Jun

15

 I think this essay is worth reading:

"primitive agricultural communities are `dynamic'. They are subject to continuing change in agricultural technology, induced by population pressure…"

And also this article by Grantham: "We're Heading Toward a Disaster of Biblical Proportions".

Victor Niederhoffer asks Alex Castaldo to explain to him what this is all about.  Alex Castaldo writes: 

The first link is a 108 page essay written in the early 1960s by Ester Boserup , a European agricultural economist I have heard about before but don't really know. At this time many people were concerned that overpopulation was a big problem for the world. In this essay she argues that actually in some cases a surge in population forced people in an area of the world to improve their agricultural technology and make other changes that were beneficial. So (local) population increase was actually a spur to innovation and economic progress.

Jeremy Grantham on the other hand is a contemporary money manager from Boston (born in England) who is always somewhat bearish (except in March 2009 when he briefly and correctly turned bullish). He is very environmentally concerned and always worries that humankind is using too many resources or using them unwisely. Quote: "Grantham [believes] that the world has undergone a permanent "paradigm shift" in which the number of people on planet Earth has finally and permanently outstripped the planet's ability to support us."

So the Boserup thesis and the Grantham thesis contradict each other, and Mr. Depew is quoting Boserup to counter Grantham.

Victor Niederhoffer writes:

Julian Simon would turn in his grave, as would the author of The Improving State of Humanity.

Vincent Andres writes: 

If on the other hand, the most valuable resource is the human brain, a larger population is better.

Steve Ellison writes: 

I would rephrase, "if on the other hand, the most valuable resource is the human independent brain,"(Because globally, what's the use of 1.000.000.000 similar brains ?).

The ratio in the brain distribution between the tails and the body probably matters. And the bigger the body, the bigger its reinforcement, and maybe (?) the bigger the crushing of independant brains.

… hopefully, this line of reasoning is wrong.

May

27

 The Bulls looked almost as clueless and bereft as the Knicks during the last minutes of their last two playoff losses. How does a team manage to lose a game by 3 that they were ahead by 12 in, with less than 2 minutes to go…?

A canal, a plan, Dallas.

Kevin Depew writes:

I'll have to look at the stats tomorrow, but my impression is that after all games in this series Bulls had a lead in the game for a large percentage of time in all games.

Pitt T. Maner III writes:

Perhaps more experienced professionals know how to pace themselves better over a series and within a game and always leave a bit of "dry powder" for when it is needed most. It might be interesting to review at what times key players were rested. To be able to play tough defense and shoot 3s at the end of a game indicates "fresh legs".

Let the youngsters go out fast, run and expend energy and compress the game outcome to the last quarter:

"Including the regular season, the Chicago Bullswere 53-0 when leading by double-digits in the fourth quarter. So, with only 3:14 remaining in Game 5, and the Bulls leading by 12 points a win appeared all but certain.

The Miami Heathad other plans though, finishing the game on an 18-3 run to advance to the NBA Finals for the second time in franchise history.

According to 10,000 simulations done by Accuscore.com, the Heat had just a 1 percent chance of winning the game with 3:14 remaining."

Full article here.

Dec

31

 Author Niall Ferguson continues to disappoint. His book on the Rothschilds is wonderful, but his recent work (High Financier, The Ascent of Money) is pure muddle. Nowhere does he mention what was the primary cause of the hyperinflation– the linking of pay for everyone in the economy who worked as an employee, whether of the state or private enterprises, to the official measure of inflation. The farmers and independent business people– the future voters for the Nazis– were the only people not so protected. Ferguson follows Keynes in blaming the reparations (even though at their highest point they represented less than 1/4th of Germany's exports), the "right-wing" civil unrest (even though the rate of assassination of public figures was less after the war than it had been before, Hitler's attempt at revolt was put down by the "conservative" Bavarian government, and the greatest violence came from the Left, not the Right) and the Army (who, in fact, mostly stayed in their barracks).

To be fair, Ferguson does quote Addison: "The daily creation of fresh paper money which the government requires in order to meet its obligations both at home and abroad (services and goods which it is 'obliged both to render and deliver') inevitably decreases the purchasing value of the mark and leads to fresh demands, which in turn bring about a further decline, and so on ad infinitum." But Ferguson seems determined to look to every cause except the obvious one: in a country that had lost its wealth, people could not restore their former "standard of living" by having the government print money and pretend that the war had never happened. Lord Curzon's observation at the time was "There has been no real determination to stop the printing press, there is little efficiency in the tax-collecting system, and there is very great timidity in putting a stop to doles and subventions."

The doles and subventions were the moving force - both for printing money and for tax evasion - just as they always are in any country. What was different in Germany was that everyone, except the future Nazi supporters, already worked for the DMV and had automatic escalators in their wage contracts.

Kevin DePew writes:

Speaking of Weimar, here is a free ebook available from Google that I found very interesting. "Cool conduct: the culture of distance in Weimar Germany," by Helmut Lethen.

The Google summary: "Cool Conduct is an elegant interpretation of attitudes and mentalities that informed the Weimar Republic by a scholar well known for his profound knowledge of this period. Helmut Lethen writes of "cool conduct" as a cultivated antidote to the heated atmosphere of post-World War I Germany, as a way of burying shame and animosity that might otherwise make social contact impossible."

Apart from the irony that Ferguson's book about the Weimar hyperinflation (Paper and Iron) is available for free (a year or so ago library copies were selling for more than $1,000), the Lethen book I found more informative about cultural conditions in the wake of economic distress/collapse. Everyone knows the mechanics of hyperinflation, which is what Ferguson's book largely deals with– only a small portion is devoted to the sociological aspects. Less known, and more instructive, are the methods societies use to cope with extreme economic disturbances.

Stefan Jovanovich responds: 

I wish I could share Kevin's appreciation for Lethen's book. I tried reading it over the weekend and did not succeed. Lethen's assumption that the culture of Weimar was "cool" seems to me too much of a stretch to be even comic in its absurdity. George Grosz was anything but "cool".  I wish I could agree that "everyone knows the mechanics of hyperinflation". You can read Fergusson's book and Keynes's diatribe about the economic consequences of not listening to him and not find a single mention of wage indexing in either tome. It is not enough to point to "money printing"; you have to answer the question of how it becomes politically acceptable to debase the currency. At the end of his life Hayek wrote this: "I do not want to leave this recollection of the Great Inflation without adding that I have probably learnt at least as much if not more than I learnt from personally observing it by being taught to see - then largely by my teacher, the late Ludwig von Mises - the utter stupidity of the argument then propounded, especially in Germany, to explain and justify the increases in the quantity of money…None of those apologists of the inflationary policy was able to propose or apply measures to terminate the inflation, which was finally ended by a man, Hjalmar Schacht, who firmly believed in a crude and primitive version of the quantity theory. - From Occasional Paper 45, Institute of Economic Affairs, July 1975. Hayek recalled that his salary went from 5,000 krona a month in October 1921, to 15,000 krona in November, and to 1 million krona by July 1922.

Zimbabwean economics was introduced to the former German-speaking empires after WW I because it was politically impossible for anyone to tell the public employees of the war economy that the Great War had destroyed their wealth and reduced the market value of their labor. We have the same situation developing now in the People's Republic of California. Our various wars on behalf of the causes of "social justice" and "the environment" and "education" have produced an economy where the activities of the people who work for the state and those whose only customer is the state are easily more than half the state's GDP. The immediate crisis here is much the same as the one that started the presses printing in Vienna and Berlin - retiree pensions.

The one significant difference is our latter-day paradise of Bismarckian socialism does not have the ability to create its own legal tender. We Californians can and do issue vouchers; but even our own state Treasurer will not accept those same vouchers in payment of California taxes. (Yet another example of the inescapable postulate that, in a society with a sovereign monopoly, money = legal tender.)

I would welcome the speculations of the readers of this site as to whether or not our golden state will be "saved" by a re-enactment of the Dawes plan (the "strong" country drains its legal tender reserves to pay back the preferred creditors who bet wrong on the great leap forward - i.e. the war to end all wars. You may have a rooting interest since since the People's Republics of Illinois/New York/New Jersey would be part of the same "rescue package". If one comes, it seems only appropriate that we name this "societal method for coping with extreme economic disturbance" as Lusitania II.

Ken Drees comments:

Cally will be bailed in version .3 of QE– Jerry Brown will receive a huge check a la Monty Hall– let's make a deal!

A bundle of lesser tier bailouts ala a fruit basket of rotten munis, bruised and blemished states will happen in conjunction– version .31 QE because the people can gulp down only one massive bailout per year so make it a big horse pill and wash it down with a big gulp.

2011 March/April for this to go down?

Mr. Krisrock shares: 

Here is a great speech Ferguson gives on"empires on the edge of chaos".

Pitt T. Maner III comments:

The paintings by Thomas Cole ("The Course of Empire") referred to by Professor Ferguson at the beginning of his lecture can be found at the New York Historical Society, 170 Central Park West at 77th St and are available as prints . I imagine they make fine postcards too.

Sep

9

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

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

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

Kevin DePew writes:

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

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

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

Dylan Distasio writes:

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

Victor Niederhoffer comments:

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

Jul

20

Federer loses to NadalHere are a few tennis notes to myself, following up on a match that I lost 6-0, 6-0 on Friday. Hope springs eternal.

–Whatever the virtues and drawbacks of the backhand slice, I need to have one when I'm in a defensive situation. However, my slices too often end up being either high floaters or direct dispatches to the bottom of the net. In retrospect, I think I need to close up that racquet face. Federer's slice (video on subscription site www.tennisplayer.net) uses just an ever-so-slightly open face. Tonight I was practicing with a nerf tennis ball in the basement, and that does seem to improve things.

–I have ongoing indecision about whether to try to hit forehands with the Western/semi-Western grip or with a Continental, McEnroe style. The Continental grip seems so relaxed and smooth, with my body motion so in tune with the swing. (See McEnroe vid) My stroke with a western grip too often feels like a flail, and I sometimes frame it. I can't even get a good mental image of what the western forehand "should" feel like. The Continental shot, however, is difficult if the ball is high, and furthermore my coach tells me that it doesn't have as much on it. The Eastern grip is sort of in-between these two alternatives, so it should be a reasonable compromise, but for whatever reason, I tend to hit the ball way too high, and out, with it.

–Sweat! Despite using a sweatband, towels, and brand-name overgrip, my palms was profusely sweaty, which did nothing for my confidence. After the match I bought all the anti-sweat paraphernalia that I could find– the Prince Grip Plus Enhancer, a Gamma Tacky Towel, and a rosin bag. I don't yet have any data on whether these will help.

–The Serve. The serve was problematic. Oh heck, it was awful. The serve is the hardest shot of all. The crazy thing is that the ball is above your head, but you need to hit it with topspin. Often the textbooks say things that can't possibly be correct, such as "Hit the ball at the highest point of your racquet's arc." At the highest point in its arc, the racquet's vertical component of velocity is zero by definition, and so you'd never impart any topspin to the ball if you did that literally. Several times during my tennis life I got to the point of having a good or even very good serve, but if and when I ever stopped playing for even a few weeks I always lost it and had to totally, painfully rediscover it.

Nick White comments:

Two interesting points…it seems grip is foundational to everything. What's the starting grip in the market? Could we call it approach (ie, quant, fundamental, ta etc)

Second point: in the link for Winning Ugly, Google Books also recommends Michel Foucault– an interesting suggestion, though not as oblique as it first seems. I presume this association comes from the foundational premise that if one wishes to improve their game, one must first prove the ball actually exists.

The more frightening recommendation was "Marxism and Psychoanalysis". Either the algorithms need some serious tweaking or the programmers have a sense of humour.

Kevin Depew adds:

I believe your "market grip" is your capital relative to your ability to defend it; hence, the ghetto slang word "grip," what you're holding of value which Dr. Dre, for one, intends to take by "jacking little homies for they grip." But that's just one man's interpretation, obviously. 

Feb

5

 I won't argue if the salary caps are warranted or not, as this is a political issue. But what I believe to be factual in economics is that caps on prices leads to supply/demand imbalances, econ 101. For example, capping gasoline at say $1.00 a gallon would cause consumers to demand more, oil companies to produce less and the result is shortages. For executive labor in the banking sector, this will be the case too, shortages of talent. It is possible there could be a massive supply curve shift where all these executives are will to take lower pay. More likely I think is that they decide to go somewhere else, and that place where ever it is, would be an interesting place to invest in.

Kevin Depew is skeptical:

Agreed, the economics of salary caps seems clear, but, to paraphrase Jon Stewart, these banks have lost hundreds of billions of dollars. Just what "executive talent" is being lost?

Jan

30

In case you did not hear about this already, in his research, Phil Maymin concludes the following:

"There appears to be a negative relation between music and market volatility. In tumultuous financial times, people prefer steadier music, and in stable financial times, people prefer tumultuous music. Furthermore, it appears as if musical tastes has some ability to predict future market volatility.

The link between music and trading has not been studied in much depth, partially due to a difficulty in obtaining quantitative data. This paper shows not only that there is a link between song and stock volatility, but that the causality appears to go in the least expected direction; namely, this year's popular music seems to predict next year's market volatility."

The full article can be found here.

Perhaps I should consider switching from my plain piano preference to Lady GaGa and Beyonce.

via legacy daily

Kevin Depew comments:

This is less "scientific," but it is an interesting visual of what you are talking about nonetheless.

Marion Dreyfus adds:

From observation over decades, films too are predictive–chaotic times are concomitant with pacific and edenic films, whereas periods of economic calm are positively correlated with martial arts and violence-prone lensers, in much the way the heavily researched topic of skirt-lengths are a secure indicator of economic roller coastering. Long and modest just anterior to boomtimes, short and shocking, with downturns in fiscal friskiness.

Nov

25

 I agree with Vic that level of market probably (more than) reflects future difficulties in the economy.  But in case this not so, I have been unable to find good articles or explanations of worst-case scenarios, i.e.:

1. What would happen on the downside if credit crunch/market seize-up continues?

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all the changes built up since 1930s?

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars –not so much how it is repaid, which it never will be, but what gets gets closed out when resources are diverted in this way?

4. Also, downside of uncertainty of continued government measures, and of delaying or not letting markets clear, of keeping bankrupt companies in business, keeping housing and other asset prices from falling to a level that would cause money on the sidelines to come rushing in?

I have not seen good articles or opinions of smart economists or financial writers on the above — can anyone point me to some of these?  Or can any readers who have thought about give a quick opinion?

Kevin Depew responds:

1. what would happen on the downside if credit crunch/market seize-up continues?

If the market were allowed to fail, there would be great devastation as many bankers and their friends, including the captains of the so-called "good industries," would go out of business. Then, chaos would ensue as enterpreneurial-minded men and women create untold ways to save and then re-direct capital to all manner of business ventures we can scarcely even imagine.

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all changes built up since 1930s?

"We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents…But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics." - Murray Rothbard (1969), "Economic Depressions: Their Cause and Cure"

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars (not so much how it is repaid, which it never will be, but what gets gets closed out when resources diverted in this way)?

"[T]he government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing." - Murray Rothbard, "Economic Depressions: Their Cause and Cure"

Rothbard wrote this stunning essay in 1969. Today, a mere 39-40 years later, we have succesfully ignored every paragraph, contravened every prescriptive statement and chosen the diametric opposite of every word he wrote.

Nigel Davies writes:

Chess players use the term 'unclear' for such situations, there's no precedent so who knows. So good articles will, by definition, be a contradiction in terms as there's no way to establish an opinion based on any kind of historical precedent. The case of Japan may be very misleading because they experienced a deep recession whilst doing business with a world which was booming (or at least bathing in temporary liquidity).

Of course things may be more understandable when one adjusts one's time scale. When, for example, did we last have three closes up?

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Laurel Kenner writes:

Mark Pittman, whom I'm glad to have helped hire at Bloomberg some 10 years ago, reported yesterday that the U.S. government has pledged $7.7 trillion to ease the credit crisis. The total U.S. debt just topped $10 trillion, and does not include most of the new pledges. Mr. Pittman has been way out in front of his media peers on this story.

My other favorite source is Amity Shlaes, a scholar who writes excellent columns for Bloomberg. This year, she published The Forgotten Man: A New History of the Great Depression, and it is quite illuminating as to how the New Deal affected the economy.

Sep

19

This is similar to what happened to the H#nt brothers when they made money from buying silver and gold. Not only did they lose their gains,…

Nigel Davies adds:

It's difficult not to feel some sympathy for the shorts. The chess equivalent would be for the tournament director to take a look at your position and, on seeing your rooks poised to penetrate the opposing ranks, declare that for the next ten moves they could move only backwards.

Kim Zussman agrees:

Who wants to compete in games where the rules are unstable?

Victor Niederhoffer comments:

When the exchange rules on silver were suspended, the gold and silver markets ceased to exist for about eight years, especially in Chicago. I wonder if many people feel as Dr. Zussman does, and whether this will lead to a tremendous diminution of trading.

Sushil Kedia writes:

SushilA short position, in general, turns out to be a postponement of purchases. Even though they are intended to be opened with an objective of purchasing lower, it is just a potential demand in the future; since buying may happen lower or higher out of a short position.

With short sales not existent or not allowed afresh this one key source of periodic demand into the future is absent. Such markets tend to go down with way more ease than those markets that do have an existing short interest. A large subset of emotive responses that can be forced into buying the dips or the squeezes is non-existent.

Likewise, a ban on short sales rather than solving the problem of weak markets only postpones the inevitable weakness into states where there are only herds of long only hands turned into sellers and no motivated buyers to step into the dips.

This perhaps can be studied, if data can be obtained, by comparing the downside swings during periods when short selling was not available and since when it has.

Kevin Depew sees another historical parallel:

Arthur "Bull" Cutten some 70-odd years ago was trotted out before the grain futures commission where he was declared guilty on six counts of "price manipulation." Same type of villification of short sellers occurred then too. I wrote about this in June during the "oil speculator" hearings because I found his declaration after the trial quite apt. I don't wish to self promote my article, the gist of it is this:

Some 70-odd years ago, the Grain Futures Commission declared that Cutten was guilty on six of the price manipulation counts he was charged with and ordered him suspended from all U.S. grain exchanges for two years. After the verdict Cutten declared, "What's the use of trading? The market doesn't move."

Aug

3

J T

"In the coming depression, pawn shops will be a profitable business". A Daily Speculations reader.

Finney had a better ending in 'The Body Snatchers' book than the movies. The dynamic duo of Bennell and Driscoll torch the pods that they find. This is important and I believe that Finney purposefully wrote it that way because it came at a time of hopelessness and desperation where everything seemed like it would be over and the world would come to an end. Guess what, the aliens in the fictitious book that survived the fire died off according to Finney and the world was saved thanks to backbone, effort and not rolling over and saying "well, we are going down".

Just as the torching does take place in depressions, look at the returns the markets brought forward from '34 - '36. Anyone that has burnt a field down due to overgrowth of weeds and thicket knows the beautiful greenery that comes the following spring. Finney I feel knew this and therefore provided an appropriate ending. A ending where life prospers and advances. Fittingly this week the Olympic motto is "Citius, Altius, Fortius" aka "Faster, Higher, Stronger".

I'm a little old fashioned, but to think that one can predict with certainty depressions or heck even recessions for that matter seems a little self centered? Am I wrong in thinking or feeling this?

Kevin Depew replies:

K DThe stock market bottomed in 1934. But the economy and the stock market are not the same thing, perhaps that is the disconnect. There are far more people with exposure to economic conditions than to stock market returns. I have not been able to figure out how stock market speculators can win by following the economy, or how those who are more dependent on the economy for survival can win by paying attention to the stock market.

Jeff Watson adds:

With economic slowdowns and recessions being part of the natural order of the economic cycle, I look at them as just another season, much like the solar or lunar cycle. There are many trading opportunities during slowdowns, and somewhere in the world, there's always a bull market. To quote Chance the Gardener in "Being There", "In the spring, there will be growth…." Metaphorically speaking, Chance, (who had no clue about anything) hit the nail on the head. The question remains, when will the spring time appear? The astute speculator who can identify the change of spring time will prosper.

Janice Dorn reveals:

Dr DornI am the Daily Speculations reader who stated "In the coming Depression, pawn shops will be a profitable business." Human history seems logical in afterthought, but a mystery in forethought" — William Strauss and Neil Howe from their book The Fourth Turning. I believe we have left fall and and are now entering winter. With all due respect to the general optimisim of this site and my high regard for Vic and Laurel, what has been going on since 2001 has been ordained by history. It is our responsibility to ourselves and those we love to protect ourselves and survive through what is coming. After the purge, there will be a new awakening, but many us alive today will not see it. If we are not prepared to go into deep survival mode, we will not make it through the coming crisis. Even if the fourth turning — winter — does not occur within the next two years, the lessons of the third turning will serve us well and strengthen and preserve what we have.

Dr. Dorn is the author of Personal Responsibility: The Power of You, Gorman, 2008 

Aug

14

 Here in the States all horses run counter-clockwise (you can almost feel this answer coming, can't you?) except the ones I wager on, which, due to an optical illusion known among professional gamblers as "being slow," appear actually to run backwards.

But in all seriousness, the clockwise/counter-clockwise question is a very good one. Why should American horse races should be run opposite horse races everywhere else in the world? The horses certainly don't seem to care; European horses frequently ship to the U.S. and perform well despite having no "real race" counter-clockwise experience. And therein lies the answer. As usual when things that don't make sense, politics is to blame.

The first circular racetrack in the U.S. was built by Col. William Whitley near Crab Orchard, KY in Lincoln County, 50 miles south of Lexington in one of the first three original Kentucky counties. Reportedly, the only thing Whitley hated more than the British was losing a horse race. When he built his racetrack, he mandated it be opposite the British style of racing in every way possible. The racing surface was made of clay, not turf, as was customary in British racing. And most important, he reversed the course that the horses run from clockwise to counter-clockwise.

Incidentally, would you believe that Man-O-War in 1920 was the last horse to win the Belmont Stakes in clockwise fashion? From 1867 to 1920 the Belmont Stakes was run clockwise "in keeping with the European tradition." But hey, it's New York. What else would you expect?

Jun

14

I was really surprised to see how much Robert Bacon's book goes for on Amazon now, making my purchase of a copy, way back when, the single best trade I've made in many, many, many years. I'm talking about on paper of course, since I wouldn't dare attempt to book any profits from the trade. I would only sell it after the book price crashes and bottoms, and I desperately need the money just to try and get back to even at Aqueduct, late in December, just before they cancel the remainder of the card due to snow.

Sam Humbert writes: 

As Kevin remarks, it's becoming tough to find copies of Bacon at reasonable prices. I believe it's a case of inelastic supply (it's out of print) meeting expanding demand (~100% driven by our readers). A similar case is an obscure technical book from 1974, published by astm.org that I buy whenever a copy turns up on Amazon, Abe, or eBay.

Generally, engineering books from the 70s would sell for near-zero, but it's a nice keepsake for me. The Dedication is to my father, who worked on the book and died before it was published. So I'm the entire market for that specific title. 

May

3

I would be really grateful for answers to the following …

  1. When there is a sudden increase in demand for an ETF do the managers have to buy the constituents and thereby push up the price of those so that the EFT's price continues to reflect that of the constituents?
  2. Is this different from a closed-end fund?
  3. Is the price of an ETF a function of sudden changes in volume in the same way that the price of a typical share is influenced by sudden changes in volume?

David Wren-Hardin explains:

  1. An ETF is just a container for a basket of stocks. I'm not sure whom you mean by the manager. If you mean the trust, the trust holds the stocks, but doesn't have to do anything if people buy ETFs on the open market. If people are buying an ETF, though, and a specialist or marketmaker sells them, he will typically hedge with the underlying basket or with the equivalent future. So the buying pressure is passed on. But no one has to buy the underlying.
  2. I believe it's different, because ETFs can be created and redeemed. You can hand the trust the basket of stocks and get ETFs, or you can break up your ETF and get the basket of stocks back. Potentially, the number of ETFs is limited only by the amount of underlying stock in the open market. Mismatches in demand can lead to impaired rebates of ETFs for those who are short, especially around dividend times. Clearing firms will then sometimes create ETFs to ease the impairment for their customers. Or customers will create ETFs themselves to cover it.
  3. The short answer is yes. The ETF and its underlying stocks trade as an arb, and changes in demand quickly move back and forth between the two universes.

Kevin Depew adds:

From the iShares Web site:

iShares ETFs are traded like stocks on an exchange where investors buy and sell them just as they would any other publicly traded security. And because iShares ETFs trade like a stock, investors can benefit from features like intraday pricing and trading, the ability to place stop and/or limit orders, and the opportunity to sell iShares ETFs short.

Like other exchange-traded securities, iShares ETFs will trade subject to a bid-ask spread. Spreads may fluctuate in response to supply and demand forces, overall market volatility, and other factors ? in other words, the same factors that influence the prices and spreads of stocks. But unlike stocks, the ETF's creation and redemption process not only helps to minimize the bid-ask spreads, but may also reduce the premiums and discounts that can develop between the iShares ETF market price and the Net Asset Value (NAV).

ETFs are very different from closed-end funds. A closed-end fund's shares are fixed, which is why they frequently trade at a premium or discount to NAV. Although they both trade on an exchange, the ETF shares can be created and redeemed throughout the day.

Also, it's important to get a handle on the composition of ETFs. The Biotech HLDR, with fewer than 20 members, is two-thirds weighted in AMGN and DNA. On the other hand, IBB, with more than 150 members, is only about 12% weighted in AMGN, has no exposure to DNA. That's a significant difference for two funds labeled Biotech. David Wren-Hardin replies:

Kevin makes a great point. HOLDRS were invented by Merrill Lynch, and unlike other ETFs from the Spyder family (SPY, DIA, XLE, et al.), they never rebalance, and their composition does not change unless a company is taken over or goes bankrupt. That's why AMGN and DNA have taken over the BBH, as opposed to IBB, which is rebalanced from time to time.

In addition, it's more costly to create/redeem out of a HOLDR than a SPY, It costs $10.00 per 100 HOLDRS to create or redeem, That works out to a dime a HOLDR share, a pretty hefty premium. SPY, on the other hand, is a flat $3000.00 charge. The minimum creation unit is 50,000 shares, so that's only six cents, 40% cheaper already. But its $3000,00 for 50,000 or 5,000,000, and at that level the fee becomes a much smaller cost.

Also, HOLDRs pay their dividends straight through. If INTC goes ex-dividend, the owner of the SMH gets the dividend the same day as a regular INTC owner, minus a touch since fees are taken out of the dividend stream. Spyder products and their ilk accumulate the dividends over time, and pay it out quarterly.

Art Cooper remarks:

An excellent resource is Russell Wild's Exchange Traded Funds for Dummies.

Dean Parisian remarks:

I bought into the ETF story early on. So far so good with the love of my financial life, RSP, the Rydex S&P Equal Weight ETF, doing what it is supposed to do.

But all is rosy neither in love nor in the financial markets. I'd like to think I was hoodwinked in shares of USO, the United States Oil Fund. Contango has pinned me down so far, can backwardation bail me out? The fund manager said I should have read the prospectus better.

Apr

30

Here's a technical question for experts on the operation of the NYSE and Amex markets.

For listed stocks with large volume, there is a daily "open" and "close" print at which a large number of shares usually trade. Ideally one can trade with a market-on-open and market-on-close order and avoid paying the bid/ask spread.
However, it seems to me that the open and close crosses have much smaller volumes for ETFs.

I'll compare Newmont Mining (NEM) and a gold stock ETF (GLD). Both are listed on NYSE. Both average about 5 or 6 million shares traded per day.

This morning 101,000 shares of NEM traded at the opening print, and 130,000 traded at yesterday's closing print. GLD, however, had a lot of volume this morning, including pre-market, but there was no obvious opening print. The largest single trade between 9:30am and 9:40am was only a few thousand shares, and that was by no means the first trade.

Are there different rules for ETFs in terms of the open and closing crosses? Is there a way to participate in some kind of crossing trade for ETFs?

David Wren-Hardin explains:

The short answer is, yes, there are opening crosses. The issue as to why a lot of them aren't seemingly efficient as stock crosses is that a lot of ETFs are traded as an arb. If there's a large buy imbalance in the QQQQs, the marketmakers and specialist will simply skew the market to where they can get their futures off to offset the trade and lock in their profit.

Unlike a stock, where the open and closing imbalance can be seen as the market's arriving at a conclusion as to the value of the stock, with an ETF, either the market knows what the value is because of an electronically traded future, or it doesn't, because the value is determined by a basket of stocks. In the first case, someone sending resting opening orders knows he will get a fill away from true value almost by definition. In the second case, the marketmakers and specialists can't figure out what something is worth until the basket of stocks is open, which all have their own opening imbalance games going on.

So in the case of something like GLD, which includes illiquid names with all sorts of late opens, the marketmakers would be fools to lay any sort of tight market. Anyone who traded against them would be doing so because he had a much better idea of where the underlying stocks are going to open.

Charles Pennington responds:

I don't understand the argument. The GLD ETF, as you note, would be the second of your two scenarios. That means there is much uncertainty about where it should open. I add that that's also the case for a regular stock. So what's the difference between an ETF and a stock in this regard?

David Wren-Hardin clarifies:

I was thinking of something like OIH. If there are 500,000 shares to go on the open, how are the marketmakers going to get their hedges off? Typically, they will wait until all the stocks are open, so they know what the value is. Of course, by this point, the world knows what the value is, and there's no longer need for price-discovery, and the customer will get arb'ed against. So if a customer is willing to do that, then he is essentially saying he know more about the opening or the post-opening than is obvious, and the trade will only be a loser for the marketmakers. Maybe he is leaning on the open prints in the underlyings in order to pick off the marketmakers.

The difference is who trades stocks, versus ETFs, or the perception of who trades them. ETFs are driven to a large degree by speculation. People trying to get in and out, people trying to capture an arb. They are often seen by marketmakers as smart money. Stocks, on the other hand, can often be driven by a different type of customer, such as a mutual fund. Their opening or closing order is just seen as a block of stock moving at some easy to mark price where the mutual fund is assured of some level of price-discovery giving them a fair price. Therefore, marketmakers, or even other customers, are more willing to step up and offset the balance.

Charles Pennington replies:

OIH is another example of a very liquid ETF which has very little volume on its open and close. Both OIH (the ETF) and SLB (Schlumberger) trade on average about 10 million in volume per day.

This morning, SLB traded 69,000 on the open, and OIH traded only 10,500. Yesterday SLB traded 36,500 on the close. My source of time and sales doesn't show any obvious large closing trade for OIH.

So there seems to be a big systematic difference.

Another Spec asked me what I meant by "closing cross". Here's my understanding:

One type of order that can be entered for NYSE stocks is a "limit on close". (There are also "market on close" orders.) These orders must be entered before 3:40pm EST, 20 minutes before the closing bell.

All such orders are held until the close. Then the specialist determines at what price the maximum number of orders can be crossed. If I have a limit order to buy at 50, and someone else has a limit order to sell at 49, then our orders might be "crossed" at 49.50. The specialist determines the price at which the cross can take place. Ideally there will be a price such that the buys and sells balance each other, and the specialist doesn't have to get involved in buying/selling. If not, then there is an "order imbalance".

However, NASDAQ over the past few years has added a closing and opening cross for its stocks, and they call it the "closing cross". I've been very satisfied when I've used it.

J.T. Holley notes:

From the AMEX webpage,

Rule 131A-AEMI. Market on Close Policy and Expiration Procedures. The following procedures apply to stocks and closed end funds and do not apply to options or to any security the pricing of which is based on another security or an index (e.g., Exchange Traded Funds or Trust Issued Receipts, securities listed under Section 107 of the Exchange Company Guide, warrants and convertible securities).

Looks like ETFs don't have the applicable MOC trade.

And it seems that they trade till 4:15pm in "broad index" cases.

David Wren-Hardin remarks:

That might be the case for products still listed on the AMEX, but doesn't help you if you're worried about things like the iShares.

There's an informal 4:00 closing price in the SPY for brokers/customers who want to mark their SPY against the 4:00 broad market close, then a formal closing rotation at 4:15.

Kevin Depew adds:

From the iShares Web site:

iShares ETFs are traded like stocks on an exchange where investors buy and sell them just as they would any other publicly traded security. And because iShares ETFs trade like a stock, investors can benefit from features like intraday pricing and trading, the ability to place stop and/or limit orders, and the opportunity to sell iShares ETFs short.

Like other exchange-traded securities, iShares ETFs will trade subject to a bid-ask spread. Spreads may fluctuate in response to supply and demand forces, overall market volatility, and other factors ? in other words, the same factors that influence the prices and spreads of stocks. But unlike stocks, the ETF's creation and redemption process not only helps to minimize the bid-ask spreads, but may also reduce the premiums and discounts that can develop between the iShares ETF market price and the Net Asset Value (NAV).

ETFs are very different from closed-end funds. A closed-end fund's shares are fixed, which is why they frequently trade at a premium or discount to NAV. Although they both trade on an exchange, the ETF shares can be created and redeemed throughout the day.

Also, it's important to get a handle on the composition of ETFs. The Biotech HLDR, with fewer than 20 members, is two-thirds weighted in AMGN and DNA. On the other hand, IBB, with more than 150 members, is only about 12% weighted in AMGN, has no exposure to DNA. That's a significant difference for two funds labeled Biotech.

David Wren-Hardin replies:

Kevin makes a great point. HOLDRS were invented by Merrill Lynch, and unlike other ETFs from the Spyder family (SPY, DIA, XLE, et al.), they never rebalance, and their composition does not change unless a company is taken over or goes bankrupt. That's why AMGN and DNA have taken over the BBH, as opposed to IBB, which is rebalanced from time to time.

In addition, it's more costly to create/redeem out of a HOLDR than a SPY, It costs $10.00 per 100 HOLDRS to create or redeem, That works out to a dime a HOLDR share, a pretty hefty premium. SPY, on the other hand, is a flat $3000.00 charge. The minimum creation unit is 50,000 shares, so that's only six cents, 40% cheaper already. But its $3000,00 for 50,000 or 5,000,000, and at that level the fee becomes a much smaller cost.

Also, HOLDRs pay their dividends straight through. If INTC goes ex-dividend, the owner of the SMH gets the dividend the same day as a regular INTC owner, minus a touch since fees are taken out of the dividend stream. Spyder products and their ilk accumulate the dividends over time, and pay it out quarterly. 

Art Cooper remarks:

An excellent resource is Russell Wild's Exchange Traded Funds for Dummies.  

Apr

3

 This has been used of late in a political context, but the Costanza Doctrine (taken from a Seinfeld episode in which George Constanza temporarily improved his fortunes by doing the opposite of what his instincts told him) would seem to offer hope to thousands of losing traders. The trick would seem to be to buy when you feel that knot of fear in the pit of your stomach, or sell when you feel the joy and excitement of a trade going your way.

George:

"Why did it all turn out like this for me? I had so much promise. I was personable. I was bright. Oh, maybe not academically speaking, but I was perceptive. I always know when someone's uncomfortable at a party. It all became very clear to me sitting out there today, that every decision I've ever made in my entire life has been wrong. My life is the complete opposite of everything I want it to be. Every instinct I have in every aspect of life, be it something to wear, something to eat… It's always wrong."

Jerry:

"If every instinct you have is wrong, then the opposite would have to be right."

Jim Sogi adds:

There is a twist to this. In the markets, and in life, there is an asymmetry of some sort that throws this equation off. How it works in life will take some thought. But in markets, long is not the exact opposite of short.

From Kevin Depew:

A funny application of the Costanza Doctrine (pre-Seinfeld) appeared in the movie "Let It Ride," which may be the closest the movies have come to real-life racetrack bettors in action. The main character, played by Richard Dreyfuss, is a degenerate gambler/loser who one afternoon mysteriously begins winning. (That the notion of winning at the track would be considered a) mysterious, and/or b) noteworthy enough for a film or book, is itself a pretty hilarious inside joke.) Anyway, in the middle of his winning streak he decides he's not even going to handicap the next race and instead walks around the track asking various degenerate gambler acquaintances of his who they like. Whichever horse they name, he scratches off the program and eliminates from contention.

When he gets to the one horse that hasn't been named, he lets his winnings ride on the unwanted horse with predictable winning results. As an aside, Robbie Coltrane has a nice turn as a dour teller. Also worth noting, the hatred emanating from his fellow degenerate gambler "friends" as his winning streak grows; everyone hates a winner; everyone loves a loser.

Interestingly, last night on the Black Donnellys (clearly, I'm watching way too much television these days), two of the Donnelly brothers are at the OTB to place a bet and hopefully recapture some money they owe to a crime boss. The "expert," Kevin, (a fictional character who nevertheless I am convinced is a direct blood relative of mine) can't decide between two horses. After much prodding from his brother, Tommy, he chooses one rather indecisively. Naturally, Tommy bets the one Kevin didn't choose, with predictable winning results.

By the way, the Black Donnellys is not a good show. The main character, Tommy, seems to have modeled his mannerisms on Tony Soprano, and the Irish stereotypes run for a full 47 minutes, laddie; may misfortune follow you the rest of your life, and never catch up. This may sounds strange, but I think I watch the show because Eisenberg's Sandwich Shop is one of the locations for filming.

Art Cooper adds: 

One of the first things taught in a first-semester computer class is that the opposite of > is not < , but rather < or = . This applies to markets as well. The opposite of "long" is not "short," but rather "short" or "flat." 

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