecting GDP 1 to 5 years ahead. For GDP predicting spending, I did find a slight positive relationship between GDP changes now and spending changes two years from now, rsq=.04. I think it fair to say marginal federal spending increases or decreases do not affect GDP much, now or 5 years from now, but the debate will rage on.

Gary Rogan writes: 

While I of course believe that Keynesianism is pure unadulterated nonsense and any attempts to create net wealth by the government are doomed to fail, the statement that 'if there had been an opportunity for profit, some clever merchant would have been making the stuff even without a government "investment". ' isn't easily provable.

Clearly two points need to be addressed. One is scale, and it's very relevant these days as the weird topic of "colonies on the moon" has become a hot issue in the Florida primary. Could it be that things so giant in scope that no real-world merchant, even a billionaire, would voluntarily attempt to do for the fear of a devastating loss may make a profit? Much as this topic has been discussed here, I encounter it all the time in my discussions elsewhere, as just yesterday I was reacting to a list of space program spinoffs.

Second is the strangely modern behavioral economics aspect of Keynesianism. Is it possible that when "fear grips the nation" merchants, along with everyone else, start behaving irrationally and their fear of loss overcomes their normally healthy interest of making a profit even when such profit-making opportunities are otherwise self-evident?

Stefan Jovanovich comments:

Er, no, Gary. The scale of current investment in the petroleum industry alone dwarfs the capital construction programs of the every government in the world. Nimitz class aircraft carriers cost roughly $4.5B each. The Ford class carriers that the Pentagon hopes to build will cost $8B each; right now they are building 2. The projected investment in oil sands in Canada alone for 2013 will exceed the entire budget for the Navy's 2 new carriers.

If there is an opportunity for profit, people with money will find it. Of course, that includes government contracting, as Adam Smith so ably reminded all of us. Keynes' theory of "animal spirits" was useful because it suggested that entrepreneurs themselves needed Keynesian economics, that - without the assurance of a government customer - no one would take the risk. That premise seems far less easily provable than mine. The many people on this List and throughout the world and throughout history who have literally made something from nothing seem to have a superabundance of energy and determination and guts and the necessary lunacy required to "make it new".

If there is a profit to be found in sending air breathing tailless monkeys into the void of space, Mr. Branson and his competitors will find it. What Speaker Gingrich is proposing is precisely what Keynes proposed, paying people in Florida to dig holes and fill them up again. Yet, somehow, he and not Governor Romney is the "true conservative". La Di Da.



 I thought it my civic duty to do some counting this eve of the annual presidential address to congress. Who in fact is the best speaker of the century ( or at least 1930), not in terms of rhetoric, but in terms of moving the market up. I am using Dow industrial index since 1928 understanding there are substitution and other biases involved. Looking a week after the speech, here are the average percentage moves ranked by president.

Bush Sr  1.5%  n=4
Clinton 1.3%  n=8
FDR  1.2%  n=9
Reagan .7%  n=7
Truman .6%  n=7
Johnson .6%  n=6
Ford .6%  n=3
Bush Jr .2%  n=8
Kennedy (0.9%)  n=3
Eike (.6%)  n=8
Carter (1%)  n=4
Hoover(2%)  n=4
Nixon(2.3%)  n=4
Obama(2.5%)  n=3

all Reps (.20%)  n=38
all Dems .35%  n=40

There were a total of 78 speeches in the period. Here is an interesting link.

The Democrats appear to be more beguiling speakers at least to the markets' ear.

I would be glad to add Grant in honor of Stefan if someone will forward any market data from 1869 to 1876. I am sure U.S.G would bring up the Rep. average.



 Does anyone recall the regulations back in the 70s on banks that forced them to offer things like toasters, blenders and coffee makers in order to attract new depositors? I believe deposit interest rates then were set by the government [Regulation Q] and the banks could only compete for deposits to lend by offering other incentives to savings depositors, like kitchen appliances. Today the situation is playing out on the lending side. The banks are awash with funds, but the Fed has forced the lending rates so low they will not cover the credit risk on mortgages or small business loans. Now the banks offer free (metaphoric) toasters to be left alone so they can just buy Treasuries.



 Since the pit trading floors have mostly closed I have an excellent simulation for being able to think under pressure and react quickly in difficult conditions. That would be to care for a cranky and hungry two year old at 6 am, while reviewing and placing trades for the day, and subject to high decibel protestations of the aforementioned. By the time the market actually opens one has developed nerves of steal from the ordeal and ready for anything.

Craig Mee writes:

Good call, Duncan.

With the keen eye of the youngster and their intense gazing at the pretty colours of the charts, it may be worth asking the two year olds what their thoughts are.



 One particularly nasty feature regarding the housing market which I am surprised to have seen no writing on is the treatment of capital loss. Losses on primary residences can not be deducted from other capital gains. What you eat, so to speak, you must pay tax again on making that capital back. Using a 20% tax rate of say 6 trillion in lost housing capital, that is roughly $1.2 trillion that the public will have to pay in incremental tax. (true if housing rebounds the loss may not be realized or incurred. Also true that some of the capital loss may be transferred to the banks if owner walk on the loan) But thinking like a politician and using government finance should they not include this potential for windfall tax receipts over the next decade or so as new "revenue". And why not just bring it all forward to 2012 and solve the whole budget gap for next year.



 I conducted my own version of Bastiat's broken window parable this weekend on a microcosm for the economy, my back yard. After the second debilitating storm of the year, there are shed and broken limbs scattered throughout the woods behind my house. I like to believe that I can keep the forest somewhat organized and English garden like, so set about making piles of woods and pulling some to the driveway for collection.

There was much activity and I did have a nice afternoon in the woods, and my daughter of 4 assisted for a while. So there was some productive activity. However on the whole the woods are still a mess, much worse than before the October storm. And the opportunity costs must be factored in, as I never got around to repainting my younger daughters room or reading all the spec post for the weekend. There is a marginal amount of firewood now available for collection, and I did hire a college kid to help for a while. But, he had to leave in the middle of the job to attend OWS. So maybe those can also be factored in the plus column.



 One type of false modesty or at least related has to be the “sandbag”. It often refers to golf, meaning to falsely increase ones handicap to give an advantage during tournaments. Examples are everywhere, as before any friendly competition with a neighbor, “I’ve not played in weeks… just recovering from a hurt…” This makes ones the underdog giving a slight advantage.

Sales reps sandbag the budget for a lower number then they might actually expect thereby increasing their potential bonus, ”..competition is tough, order are down, conditions bad.” Of course on the other side are the executives who pad the budget and maybe these two forces make the market. In fishing the sandbag equivalent would be, “ this is my first time on the river.. not sure how to work this water…” in which case your friend surrenders the best fishing holes and runs.

Southerners I think have particular skill with the "sandbag" given their genteel mannerisms which can hide their true sagacity and abilities. They are in fact much more adept at most things practical and otherwise. At first I underestimated my college roommate his being from small town Florida. But he was my better at everything from music to sport to study and I learned much from him.



 Since Rocky made the reference, there must be other market lessons we can learn This is Spinal Tap.

In my experience trading I note there are times (perhaps a dozen a year though not widely known) when positions spontaneously combust, like the affect on drummers in certain late 70s rock bands. And in trading as Tap so eloquently expresses, “It's such a fine line between clever and stupid”

p.s. I want to see/hear a Rocky - Nigel Tufnel impression one of these days…



In these time where heroes and inspiring figures are hard to find, I would put Jobs right at the top of the list. His vision of bringing the world to a digital age brought us not just cool devices, but more music, books, culture, and greater efficiencies so more time with our family and friends. And all these benefits were the surplus to the actual tangible wealth he created for himself, shareholders and investors. When my daughter asks me who the heroes were of my generation, I will say Jobs.



Looks like the Platinum vs. Gold spread is expanding. My wife will be pleased as I chose the industrial platinum over the shiny metal, and glad it has some value over just car engines. A note from my broker trying to induce me to trade gold notes that the Treasury is sitting on 260m oz of the shiny, so roughly a 130bil unintended windfall this year. Also noted yesterday: property values are down in every state except OK, ND, and the district which enjoyed a nice 12% increase yoy.



There are some benefits to higher rates that are never mentioned, which I think will and should happen, things like yield curve flattens. For the $100 billion it will cost the gov, there are those who benefit by equal or greater amount.

It's good for savers like retirees and depositors. Good for currency, maybe. Our dollar depreciation could slow or reverse. Could be a catalyst for corporate and housing activity, i.e, "if rates are going up soon, better invest, buy xyz now, not later". Banks may be more interested in actual corporate lending if treasuries spread narrows.

Higher rates and higher GDP are not mutually exclusive. End to the zero interest rate experiment, which just seems wrong to me, and easier to run discounted cash flow models without having a zero in the denominator.



 If the financial Armageddon does happen this week it will be the most well forecasted one in history. Now CME raising bond futures margins in anticipation of increase volatility and declines in bonds. While actual volatility for bonds around 10% roughly where it has been all year and well below say last December, and if I am not mistaken Nas 100 is just off 10 year highs.

Gary Rogan adds:

Speculation about what the "stubborn" conservative Congressmen "need" to "do the right thing" and "compromise" has reached a fever pitch. So many cannot understand why the markets are oblivious to the obvious failure to capitulate and are not providing the necessary pressure to avoid "the terrible fate of default". The best way I heard it put on a radio program full of "thoughtful" independents and liberals is "Why would they seek the safety of a bomb shelter if the bombs are not falling?" 



It is hard to resist commenting on the debt issues as I get a chance to play macro global economist. But in a three liner it seems to me both sides rejected a decent bi-partisan plan in Simson-Bowles. So talks are a dead end now. The fed policy is to inflate away the debt and pay back creditors with devalued dollars which makes sense. Too bad for tax payers that most of the debt is owned by us, not the asias. If I were a macro player I want to own stuff, stocks, gold, land, and no paper debt or any currency. Of course they will raise the debt limit, but it could go over the self imposed deadline just to make it interesting. Default no, downgrade, not this year.



I believe the 10/30 year bond market right now price in no principal default, possibly a few late interest payments and no major deficit reduction plan. If they reach some type of real deficit reduction plan (unlikely), then 10 and 30 year rally. The real bear scenario would be if there were actual principal defaults. But this is also unlikely to happen. They raise the debt limit on August 4th and all go on summer vacation.

Regarding all the models, CAPM, EFT, Black Scholes and others depend on a risk free rate but substituting a nearly risk free is probably good enough. They are all just models and even Fama admits the EFT has too many exception to really work. The IRR and NPV that companies uses for capital projects usually use a cost of capital or corporate bond rate.

I think politicians are definitely watching the market and not the other way around, and no real deficit change will occur until 10/30 year yields are much higher. It is just to cheap and easy to keep running deficits for now. The bond market will drive the policy and for now rates are amazingly sanguine.



 Our family visited Mystic historic seaport this weekend. Though most of the day was spent chasing a rambunctious toddler across the village square, we did manage to board a few of the Tall Ships and Schooners on display. One interesting fact is some of the 100 foot schooners were working long line fishing vessels up into the 1950s. The advantages of sail and maneuverability severed them well into the modern age. They would fish the Grand Banks off Newfoundland and would stay at sea for up to a month if they were salting fish, versus icing them which allowed only for shorter trips. It is impressive to see a design that functioned so well for over 100 years. Looking at any of these old boats at port one can almost sense their pining for the distant seas again.

Happy 4th to all,




Rough winds do shake the darling buds of May

And summers lease hath all too short a date;


 Given the dramatic move in crude this May and the dramatic day in stocks almost exactly one year earlier, I decided to see if the Bard offered any predictive forecasts, May being "windy" and summer being "short".

Not much to offer for trading but the Sonnet if recited at the right time is guaranteed to foster a Spring romance.

2006 to 2011

Not much to offer for trading but the Sonnet if recited at the right time is guaranteed to foster a Spring romance.

SP500 Day Range >50 points

Month  N

1    3
2    1
3    1
4    0
5    1
6    0
7    0
8    1
9    4
10   17
11   8
12   3

Crude Daily Range >$5.00

Month N

1    2
2    0
3    2
4    1
5    2
6    8
7    6
8    4
9    6
10   5
11   3
12   2

SP500 average day June, July and August=  -.25 point
SP500 average day not June, July or August=  .09 point

Crude average day June, July and August= $-.06
Crude average day not June, July, or August $.01



 One could compare hedge fund managers and fish, since in fishing much depends on the conditions of the river and environment. During the higher flows the fish spread out. There is more oxygenated water, seams, pockets and pools to reside in. If weather cooperates there will be insect hatches and good feeding for all in various and abundant places.

However, during the lower flows the options decrease. There are fewer pools and the fish stack up, competing for aerated water and access to a seam where a bug might coming down the current for a meal. In some cases larger trout will even feed upon smaller ones of the same species. Other predators, like anglers, can easily spot the schools during these lean times which add to their vulnerability.

The schooling affect does not lead to success, but is a by product of their collectively looking to be in the best spot given the circumstances around them. Or take a surfing example, a line up is not a result of surfers interested in paddling collectively, but a desire by each to be near the crest of the next nice swell.



 A couple of weeks ago, The Chair discussed a dinner he had with Dimson — and that Dimson noted the "long term rate of return for everything other than stocks" is around 2.8%."

This morning, Steve Landsburg articulately expanded upon one of my points regarding utility value– demonstrating that headline numbers regarding long-term returns can be horribly misleading. In particular, he addressed James Glassman's recent WSJ op-ed where he admits that his Dow 36,000 call was wrong. But importantly, Glassman's mea culpa was wrong for the wrong reasons.

Landsburg's essay reminds me of the adage: "There are sardines for trading. And there are sardines for eating.

Duncan Coker writes:

I have known a number of developers as friends from having once lived in a resort town. During the go years when they would sometimes present a deal to me for a small share, I would point out the implicit 5 to 10 times leverage, or the large share of sweat equity they usually wanted. They would always look at me like I was an uneducated amateur who did not understand the main unspoken premise of building. Build it and they will come is always the motto, and you do have to admire their optimism.

Kim Zussman writes:

"The truth is that stocks appreciate faster than houses precisely because a house does not just sit there; it provides shelter, warmth, and closet space every single day that you own it. Stocks need to appreciate faster to compensate for the fact that they don't provide any comparable stream of services. If stocks and real estate appreciated at the same rate (counting the dividends as part of the appreciation, as Glassman does), nobody would own stocks."

Margin issues notwithstanding, very few would choose homelessness to be in the stock market. A better comparison would be a rental house held as an investment - where the shelter utility is capitalized - vs (initially equivalent value) investment held in stock(s):

Over time, stock will pay dividends (or reinvest earnings, etc), and the investment will grow by capital appreciation + dividends Over time an investment house will pay rental income, and the investment will grow by appreciation + rental income - upkeep

The Case-Shiller home price index shows real house prices approximately flat (with considerable variability) over the past century, whereas the stock market is up. It would be interesting to compare rental property - including rental income - to stocks over the same period. In theory rentals should go up more, to pay for the aggravation of being a landlord.

Henry Gifford writes:

An important factor usually left out of such discussions is that houses can be bought on 80% or 90% "margin," with fixed interest rates, in effect, being a giant option on the US dollar, favorable to the real estate owner in times of inflation, when real interest rates can be negative.I think this is how most people who make money on real estate make money on real estate, although few talk about it this way. 



One flexion activity is creating an artificially steep yield curve. This translates to the high bank margins which are created not by the value they add as in other businesses but by the friends they keep at the fed and treasury. I heard Hugh McColl speak several years ago, (a non flexion man of respect) founder of NCNB now Nations Bank, sum up banking activity as "renters" of money. The rents are artificially high. And those rubes that have to save for a rainy day like myself write checks every month for privilege of doing.



Glancing over the GDP numbers it is comforting to know that, in the era of belt tightening and austerity, real non-defense government spending has increased 15 out of the last 16 quarters and a healthy 3.7% most recently. Real estate and job growth in the Potomac area looks strong.



It's interesting how the continent is so fearful of inflation and the colonies so fearful of unemployment. Both worries are rooted deeply in history, and the result has been playing out over the last several weeks in currency.



 The Chair offers a meal in the ideas of forgetting and trying to start fresh in trading every day, week, month. In my case I tend to remember and overweight the large losses and not the average gains. This leads to trading too infrequently and then being subject to adverse selection. Sometimes forgetting is a good thing. This past year it would be hard to forget the intra hour move of 10% in May, or intra month move of 25% in Oct 2008. Though they deserve some consideration, their likelihood of occurring again is probably overweighted for me. I am reading a book called Waves where it documents a 1700 foot wave that hit Lituya Bay Alaska in 1958. How many fishermen would ever venture out if they dwelled on the past too much? I have found in tennis, I often play better after a period of not playing, as I forget my bad habits. For some reason I manage to remember the core fundamentals. This affect unfortunately wears off when the dreaded reversion to the mean takes hold.

Ralph Vince comments: 

Interesting observation Duncan. I am of a similar mindset, have been working with the idea the past 12 months and have drawn the conclusion therefrom that "expectation," the probability-weighted sum of possible outcomes, aka "Mathematical Expectation," of what might happen, is not only NOT how human beings asses risk-opportunities, and rightly so. If we did, the analogy I like to use is, we would never board a flight.

But we DO board a flight, knowing there is an incredibly small probability of never arriving at our destination. Why? Because we "expect" to arrive at our destination.

In fact, the notion of Mathematical expectation is really a mere proxy (and a poor one at that) for assessing risk-opportunities compared to what we should use.

Thinking about writing a book on this. The problem is it ties into everything else I have ever worked on, and a lot of it would be redundant.

George Coyle writes:

I too suffer from this problem. This is obviously tough for those trading with casino logic which requires the "house" to play all games (subject to size limits). There is a concept in psychology known as systematic desensitization ( which attempts to stop responses to fear and anxiety. It might be useful for trading, but presumably one would have to incur many losses to get the benefit. Also, if we check the opposite end of the spectrum (the bank traders who take large risk because they can just jump ship and move to the firm across the street if they lose) it would appear having nothing to lose personally, and thus an asymmetric risk profile, would also result in eventual disaster. So there must be some optimal level of fear/greed/caring/indifference, the efficient frontier of trading emotions. It is difficult to think of how it might be measured and then used.

Craig Mee comments:

This seems to be a catch twenty two here, how individuals receive risk, and how the market does.. As everyone is boarding different flights at different times, surely fear and greed , or lack of …fifo's each other out. 

Ralph Vince adds: 

Put another way, what the casino "expects," and what you, the solitary individual "expects," are not mirror images of each other.

George Coyle adds:

The casino expects a slight positive expected return over the course of time (by virtue of the odds of the games). The only real exception is blackjack in which a player has an edge provided s/he can split aces and double down on split aces. The speculator using a casino approach would expect the same. Basically the central limit theorem says that over a large enough sample the distribution of outcomes will be approximately normal. In this instance both speculators and casinos using this logic assume a slightly positive mean (expectation) to the distribution. So they do expect the same, a profit over time by virtue of the laws above. The amount of said profit varies as markets are not governed by the statistical laws of casino games. So they aren't mirrored, but they have the same trajectory. Both experience runs against the expectation, the goal is to manage emotions such that a big loss does not prevent a speculator from playing the next game which may cause the positive average to be realized. The casino does have the benefit of odds remaining in their favor over infinite time.



 The lowly heating oil front month futures contract now at a year high at last weeks close. As earlier discussed will this mark a top in all dollar denominated markets. I am waiting to lock in on a price for my winter oil supply for my home. But I have a hedge of a large supply of wood in my back yard and potential for a wood burning stove. I also learned this weekend that as predicted by the Chair the specialization of labor much more efficient when it comes to cutting, splitting and moving fire woods. At $95 a cord there is just no way I can compete. Though I had a fine afternoon splitting wood.



 The economics of buying a chainsaw highlights some of the ideas on how to value time. How do I calculate, cost, benefits and lost opportunity and what should I consider as leisure, exercise, entertainment time versus labor? For the issue at hand, there is a forest abutting my back yard, and with the recent wind storms a few downed trees. They could lay there for a few more years, but on the other hand they present and eye sore in the other wise organized forest. Second, winter in coming and I am down to around 1/2 cord of fire wood and will need roughly another 1/2 cord to make it through. Market price around here for a full cord delivered is $180 give or take. The chain saw I want is a sparkling new Husqvarna 40cc for around $350. Not considering labor it is a 2-year pay back on the wood alone.

There are other factors though. For one, I like doing yard work and spending time in the woods. Being outside, throwing on the coveralls and getting muddy is definitely a benefit. Running a chain saw is fun as well, (positive marginal utility), though I am sure I would feel differently if I was a full time lumberjack (downward sloping utility curve). Lets assume it is safe and I am somewhat skilled. The exercise involved is fairly high, probably 8 to 10 hours to cut, move, split ½ cord. So I list this as a benefit. Then there the satisfaction part afterward of looking at the neatly pilled wood stack and the peaceful spot in the woods where the dead tree no loner resides.

Opportunity wise, I could always be doing more research as a trader, or spending time with my family, the later being the most important. So there are costs there, but time in nature has benefits as well, like long walks, swimming, rowing.

Add it all up I am leaning strongly toward making the purchase and heading out to the woods this holiday. If anyone has any good arguments for or against let me know.

Craig Mee writes: 

Chainsaws and markets… mmm!

This reminds me of a young broker years ago who went on his first interstate trip. On arriving in Melbourne, Australia, he went to take a bank client out to lunch. The client says "let's forget lunch, and hit the hardware store for a spot of shopping" ! Well he promptly got the young guy, who didn't know any better, to buy him the latest chainsaw with his company Amex…and once the client's boss at the bank found out, the client promptly got fired!



 With the dollar being so despised and the revulsion to owning green backs, with Aussie near parity, Euro at 1.4, gold, silver, corn, wheat, sp ,etc all at or near extremes, I wonder when the vigilantes will get around to the bond market. That too is dollar denominated, and of course you can't fight the fed on the short end of the curve, but the long end once was held in check. It reminds me of Ed Spec when every one wanted goods and no one wants to hold cash, then a speculator obliges.



It would be interesting to know which broker and clearing house accepted an order to sell 75,000 emini sp in apparently some sort of staged (GMTFO) market order that lead to the 5/6 event. 10% slippage I guess was acceptable, and had it been in just one stock no one would have noticed, but to move a whole market is different. The order only represented 3% of the daily volume. I wonder had it been placed closer to the more liquid open would it have had the same affect. Or did someone come back from lunch, see the market down 1% or so on a $10b fund, and have a change or heart. I don't think the HFT boys made on this, many smaller players margined out at the lows, brokers made their commission, customer filled his order, but hard to find much of a conspiracy other than a sloppy trade and a sloppy execution.

Vince Fulco writes:

The official line was it was a staged order supposed to make prints along with ~9% of the volume. Either we have extremely sophisticated HFT sniffers in our midst in ES or someone has a fat mouth. Once WR's actions were known, it was just a matter of other parties getting ahead thereby turning it into a 1987 portfolio insurance like scenario, the lower it goes the faster WR needed to sell. 



 As we mark another backward roll day for the equity futures, I long those good old contango days. It just does not feel right marking down the distant month. Aren't things supposed to be better in the future. Of course I understand the arbitrage with the cash market, dividend and interest rate, as proxy for the fed model. And for some a positive carry is great. Maybe I am just jealous because I can't borrow at 25bps, cost me more like 500 or so.



 A small example of risk and reward played out this morning. I live near the ocean and woke near sunrise to surf. There was a gentle rain but not a problem. As I get to the water I look out to glassy waves and a light rain, but far out on the horizon is a storm, which will probably not reach here, but a storm none the less. Then, there was a large lightening bolt that lit up the sky to the horizon and thunder. Do I surf or head home? The getting up early, driving here, getting ready, are all sunk costs, and irrelevant. I do a quick analysis of the risk/reward, but have no real data to back it up. What are the odds of being struck by lightening in the water within 10 miles of a storm? I guess, probably over 1 in a million. Does this increase with more time in the water?, My estimation is yes. Is it dark and intimidating looking? Yes, but probably irrelevant. So I decide to risk it. I catch just a few waves then head in after maybe 30 minutes. Was it just a bit more exhilarating because of the pending storm then just a normal day surfing. I will admit it probably was.

Stefan Jovanovich comments:

According to the wife of his old colleague Croker, the Duke of Wellington had his own discipline of risk-opportunity analysis. "All the business of war ", he told Mrs. Croker, "and indeed all the business of life is to endeavor to find out what you do not know from what you do." Wellington's phrase for it was elegantly simple: "guessing what was at the other side of the hill". (Arthur Wellesley's genius was to use terrain to spare his troops from the murder of the French cannon; he had his troops lie down during bombardments on the reverse slope of hills, where the spotters could not see them. This "cowardly" tactic was ridiculed by Napoleon - himself a gunner, but it was soon copied by the more intelligent French generals. That is the further implication of the Duke's maxim: your wise opponents will steal your best ideas.) 

Ralph Vince comments:


What you have hit upon is the peephole to an entire discipline I call "Risk-Opportunity Analysis."

It explains, say, why we will get onto an airplane even though there is a (very small) probability that it will kill us. It explains, mathematically, why we do such things, and shows the mathematical reasoning for such. It can be extended then to trading, how much to risk, etc.

The conventional notions of assessing risks do NOT address this, and, in my opinion, as proved through the tenets of Risk-Opportunity analysis, are just plain wrong.

Incidentally, and forgive my plug here, but if anyone is interested in this, I am having a 2 day course in Tampa and in Tokyo in the next two months, and you can learn more at

Pitt T. Maner III writes:

Would one change actions if more information or warning was available? How does real time information play in and can one truly interprit it properly and realize the statistical significance. 1:1 million odds can change when the strikes per minute count starts to climb. These alarms can be pretty unnerving.

Normally in the health and safety field if one sees a strike then you wait about 30-40 minutes and continue work if no other strikes are seen in that time interval— its a real rough rule of thumb and hardly perfect. Some go with a 6 mile radius for the detectors. Lightning risks are considered higher if they go within that radius.

For the alert-based systems though there are a lot of factors to think about.

By the way, that Tampa area is considered the "Lightning capital of the world"

I have heard of projects being shut down over there when lightning was detected by multiple detectors within a 20 mile area because the storms can move so quickly and/or the bolts generated can cover that distance too. So it can be difficult to work outside in Florida in the summer when following a strict lightning policy.

But in South Florida we get these too— out of clear sky.

Rocky Humbert writes:

There is a huge corpus of literature that shows people's instinctive assessment of risk and reward often have little to do with the HISTORICAL probabilities. Charlie Munger gave a long-winded speech at Harvard in 1995 on the "Psychology of Human Misjudgment." And as Ralph knows, "Risk-Opportunity Analysis" is not just about trading. It encompasses everything from physical System Fault Tolerance/Reliability (my dissertation topic) to classical economic utility theory to government/regulatory policy. And don't forget Pascal's Wager either!

Most people live (and die) in the middle of the curve. And the rest live (and die) in the tails. I'd argue that the wise man should try to make decisions which maximize his eternal happiness, and ignore the statisticians and meteorologists…or as Ed Seykota supposed said "Everyone gets what they want out of the markets."

Ralph Vince responds:


Yes, with new information, you have a new starting point from which things can change with given probabilities. The things that might happen, and their probabilities may be the same, but you have a new frame of reference, a new starting point. Think of a horse race, where you can change your bet at the first turn.


Very true, and that corpus is very interesting for a host of various reasons.Usually, we find, there is an often not-so-obvious logic to people's choices even though they appear inconsistent with historical probabilities.

But what I am alluding to — the inescapable conclusions I have found myself in — there is a lot more to it than that, and it;s a big can to open up here. In retrospect, it's all very obvious, and I can look at it and say to myself, "Yes, of course, this is obvious to me now."But it isn't obvious in the main, and frankly, from the polling of people I have been doing, not obvoius to anyone at all, which is the MOST peculiar thing about all of this. 

Kim Zussman adds:

As is often the case, some answers can be evaluating using limiting cases. For example, you will never die in a bicycle accident if you never ride a bicycle (approximately).

As health care provider, I note frequently patients express regrets about having done something (or not doing something). The nature of regret seems to include a miscalculation of what consequences will actually feel like were they to occur. ie, the vague consciousness that you might crash your bike feels different than thoughts about the future while traction is decompressing your spinal cord.

Part of the intellectual maturation process is the effort to improve estimation of the experience of untoward consequences.

Jim Sogi replies:

Duncan, I've surfed in gnarly thunder lightning storms and wondered the same. The surf tends to be good and uncrowded as the storm cold front pushes, and lifts the wind towards the sea making the winds offshore for a while which is good for shaping the waves. In addition, the storm front may be pushing a wind wave front. What I've since found out is that the lightning can travel over the surface of the water until it finds something grounded. Not good. I've read about mountaineers stuck on the mountain during a thunderstorm. They describe some weird effects where their tools turn blue and their hair stands on end. The lighting can travel over ungrounded surfaces looking for ground. I think in the water if there was a nearby hit, I'd hold my breath and go underwater and allow the bolt to go above me. Also, I would NOT sit the furthest out to sea. In general, if the storm is isolated, the risk reward would be good. I try to take that approach trading as well. Similar but different analysis for sharks. I'll post about that later.

There is usually a time window. Before Hurricane Iwa hit here in 82, just before the storm hit, there were 20 foot waves, with offshore winds early that morning. Only a few spot were able to hold the swell. There were only 3 guys out. At about 10 am the wind turned and things got ugly. We hunkered down but were happy to have taken the risk and rode epic waves I still talk about to this day.



Acacia trees--where ants live, and elephats feedA fascinating article on how ants protect their trees in the savanna from elephants:

"It really is a David and Goliath story, where these little ants are up against these huge herbivores, protecting trees and having a major impact on the ecosystems in which they live," Palmer said. "Swarming groups of ants that weigh about 5 milligrams each can and do protect trees from animals that are about a billion times more massive."

More here .



 Just scanning the headlines on any given day it is easy to see the biases built and if you had to put the pundits in one camp or the other with regard to view on the stock market, the academics are universally bearish, business CEOs bullish, government officials try to appear bullish but in their actions are bearish, financial journalist are bearish, mutual fund managers are bullish, hedgefund managers bearish, bond fund managers bearish on everything and real estate developers are always bullish down their last penny. So in reading them maybe those times when they go against their natural biases is when to really pay attention.

Vince Fulco adds:

To support what you say, the latest results of CFO mag/Duke survey (July/August) of 1,102 CFOs indicates the top three concerns about macro are 1) consumer demand, 2) fed govt policies, 3) price pressures.

Within their own co's: 1) ability to maintain margins, 2) ability to forecast results, 3) maintaining morale. Geographic breakdown was 535-US, 139-EU, 219-Asia ex. China, 209-China.

When asked how one would characterize company's market position, 47% said cautiously pursuing growth and 26% aggressively.

Rocky Humbert comments:

Mr. Coker makes an excellent observation. Trying to refine this a bit more, I note that the "pundits" seem to be represented by a recurring small group of quotees.

Academics: I've previously demonstrated a reverse correlation between stock prices and google hits on "Nouriel Roubini." Should Wharton's Siegel ever turn bearish, it will be an all-in buy signal for stocks, and the day when Roubini turns bullish, the opposite will be true.

CEO's: There's a corpus of studies which show that one can be well-served by watching insider buying. "Watch what they do, not what they say."

Financial Journalists: "Man bites dog" sells newspapers and "The consensus is always wrong," sells newspapers. The latter ignores the fact that "the sun will rise tomorrow" is a consensus opinion that has been (so far) correct, and no one should pay much heed to a guy who bites his cocker spaniel anyway. Notably, long-term bear and high-IQ Jim Grant turned publically bullish on US stocks and bearish on US bonds in March, 2010 and has been bullish on Japanese stocks for the last decade. In fairness, he's been bullish on gold since 1981.

Mutual Fund Managers: They are always bullish. But it's not a good idea to ask one's barber if one needs a haircut. Most importantly, there are NO mutual fund managers who have outperformed their benchmark over an entire career. Two came close, but Peter Lynch retired too early, and Bill Miller retired too late.

Hedge Fund Managers: Byron Biggs (who is Druckenmiller's Father-in-law) has been consistently bullish for the past three years, except for an afternoon on June 30th (which was an excellent buy signal.) The consistently profitable hedge fund managers rarely talk to the press (on the record) for obvious reasons.

Bond Fund Managers: One wonders how Bill Gross can spend so much time in front of the camera and still run his portfolio. Yet he uttered seriously bearish bond comments in March 2010, and the rally which followed was breathtaking. This is an brilliant example of Duncan's point.

Real Estate Developers: Donald Trump's casino properties have filed for bankruptcy three times. A hat-trick of this magnitude rivals Wayne Gretzky. If one includes mutual fund investors, Trump may have lost money for more investors than any other real estate promoter. Truly the "great one."

Government Officials: I question whether anyone listens to them at all.

Here are three more observations:
1) University Endowment managers believe that they are all above average investors, and "you can be too."
2) "Value investors" believe that anytime a price moves up a lot, it's a bubble.
3) At any cocktail party, there is always one guy who owned a stock that rose 1000% during the previous month.
4) Baby boomers who rode the Nasdaq/S&P bubble in the late 1990's are almost always bearish about the economic prospects for the USA.



Looks like the SEC is following the hedge fund model in their new Whistler Fund with a straight 30% over a $1mm hurdle going to the most talented moles. Nice to see big gov finally embracing an incentive structure. I wonder if you turn yourself in if you can still collect on the reward, or how they handled that in the old West.



 One was recently asked, how do you spot a hoodoo when you are in or dangerously close to their presence? I would say that their past record of failures is a good starting point. As is their ability to talk a much better game than they play. Also, their attempt to impress you with the trappings of success, ( a conference call with their five principals is a usual gambit). Not to be disregarded is their locus of operations, often from a ephemerally built recreational area where permanent lodgings and such things as pianos are not availalbe. The inclination to befriend you and flatter you is also a clue. But how can this be quantified, and how can we learn to avoid them? What should you do when you've met a hoodoo? I've always taken to burning my shirts, especially if they've hugged me as they ofen do. Dare I ask the question of whether there are such things as hoodoos or is it a figment of random numbers? No, that would be too mind boggling. But please help with your insights.

Alan Millhone writes:

Some years ago my late father and me were enlisted by Banque Worms to take over a failing condo project in our area.

The developer met us and after I shook his hand I could smell his pungent cologne on my hand for the rest of the day. He had a lady friend assistant who wore a see through dress with precious little underneath if the sunlight caught her profile just right. When I first met him I could see " carpetbagger " across his forehead.

He was a genuine "slicky boy" right out of South of the 38th Parallel.

People like him wear a lot of bling and cheap after shave. Usually have a woman at their side as a distraction.

They are long gone. Our crew finished the job.

Stay vigilant and wide eyed. 

Pitt T. Maner II adds: 

hoodoos at Bryce CanyonFortunately, I associate the word "hoodoos" with the past leader of my university (UF) geology field camp, Professor of Geomorphology, Dr. Robert Lindquist, who was an expert on the formation of hoodoos in the magnificent Bryce Canyon in Utah and knew of the locations of many wonders in the West–original survey markers left by Powell, dinosaur bone and gastrolith graveyards, amazonite on Crystal Peak and ancient lahars in South Park, Co. A geologist's geologist who looked like he had stepped out of the 1800s.

As for the other definition, there was a person who once recommended Enron, Freddie and Fannie, and several other long ago bankrupt companies and who was so consistently wrong for awhile that it was almost uncanny. If one had just done the opposite. It was a good education to lose money at an early age though on hoodoo picks. Better to lose and learn using your own thought processes–at least there is a sliver of hope for improvement. 

Russ Herrold writes:

I might add that to view a person's bookshelves (even ones only in public areas) or even books in the process of being read on a table, or to note the absence of such, in each case provide a window into the mind of that personis to me a 'tell'.

Alston Mabry writes:

To see something clearly, it can be helpful to study its opposite. Recent list discussion included one of my favorite anti-hoodoos, Richard Feynman– intelligence, curiosity, enthusiasm, creativity, generosity, joie de vivre.

Russ Herrold adds: 

This certainly may work for when to exit or what to avoid. My brother also seemed to have a uncanny ability to leave the party, when things were getting hot… too hot… right before the cops came and arrested everyone. His friends started following him. However, the same may not be true with when to start a party. As a kid I remember people would fight for a seat next to me during a math test. If I did not like them I would pull a Goldman synthetic and write down some wrong answers, to be corrected latter in secret. It has been my experience in investing that the surest sign of a Hoodoo is willingness to copy someone elses system or trade and yet have no idea why they should expect it to work. There seems to be floating around hundreds of billions par value of formerly AAA paper that now only worth hundreds of millions that seems to prove that these Hoodoos are extremely common, if not the most common Hoodoo around.

Nick White writes:

Perhaps the most difficult aspect of detecting hoodoo-ery is to discern the difference between the genuine actions of the bona-fide dealer versus the pretense of the hoodoo (who - come to think of it– may well be bonda fide, too, but just cursed. Let's call these poor souls benign hoodoos versus their more malignant bretheren).

I think the sure tell of a malignant hoodoo is that their most effective lies will be those very closest to the truth…yet there lies their very advantage over us, and requires some street smarts to know the difference. Perhaps the foil is to know and experience for ourselves the difference between ambition and aspiration. The Stoics made this sort of distinction to help them in their quest against self-hoodooery: Ambition was vulgar, akin to avarice, full of scheming and accompanied by a very lowbrow, keeping-up-with-the-jones mentality. These sorts of feelings were to be put to death in oneself moment-by-moment through Stoic practice. Aspiration, on the other hand, was considered more noble, civic and had the connotation of dilligence, discipline and a bent toward giving a world-class performance simply for the sake of excellence as a way of life. Therefore, perhaps we might say this kind of vulgar ambition is the giveaway quality of malignant hoodoo-ery? Applying this little rule-of-thumb might constitute the foundation of an early warning system.

However, before any of us jump on the moral high horse and consider themselves "aspriational", the Stoics further stipulated that it required very great self-knowledge to even know the difference between these two values, let alone to declare oneself in one camp or the other. Even then, the Pyrrhic victory was assured– if you felt yourself to be truly humble and aspirational, you were most likely hopelessly ambitious and required greater training to cure the very need to make such statements about oneself.

Jeff Watson adds:

Nick, you made the most erudite explanation of hoodooism I've come across in a long time. One might wish to consider the partial hoodoo which affects 95% of the population. With the exception of a few good trades and the ability to be a good father, I'm a world class hoodoo, among the best. I won.t deny this because that would be a folly, and total lie as I can make money but my personal life is a train-wreck. I won't get into the Faustian aspects of all of this, but it is there. Hoodooism comes in many ways, shapes, and forms and I've seen and done them all. Hoodooism is like the old adage that history doesn't repeat itself but it always rhymes. The hoodoo that the chair describes isn't enough, the one you have to watch out for is the one that makes money on a regular basis, he's the danger.. He might steer you onto something good, but there is always a price to be paid, and the price is not always what you expect and not the currency you wish to pay..

George Parkanyi writes:

This whole notion of hoodoos frankly I find rather uncharitable, and burning one's shirt after a tainted hug smacks far more of superstition than science.

Now not hanging around negative people I understand. Some just wear you down with their negativity, and you do have to cut your losses at some point. But to classify those who have tried and failed into their own undesirable caste is unfair and a vast oversimplification. People run into difficulty for many reasons– failed relationships, health problems, sometimes just honest mistakes. My experience has been that people have far more to offer than what appears on the surface– regardless of their circumstances.

I wander past homeless people– ostensibly life's greatest "losers"– sometimes as I go to work, and when I really think about, I'm awestruck at how they have managed to survive all this long– with absolutely nothing, through harsh winter conditions. How do they do it? Clearly, they have skills that I don't. One time I gave a not only homeless but also legless man $10. He didn't ask for it. I just walked over and gave it to him. Here he was on the front lines at the very edge of humanity, representing on my behalf one of the worst possible circumstances that I could even imagine for myself and somehow I was drawn to him. When I gave him the money, he beamed at me with this smile of pure joy, looked me straight in the eye, and cried "God bless you!" To this day I will never forget that blessing, because at that moment there was a seismic shift– I actually physically felt it– in my understanding.

In the lands of the dispossessed, I don't see hoo-doos at all. I see potential teachers.

As for people who befriend you only because they want something from you, the best I think you can do is make your own decisions on to what extent and level you wish to engage. If you enjoy their company or there is something about them that you like, go with it, but don't take risks that would seriously jeapordize your business, family, and other relationships. Not everyone is genuine, yet not everyone's on the make either– and some people are absolute gems. To be completely distrustful will cut off a lot of wonderful experiences. To expect too much of people or to be overly trusting will set you up for disappointment, or worse.

It's like trading really. If you diversify your relationships you have less risk and less volatility. If you concentrate your relationships, you have more risk and more volatility, but perhaps a bigger payoff in the intensity of love and friendship. You have to figure out the right mix for you. The interesting thing about relationships is that that while you're investing in others, they're also investing in you. The more relationship value you create, the more relationship value you (and others) will also accrue. I can't quantify it, but I think there is a real multiplier at work there.

Last point. If you're not confident enough to engage or deal with a "hoo-doo" without fearing harm to yourself, then perhaps you should worry less about the "hoo-doo" and examine your own fears. What difference should it make to you if have a conversation, dinner, or even a business deal with such a person (however defined)? In what sense would that make you a lesser person or cause you harm? It may or may not, but I think its a good question to ask.


Jeff Watson comments:

George, it would behoove you to read up exactly a hoodoo is before writing such an elegant, misguided essay. The essay was great, almost fantastic, but missed the point. I can say this because I'm a hoodoo and proud to admit it. Not all hoodoos lose money in the market and in life and divorce. Some lose through gambling drugs, going for long odds, begin too easy with short odds. I lose my money by staking unreasonable ventures, loose women, and bad ventures. Not a lot of misadventures but enough to affect 11% of my bottom line. Add that to my losing trades, my 30 dependents, and I have a big nut to make every month. Nothing like the Chair, but still significant. There should be a place in the hall of fame foe us grinders who knock it out every month for years…That's gotta count for something.

Duncan Coker writes:

On the topic of hoodoos, when I am performing a task others can either help me perform better, have no impact, or lead me to perform worse. A hoodoo would would reside in that last category. I am not so concerned about their motivation or intent, just their impact. With my favorite fishing comrade, we actual raise the level of our game so to speak, so an inverse hoodoo. We share information on the flies that are working, fish caught, good spots on the rivers, ( after a small bit of subterfuge of course for good measure). We have a good rhythm of leap frogging each other up the river, alternating the good stretches, not spoiling the water ahead for the other. Plus the general level of conversation or lack of it fits well with the day allowing us to focus on the river and landscape around us. In a pinch we can count on one another. I recall one day I slipped and snapped my fishing rod while at the same time managed to lose my fly box and all flies and watched it float away into the fast current. My friend saw it all and after a few jibes, offered to share his set up, and we took turns the rest of the day. We landed my rainbows that day.

But I have fished with hoodoos as well. One guy we nicked named Trigger. He was so nervous and jerky casting and moving around the river we thought he had an itchy trigger finger and thus the name. He could destroy a beautiful fish laden stretch of river faster than anyone I have seen, with sloppy casts, poor retrieves and a general disharmony with the environment. And he liked to talk, talked way too much. So just being around the guy brought my fishing down and took away my rhythm. Plus, he had the very real affect of spooking any fish near us. They must have known he was a hoodoo as well. One day was enough with Trigger.

Nick White comments:

Actually, I wonder if the null hypothesis is that we're all natively hoodoos…with only will, practice and a life record to help us refute it?


George Parkanyi responds:

Humanity in the aggregate, and individuals all, are - maybe flawed isn't the best term - let's say limited, at any given point, by the sum total of our experiences and our genetically born underlying capabilities and pre-dispositions. Most of us I would think have far more potential than we ever actualize. As infants and children, we start out gang-busters, absorbing everything - especially information and ability most pertinent to our survival. It is primarily a world of exploration for us at that time, underwritten by the support of those that take care of us in the early years. We're all about curiosity and imagination. As our thirst for knowledge and experience leads us to new experiences, we also begin to develop routines and habits, which enhance efficiency and conserve energy, but also help us re-experience that which we have enjoyed or that have worked in our favour before. The filtering begins, and the type and nature of recurring experiences that we seek increases. Habits take form, even at a young age. The continuously developing habits, I believe, progressively and increasingly compete with our desire and ability to pursue new experiences. At certain points in life, we even choose massively pre-packaged experiential templates (e.g. marriage, career) as well, which hugely filter and channel our future experiences. Ultimately, we (not all of us, but a large portion) reach a point where there is no further desire to seek new experiences that are outside our past experiences. Our habits completely define us. As we age, we also begin to lose the resources, particularly health and energy, with which to pursue and expand our overall life experience.

Perhaps a hoo-doo is simply a person that can or will not go to the next level, and finally settles for habit being the determinant of his/her future experiences. Perhaps they give up on the pursuit, or are ultimately distracted away from seeing or imaging that next level of experience beyond the point that they have already reached (which point would be different for each person), and never even think to look toward the horizon of their life again. All I know is that habit is a very powerful force, and ultimately I think it overwhelms us.

John Holley comments:

"Amen, JT. Sorry I made you burn a shirt that time I hugged you at the Mets game, Vic!" KD

Just to show I put my actions where my mouth is, I will share with the list that I recently have read two very important books that have shaped my life thus far. Both are shared favorites, highly insightful, and forever giving and common amongst the Spec Listers:

1) Memoires of a Superfluous Man - A.J.N. (via Vic)

2) Five Lessons: The Modern Fundamentals of Golf - Ben Hogan (via my Dad, also Kevin Depew's fav golfing book)

These books are on my top ten list. If you haven't read them then do it. In fact read them over and over again.

Other than G-man's speech in Atlas, the 1 thing I hang onto that Lack shared recently in a post regarding his Father that would get you out of being a Hoodoo is appropriately going to be number twenty six.

26) “If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down on his shoulders—what would you tell him to do?” " To Shrug." Shrug, bare more. Your mind can handle it.



As another benign FOMC day passes, the spread between Fed funds and 10 year Treasury stays at 350 basis points. I would propose that on average the spread is around 150 bp and probably where it should be now given the inflation cycle. So that extra 200 bp, multiplied times all the money market funds, demand deposits and cash, gets seamlessly and efficiently transferred to the deserving parties. While one branch of government puts on a side show, another takes care of important issues.



 I will be interested to see how the employment news is digested so to speak as the futures markets had 45 minutes on Friday and now some 12 plus hours since Sunday open to react. While the cash market has not traded. Is it "old news" and already absorbed as efficient markets would have dictated or does the cash market have something to say about it?

I have a small wager on the answer.



I have been doing some counting. This month we had very few down days, 4 to today and if the last day of the month is down [Ed.: as was the case] that will make 5. Looking at SP Futures last 12 years, ending 2009 (sorry, slight gap in the data to present) here is the distribution of number of down days starting with close of last day of the month and looking back 21 days including last day.

Number of down days


1     0
2     0
3     0
4     1
5     1
6     5
7     5
8     20
9     33
10    24
11    30
12    11
13    9
14    8

none above 14

The average down days per month is 9.9, but looking at the extremes…what happens one month out? Nothing earth shattering, but definitely not bearish after a bullish month and trend followers may continue to have their day. Of course much activity goes on within the month that this does not pick up.

Speaking of counting, my 2 year old likes to count. While at the beach one time she asked if we would count the waves, at night to count the stars. The wonder of children.



Hannah KearneyThe two sports I am somewhat qualified to teach are fly fishing and skiing, and this weekend I took my 2-1/2 year old to a snowy hill nearby for some lessons. How many instructions can you really give a toddler? So I know I can only offer one maybe two comments that might stick with her and give some help.

In the case with skiing I can say that all my experience of 30+ years skiing, watching races, free skiing, and teaching others, can be distilled and put into two words that can really help. "Hands forward." It works. With hands forward, extended out in front, it puts your body weight forward, centers your balance over your skis, focuses your vision ahead of you, relaxes your upper body and puts you in the ideal stance.

Also, as you advance, "hands forward" will coordinate pole plants, help your rhythm in turning, direct your skis down the fall line, plus a hundred other small elements, and just plain looks graceful and in balance. I was delighted when I heard an interview with Hannah Kearney after her incredible gold winning moguls run describing her turning… "I was just thinking about keep my hands out front here…" That was all she had time to think about.



The partnership between Ostrich and ZebraThe reaction to recent events where something devoutly to be wished actually happened and sadness and disappointment and revulsion occurs is part of a general syndrome related to the dissipation of the sex cells. Time and time again, a company reports good earnings above expectations and a terrible decline ensues. Time and time, an important link in the totality is confirmed a la Bernanke today, and the market drops an immediate 1%. Time and time, a bill that everbody wants, like the stimulus bill, or the Massachusetts election results, occurs, and the market drops an immediate 1% the way it did last Tuesday. What is the reason for this? Is it a variant of 'buy the rumor, sell the news', or is it insiders selling on the news? Or is it related to the general apathy that results when the discharge has occurred? Can it be predicted, and acted upon?

A friend writes in that the ensenble of comovements between bonds and stocks posted on our web site always reminds him of Leo Goodman's classic article "Movements and Comovements between M Dependent Time Series" that Doc Castaldo has kindly sent hundreds of copies out to far sighted researchers in previous glory days. It is good to honor and create a visual model and real life exampe of such important dependcies. And perhaps this will be a prelude to providing statistics on this site that will be at least as informative by half as the average sports statistics contained in such fine publications as The Post or Sporting News under "Stat City". The desire to provide a league standings tabulation is keen.

I am reading several books on animal partnerships and the partnership between the ostrich, which has good eyes, and the zebra, which has good hearing, reminds me of the partnership between many markets. One or the other, whether it's silver or the omniscient one, are there to alert to possible danger. One feels the pain of the CEOs who were at a dinner at the Oval last Wednesday, and learned about the Volcker plan only at 9 pm that night an hour after the dinner and just 12 hours before the 6% decline started. "That's not squash," as my friend from New Zealand used to say when I mixed in a volley or two. Heard at the Olympic Club at 10 pm: "You might want to play an all court game tomorrow, mate."

Of course there is a higher purpose to the recent decline of 6%. First the move must shake out all the weak longs who were buying it based on their hopes for the January baromoter. Next, it has to set all the public behind the form so that they will sell out in disgust at the three-month lows. Finally, it must engender a Dow below 10000 to create the kind of newspaper headlines and fear that will shake out the remaining weak longs before a rally occurs.

Paolo Pezzutti comments:

After you have finished your succulent second plate of spaghetti "all'amatriciana" and you are offered one more, can you eat it? After a long uptrend when earnings have beaten repeatedly expectations for a year, can you really expect more surprises? Some take profits, others go short. It seems that the news release is the trigger to execute actions that were long planned.

I found on CXOAG this post that addresses the issues raised: Earnings Surprises and Future Stock Market Returns. The post reports about the study Aggregate Market Reaction to Earnings Announcements.

The authors investigate the relationship between earnings announcement surprises and market returns on the days surrounding earnings news. The analysis identifies a negative relation between earnings news and market return that persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news. There may be a considerable degree of inefficiency in the market’s processing of aggregate earnings information. Consistent with this interpretation they find that Treasury bond rates and implied future inflation expectations respond directly to earnings news.

George Parkanyi writes:

Definitely, the same type of news after a few months loses its power to move the market (true for both the down side and the up). At a certain point you stop listening, you’re on auto-pilot. Markets respond to surprises –- the something new, the something different, or the something possible. This is very much a human characteristic.

A related example was the Internet bubble. Everyone was buying the companies that had no earnings – because while they had no earnings the potential for earnings was unlimited. As soon as companies started to report any kind of a profit, they were crushed. For now someone had put a limitation on all that “potential”. I was highly amused at the time how earnings for an Internet company was the kiss of death.

Kim Zussman writes:

If it were as simple as "up on good news", Galleon and others trading on inside information would immediately overtake the solar system –like a hadron-collider black hole. This evidences supernatural laws which prevent even cheating determinists from commandeering supreme mating rights.

Years ago at a Stephen Hawking lecture on time travel, he "discussed" (the lecture spun from his laptop) various paradoxes produced if one could go back in time. For example, if you killed your parents in the past how could you have been born in the future to go back to kill them? One theory was that when you pulled the trigger, the bullet would "diffract"; somehow splitting before hitting it's target — in compliance with rules keeping the universe in logical order. (whose logic?)

Another theory was parallel universes — one in which your parents died, another they lived and you were allowed to develop.

The questioners were kind to Stephen, because of his illness, but after the show he sat helpless in his wheel-chair in a van outside with the dome light shining on his contorted face like an involuntary spot light. A crowd hovered outside to see the great man, like at the zoo.

On a different note, Pfizer's run-up to the Massachusetts Miracle is typical. Removal of near-certain health care reform and promised payoff by pharma met with big decline. Would you have sold knowing the election results before hand? The upside is that if you can be at peace with the way market treats your logic, you will understand how to be a ladies man.

Duncan Coker writes:

 I would like to pick up on Messr Parkanyi's comment regarding "the markets respond to surprises, something new, somthing different or the something possible…this is a human characteristic." I agree. Related to this, I attended a showing of the film Poliwood last night where the director Barry Levinson was there for a Q and A session. It is a documentary about the triangle of media, celebrity and politics and how the lines between reality and theater, entertainment and substance, are becoming more and more blurred. Politicians become celebrities and celebrities become politicians. Media fosters celebrity and celebrity feeds the media. Politicians need the media for promotion and the media needs them for content. One of the ways to get high ratings in news television is to present conflict in a dialogue. That is why guests are always at the extremes of a position. It allows for more yelling, arguing and better entertainment for the viewers. Polarization is more interesting television. Informed and moderate discussions is just boring to watch.

I wonder if this carries over into the market. Stagnant markets are boring, wild swings make for better entertainment. Also, who benefits from wilder markets, financial media has something to write about, brokers and exchanges have more commissions and fees, money managers can justify their services. It allows politicians something to regulate, gives floor trades movement to scalp, hedge funds can fire up the algorithms. The causality works in both directions as well. Last week the politicians spiced up the boring upward move of the past 2 weeks. When a fund is rumored to be weak or going under another spike. The media does all it can to create excitement and volatility around the market. When traders over-trade and the line between entertainment and substance can get blurred. Also, like the television example, conflict is more interesting. In the case of the bulls and bears it is most interesting at the extremes, so the market follow this type of cycle.

Ken Drees adds:

This fits here with financial television as of late. The big question or overall theme being is this just another dip for the market or something more? Hopefully capturing viewers by keeping this nail biting question front and center–having two view points and the ensuing debates roll on out.

Off the bottom it was "is this a sucker's rally or a setup for another drop?"; now its "is this just a little dip and the start of a sideways consolidation, or the start of a substantial 5 -10 % correction?"

It seems like these times of opposing question of market direction after extreme linear moves should be watched closely for reversal. I find it interesting that the choice not talked about much off the march low was this: Or is this the start of a nice 50% multi month rally from oversold conditions not witnessed since 2001?

Today the choice missing would be this: Or is this the start of a 50 to 70% drop, retracing most of the gains of 2009?

TV — usually it's what they don't say or its the opposite of what they scream into your face — making great TV but bad advice.



 From the angler's desk, a check list/prep list for a day on a river:


Is my equipment working, waders leak free, new laces on the boots, reel clean?

Did I bring a backup rod and reel in case I slip a break it when wading down stream?

What is the steam flow? 100-400 cfs is good, above 1000 and I can’t cross the river.

How is the weather? Partly overcast is perfect, but I can adjust. A lot of sun you can see the fish early but they will spook fast, so means longer casts and lighter tippet. Heavy wind means bringing a short faster casting rod.

What is the hatch for that day and when, do I have the right flies dry and wet? I need a new leader each day, right length and thickness.

Do I have my topographical map, especially if it is new water?

Do I have drinking water, a bite for lunch and some chewing tobacco for when the fishing is slow and to change the luck?

Near the river

How many cars did I see within five miles of my spot?

If I see a heavily fished area do I stop to see the action, pick up some clues on the fishing before moving on?

How does the river look — clarity, flow?

Are there any fish rising or lounging near the banks?

How should I rig up this morning, dry fly, nymphs, strike indicators or no? I always rig up away from the car as closing doors like to break rod tips.

Will I fish wading upstream, (preferred) or downstream? Where is my buddy fishing and which water will he cover before me?

On the river

Where are the seams, the riffles, and pools I want to fish?

How can I best approach?

I always test cast for a few minutes. How is the cast and rigging working? Is the line releasing the way I want?

Is the presentation right?

Where are the obstacles, rock and submerged logs that trip you while wading? Always look behind you when casting the first time. That is where you buddy will be standing or a bush to tangle your line.

How will I land a fish, where is the best spot, how can I get him to shore?


Practice your misinformation on what they were biting and where you were fishing to throw off fellow anglers. Anything with a Stony is good for location (e.g. Stony creek, brook, bend) For fictional flies added a “double” or “jumper” to normal selections. A double hairs ear, or wooly jumper fly. Also, work on your translations of fiction from other anglers, “a little slow” means not a fish all day. “Saw a few rising” means saw a couple of darting shadows. Of course, the fishing spots suspiciously not mentioned are the ones to go to. And write some stories both to record the day and for you own enjoyment.

Along these lines here is a book by a fishing friend of mine, due out in May. The title says it all: The Little Red Book of Fly Fishing.



Could there be a better industry to be in than the banks at present? With the yield curve its steepest in years, a bank can borrow from one branch of the government at close to zero via the discount window and lend to another branch of the government at 3.5% buying Treasuries, for a risk free 3% profit margin. Leverage that at a very conservative 10x (meaning 10% reserves, versus required 3%), and a risk fee 30% ROR. Plus a big chunk of the competition is out of business and your biggest client, the government again is churning out fees and commissions at a record pace via Treasury auctions and the like. Sounds like the best business model going.



F D RReformers, in their efforts, prefer to focus on the supply side of the equation — ignoring almost completely the demand side. In the financial arena there is much finger-pointing at the sell side of such products as CDOs, and the riches that were made. Not a whole lot of attention paid to the largest buyers — long acronyms — that enabled the transactions. On trade much attention is paid to foreign suppliers who take jobs, not to the benefits derived from on the demand side for the array of products at lower prices. Perhaps supply is just easier to regulate. The same holds true in health care. It is hard to change supersized demand mentality and fitness avoidance — the suppliers are just easier targets.



FalstaffProductivity is one area where of the economy that can not be compelled to improve by those royal powers above. Or as Falstaff once said to Prince Harry over a cup of sack:

"What, upon compulsion? 'Zounds, an I were at the strappado, or all the racks in the world, I would not tell you on compulsion. Give you a reason on compulsion! If reasons were as plentiful as blackberries, I would give no man a reason upon compulsion, I."

So Q/Q annualized rate of 8.1% does give me a sense of optimism as that and innovation account for our improved standard of living, wealth and many positive things over the last century.

I looked ahead to SPY performance 1 and 2 quarters later, but the results are not noteworthy in fact there is a negative relationship:

1 month ahead SPY quarter predicted by Prod, correl -.11, slope -.27, intercept .82, rsq .012

2 months ahead SPY quarter predicted by Prod, correl -.04, slope -.12,intercept .41, rsq .002

Serial correl of quarterly Prod -.15, Average annualized rate 2.7%
Serial correl of quarterly SPY .30, Average quarter .3%

Data 1999-2009

Still it is a big headline number, fourth largest over the period, though productivity never gets the same attention that employment will get tomorrow.



 What is my purpose in life, or more accurately what is my comparative advantage?

I am half way through reading Heyne's Economic Way of Thinking which has been on my list for a while and it has sparked some thoughts about economics but also some thoughts on the bigger questions in life. There is no doubt in my mind that in markets and societies the rules of economics, competition, comparative advantage, low transaction costs, and free exchange all lead to the greatest good for the greatest number of people. But the question I pose is can these same rules be applied to ourselves to answer the big questions we face in life like, what should I pursue as a career, where should I live, should I marry and if so whom, how should I spend my time and doing what, what is my purpose,and where will I be at the end of it all?

As we go through life making decisions and choosing different paths the concept of opportunity cost is ever present, whether we acknowledge it or not. For each road we go down there is another forgone. If we chose to go to Harvard, we give up a chance at going to Yale. If we spend our time trading we give up maybe a job in sales, or time surfing or skiing. We chose what brings the most economic value or perceived wealth. There is a simple but deep definition of wealth in the book, and that is "that which we value." So wealth is a very personal thing, certainly not just money.

Another concept in life and economics that we encounter every day is that of scarcity. Examples of scarcity are everywhere; apartments in New York, school admissions for one's toddler, jobs in trading or openings at a college. Scarcity leads to competition as we vie with others to obtain the things we value. We spend time searching for apartments, studying to be better students and competing to be the best at our careers. But other things in our life are scarce too. The aesthetic things we value are scarce — a sunset over the ocean, the view of the mountains, dinner with your family or friends, reading a non-trading book, watching a fire crackle, time outside. These aesthetic things all have a time scarcity associated with them. Indeed time itself is ultimately our scarcest resource.

Can the economics concepts of scarcity, opportunity cost, competition and comparative advantage which I know to be the best as applied to markets and allocating resources, also help me the individual lead the best, happiest, fullest life I can? When I chose a career I balance the wealth this brings me against the opportunity costs, not only of other jobs, but of the value I place on leisure time as well as those aesthetic things mentioned before. So I suppose the richest among us will be those that get the most of what they value most. If this is a lot of money, so be it. But if you place high value on say fishing or taking walks with your wife and two year old, spending time doing that will make you a wealthy person. We all have to "pay the light bill," but with any luck there is time left over to pursue those things we value most. So I think economics can help in answering those big question mentioned earlier. Also it helps me to prioritize. Once you know what it is you really value it makes going about getting it easier.

Laurence Glazier comments:

A moment of futurology:

As we get deeper into the era where useful things can be produced ever more automatically and cheaply, unsubsidized jobs may become rare, even if shared out part-time. Passage to such a changed society is unlikely to be calm, however it will give people the chance to develop their creativity, an essence-ial part of us all which education quells until, if one remembers, retirement. And those who have jobs would consider it an immense privilege.

It is a future I look forward to (indeed there is no need to wait). Yet, as a chess master once said, "Between the opening and the endgame the gods have placed the middlegame." And society will resist being dragged by the wind of technology to this endgame, as surely as the artist, alone in the studio, resists looking in the pitiless mirror.

Laurence Glazier is a British musician, artist, philosopher, chessplayer and speculator.

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