I subscribe to several agricultural private forecasting firms and while one still has their feet on the ground estimating the yield county by county, most are using models that are even higher tech like this modelling system.



 The contango between current prices–oil for delivery within 90 days–and those 6 years out attracted my attention for what is probably a very stupid reason. I have been rereading Charles Dow's journalism, and I was struck by his comment that the "commercial cycle" (his term) in prices ebbed and flowed every 6 years. Not 4, not 11, but 6. Dow thought that scientific speculation (also his term) was a matter of finding values within the prices that the markets produced each moment. Values for him were not some Platonic idealization but a matter of commercial sense. One of the rare complaints he ever wrote to his readers about them was that, in dealing with the stock market, they abandoned the very commercial sense that had given them the money to speculate.

Is there value in a future commodity price that is, once again, at a rare extreme compared to the costs for present delivery? Dow would have thought so.

P.S. FWLIW, Dow thought a scientific speculator should expect to double his money in every commercial cycle–i.e. earn 12% compounded annually.

When I asked "is there a value in a future commodity price that is, once again, at a rare extreme compared to the costs of present delivery?", Charles Dow would have thought so because, as he wrote, "the best profits in the stock market are made by people who get long or short at extremes and stay for months or years before they take their profit." Contrary to modern journalists, Dow made no presumptions about his own abilities to find where in an extreme the profits were to be found. In oil itself? In E&P stocks? In refiners? What made Dow such an exceptional journalist was his rare combination of humility and curiosity. He wanted to know what the market would tell him; he never thought he had advice for the market.

Jeff Watson writes: 

That's the difference between a professional and everyone else. The professional lets the market speak to them, tell you the story, and everyone tries to tell the market what to do based on their own cognitive biases. 



 A friend posted this link to his Facebook page. It's about the chess scene in Bryant Park, Manhattan. It's a very well written article, and I suspect it will be the best 3 minute read of your day. Lots of the highlights in the article make me draw parallels with the markets. For example:

The author said, "A chess match with a stranger in a public park involves a sudden and awkward intimacy…You are usually silent and bent forward, concentrating together, antagonistically, on the same problem. You are conscious not only of your own position and ideas on the chessboard, but also of the stranger's body, energy, breathing, where the eyes move on the board and what they speak of intent." In the markets, one needs to get inside the counterparty's head to understand the motivations, strategy, and game being played. (If one doesn't know who is on the other side of the trade, one must figure out the rationality of the other side, because they have reasons to be in the trade that are just as important as yours.

He further went on to say, "I have staked out a solid position I can feel myself coming undone. Usually this occurs when I build an early lead and then become so terrified of squandering it that I panic and end up doing just that." How many times has one blown a good position and had a winner turn into a loser…and one watches it unfold, well aware of what is happening."

Interesting point brought up: "He was the stronger player but I should have won." In the markets, one can beat a stronger player if one is nimble. Every trade I enter, I enter with the assumption that the counterparty is stronger than me and has better information.That way I can plan my escape if things get dicey.

He adds: "What is it about chess that can make losing so annihilating and the reactions to it so acid?" Amateurs and the public mentally beat themselves up over a bad trade, when the proper thing to do is figure out how you FUBAR'ed the trade and the lessons that can be learned. He postulates, "The supercollider of egos and skill levels at the park can produce democratizing and humbling effects." There is a lot of ego around the markets, and that is not necessarily a good thing.

He went on, "The randomness is part of the draw but also provokes a fear." Markets can be very random, especially when the form is about to change and it's trying to figure out a price where it will trade at.

As an aside, two things my mentor taught me. Nervous markets close lower, and markets always move to the level where there will be the maximum amount of trades allowable at that time. That's why when we were locals and the market wasn't moving, we'd start offering the market down and start selling in order to bring the market to a place where the paper would come in. It's not really different in the electronic age.



 "U.S. to prosecute high-speed trader in first criminal spoofing trial."

Has it ever occurred to anyone that some of these "spoofed" orders were put out there, not as spoofs, but as real orders to get filled? The markets are still a game of deception, and spoofing is a valuable tool. I knew guys that would bid for 3 mm bushels a half cent under the market and would pull the bid when it got close (it was a primitive spoof but it worked). Sometimes traders put out the "spoof orders", got hit and were able to adjust their position, whatever way it was, and the counterparty has no clue what's going on.

There's always someone out there that, for whatever reasons, will always take the other side of a huge order. There is also an idea going around that if you can hit and fade a spoof order you will make money, and this is not necessarily true. As an aside, in the grains, it's usually easier to get your price for a half million bushels than if you were are trying to buy or sell 5,000 bushels where you will get dicked around for a quarter cent. There is always a big commercial, grain company, hedger, or large spec willing to take the other side of a big order, and there is a good chance you will get filled at your price.. 



 Here's Old Man Cutten's short book "Story of a Speculator." Cutten was bigger than life and was arguably the biggest individual wheat speculator in history. There are so many market and life lessons contained within, and it gives a glimpse of what the grain trade was like a century ago. His market lessons contained in this short read became my lessons when I was first starting out. His comments on liberty, government, and choices are priceless. So much of this is relevant today, which is an added bonus.

Stef Estebiza adds:

"None can dictate prices who cannot control production" -Arthur Cutten

Not all of what you see is GOLD.

Read to the end of the first page and the start of the second in "The Parable of the Rich Fool"

Larry Williams writes:

That widely circulated epitaph of speculators misses some key points as it did with Cutten.

Henry A. Wallace, the then United States Secretary of Agriculture charged Cutten with improper trading activities and tried to have him barred from trading on all futures exchanges in the United States. This ultimately went to the US Supreme Court in the case of Wallace v. Cutten, 298 U.S. 229 (1936) (decided in Cuttens favor over the issue "was Cutten guilty for violating laws that were passed—after—the acts of commerce/speculation were commited).

The government then went after him for income tax evasion. The tax suit would only be settled by the executors of his estate, because Arthur Cutten, his fortune vastly depleted by the stock market crash and the cost of lawyers to defend him from the government lawsuits, died in Chicago of a heart attack a few weeks short of his sixty-sixth birthday. His body was brought back to his Canadian birthplace and interred in the family plot in Guelph's Woodlawn Cemetery.

So we have gummint guys going after evil speculator and breaking the poor fellow. I'm certain Soros learned from this which explains is ability to fund politicians.

Most folks live for today or in the past, speculators live for and wager on the future. They are the builders of the future.



 Monday, October 19th is the 28th anniversary of the 1987 crash. As I was a young pup in junior high school in Queens, NY at the time, I certainly remember the reaction around New York be it media, neighbors, etc. I even watched my father pretty much chug a scotch when he got home that night and he is an Accounting Professor who never drinks and is certainly not of the speculator ilk. (He likes his drift nice and slow) For participants who lived it, what is the best thing to do in that situation? Certainly, taking out the canes is warranted for best of breed stocks. But does one start thinking differently, would a past in a form of martial arts training, boxing, or Krav Maga be of help? I can't help but think of the value of situational awareness as is taught to fighter pilots. Any insights would be appreciated.

Jeff Watson writes:

That week in '87, the grains had a magnificent sell off, which made many locals millionaires. I know that I had a good year in a 7 day trading period. That rout was almost as good as the Chernobyl disaster a year and a half before when one was able to sell as much grain as their account would carry……at the top. However, Chernobyl had some tectonic shifts which caused mini quakes for months. Lots of newly minted millionaires on the 19th, and the existing trade didn't get hurt that much so it was good business for all.

Russ Sears writes:

This, I believe, is a great question for sports psychologists. Visualizing your actions in a stressful situation and deciding ahead how you are going to react is very helpful. Then when the pressure comes your instinct is much more likely to go with what worked in your visualization rather than choke, flight, or freeze. You are even able to choose your fight tactic.

If I would have known this in 1992 at my peak in running but novice at the marathon, I could have been an Olympian. The USA competition was weak that year and I was at my prime. But when I hit 20 mile mark in the LA marathon at 1:41 time of change but also hit the wall soon after and crashed and burned because I eased up rather than pushed through it. That pace was easily the fastest pace for a USA runner up to that point that year if I could have head even close to it.

On active trading I found though that much of the stress comes from watching the market too closely so that every jump seems to need preparation. But basic risk management says to have a cash contingency stored for a short emergency use whether it's a stock crash or a bout of unemployment.

Mr. Isomorphisms writes:

Five minute miles. I just can't wrap my head around that.

Russ Sears writes:

Easier for those who run 65 second 400's than those who run 11 minute 2-miles, imo.



Here is an old USDA working paper on the mechanics of wheat and corn price forecasting. It's a very interesting read, but flawed in so many ways, and I will leave it as an exercise to the reader to spot the numerous flaws. Still it does give insight into what and how the people at the USDA are thinking and there are market lessons in that.



 The trouble with progressive wagering systems is the vig is always much higher than the advertised 10%. Plus whatever the state take out is, it really grinds against you in both the short and long run. Plus the knockout rules without a rebuy (which is always a bad deal but suckers love it) tend to make this a random event….this should be tested.

I know Johnny Moss couldn't pass up 15:1 odds on that sucker punch to knock out the champ, but going for the long odds is stupid and goes against everything I have ever learned.

Anecdotally I will say without equivocation that I have never won long odds, and if I got a little "Lucky,", never was paid true odds. The market is always going to offer you the shortest odds it can charge because there is always a spread.

Since I became an adult, I learned to offer really long odds all the time (a big long term put or call so to speak), but I won't take long odds as I have no control of the vig with the taking odds whereas I do with the offering of odds.

One is better off taking a bet that feels good and think it's a real 3:1 shot but it's on the board it's trading at 11:2. Going for the 15-20% and greater odds is just making the bookie writing the long odds, rich. When you take odds like that, you are playing the lotto and we all know how that turns out.



There are many market lessons here in this Seinfeld clip and many more questions begging to be answered.



One could make a case that Ceres is singing a new song in the grain market, a song that has been frequently heard in previous Augusts. How long she will be singing it, I don't know as it is way above my pay grade. I'm just a paying customer on this ride.



 Mick Fanning was attacked by 2 great whites in the final of the J-Bay contest, the biggest contest of the year. Luckily he emerged unscathed with no physical damage. Sadly, the interview afterwards has been removed from the web, but in it he said that he was totally shaken and said that it wouldn't matter if he ever competed again in surfing.

This reminds me of when I got whacked in the Mexican Peso debacle in 1982 and also saying that I might never trade again. I empathize with Fanning on 2 levels as not only did I get whacked in a few big trades in my life, but I also have been chased out of the water by sharks in New Smyrna Beach, more than once.

One hopes Fanning will return to surfing, but one would understand if he didn't. I know lots of guys that got blown out in the market, never to return. I also have a friend who was a life long surfer who got bitten on the foot by a 5' shark and quit surfing on the spot, never to get wet again.

I wonder what makes some people quit and some people come back. There's some kind of primal fear surfing, when you know that you are not at the top of the food chain and can get eaten alive. Check out this gnarly video .



 Trading pits, you had a great 167 year run. You taught me almost everything I know, and you aided in my development as a spec. We had a lot of fun, although most of that fun cannot be repeated in this venue. The pits were unique…there is no business school in the world that could teach you how to handle it when one buys 3mm bushels of wheat, and suddenly the entire pit is in one's face with offers, palms outstretched, doing severe damage to one's account. Thanks for the memories, market lessons, life lessons, lifelong friendships, and the great game you let me learn. This image courtesy of the



 Can one predict with all the trillions swashing around, and the ability to print money, and all the countries meeting to save their perks and flexionism, and the Greek stock market vigilantes down 15% in a week to make sure there is a deal, that a deal will be made. And it will be flimsy one. That as soon as it's made, it will be like the two 8% drops that occurred back to back when the bail out deal first was missed and then was made.

Jeff Watson writes: 

Greece's GDP is a little over half the size of the Dallas-Ft Worth Metroplex GDP. As far as the total Eurozone GDP is concerned, the Greek GDP is a metaphorical rounding error. If France and Germany are going to get screwed, they control the ECB and can print some more money. But news and concern about the Greeks suggests that the flexionic cowboys driving the herd this way, then that way, their Border Collies nipping at the heels of the herd.



 One grows tired of not possessing a concise, very readable and practical text covering the majority of known statistical tests.

Despite the last edition being 10 years old, I believe that the book 100 Statistical Tests by Gopal K. Kanji is the very best book of its kind–period.

Each test covers no more than 2 pages. The author suggests when to use it, shows a practical worked example and some other info with tables in the back of the book.

If one wants more detail then a deeper text can be consulted elsewhere. But as a grab off the shelf, check the index for your test and then see how it is done tool, this book scores very highly with me.

William Hughes writes:

Here is a downloadable pdf link for the "100 Statistical Tests" book you were discussing.

Jeff Watson writes: 

In addition to that excellent book here is a great probability and statistics cheat sheet.  



 We were sitting in a clubhouse at the track last weekend when the big gambler of our group started bragging about his winning game of blackjack. He mentioned that he was the best card counter around and that he played a near perfect game of blackjack. I smelled an opportunity and told him that I consider myself to be the best card counter on the planet. I added that I know where every card in the deck is, and I would gladly put my money where my mouth is. I told him that he could shuffle a deck of cards as many times as he wanted and then start turning over cards in front of me, at about a 5 second per card pace. When he got to the last card, I would tell him what it was before he turned it over. I would not touch any cards at all and only he could handle them. I offered him 2:1 to get him to bite, and the other two guys sitting at the table also wanted some action, so I helped them out as a benevolent gesture.

My friend shuffled the deck 7 or 8 times, cutting the cards several different times. He started turning the cards over in front of me, and I stared in deep concentration. When we got to the last card I took a breath and said, 2 of hearts. He turned the last card over and it was the 2h. The guys asked me how I did that, and my reply was that I am a savant when it comes to cards.

The key to this surefire bet is that one must assign a number value to every card in the deck. I do it this way….Ad is 1, Ah is 2, As is 3, Ac is 4, 2d is 5, 2h is 6 and on an on until the Kc which is 52. If one adds all the assigned numbers in the deck, the sum of 1+2+3+…..52 totals 1378. When playing, every time the dealer flips over a card, one simply adds the assigned value to the running total. At the last card, if the sum is 1372, that subtracted from the total of 1378 gives it an assigned value of 6 which makes the last card the 2h. Another example, had the total been 1327, the bottom card would have had a value of 51 which would have been the Ks.

To be successful with this prop bet, it takes some practice, requires discipline, a bit of mental math, and a quick memory to recall the assigned values of the cards as they are turned over.

There is no such thing as a new prop bet. Everything has been done before….the aforementioned prop bet is a variant of another bet that is at least 150 years old, maybe older. However, my buddies thought we were playing one game, but I was playing a totally different game. Despite the fact that all prop bets are very old, people still fall for them. My friends did not even know that they were being victimized by a prop bet, and that's the best kind of bet. The market offers hundreds of prop bets a day, and there is no shortage of suckers lining up for the sure thing. In the markets, the suckers think they are playing one game, but another game is being played on them entirely. The prop bets that I offer are no different in end result than the prop bets that the market offers…..and I have been known to bite on those market bets from time to time. The market does the best job disguising the fact that the opportunity offered is a prop bet, and that is why it's so easy to get crucified. One can walk away from one of my sure thing bets……it's not that easy as far as the market is concerned.

Whenever I think of walking away from prop bets, Runyon always comes to mind, Sky Masterson specifically. He said, " One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider."



 New Yorker staff writer William Finnegan hit one out of the park when he wrote about about moving to Hawaii as a kid. This very well written piece discussed family, middle school, friends, enemies, romance, surfing, and trying to survive as a racial minority. He did a great job of describing the culture shock felt by a white boy from affluent S. Cal, moving to a rough, working class part of Oahu.

It's quite a long read, but it's well worth saving for a rainy day. Finnegan has written a few other articles about surfing for the New Yorker. In another story featuring the famous Dr. Renneker, Finnegan wrote the following description of famous surf breaks, comparing them to different composers.

Finnegan wrote:

Ocean Beach is the polar opposite of Waikiki—cold, gritty, scary, not for beginners. I find beauty in it, but an utterly different, more challenging, modernist beauty. Captain Cook, when he first saw surfing, compared its effects to those of listening to music. When I think of Waikiki, I hear early classical compositions: fugues and Bach concertos, sacred music. Being out at Ocean Beach is like surfing to Mahler. This glistening morning at Four Mile has a score by Handel. That wave in Indonesia might have been composed by Mozart. Sunset Beach is pure Beethoven. Strangely, when I think of the best wave I've ever surfed—the one breaking off an uninhabited island in Fiji—I hear no music at all.

That is some of the best surf literature, ever. Many specs, the Chair especially, like to make comparison between different kinds of music vs different kind of markets. Just as one can compare music to markets or music to surfing, a few of us compare markets to surfing. To quote Mr. Sogi San: "There are many market lessons in surfing." I agree totally and learn new ones all the time. Both of those articles contain food and nourishment, maybe not a meal for a lifetime, but certainly a hearty snack.



Over at Business Insider, they carried this graph. It looks pretty scary. I don't think it's possible to sustain current prices in the face of declining inflows, but maybe I'm misinterpreting it.

Larry Williams writes: 

Look at the chart! This has happened many times before where the blue line guys got out and the rodeo went on higher. It's not the first rodeo they missed. Who're you going to believe, the chart or a cub reporter?

Steve Ellison adds:

I don't have the data to test this rigorously, but my hypothesis is that "net inflows to mutual funds" is a contrary indicator if it is an indicator at all.

anonymous writes: 

All the studies such as the ones carried out by DALBAR suggest that returns weighted by investor money flows are always worse than time-weighted returns.

There is a movement of people who think that this "behavior gap" can be closed with education or sound advice for all. I find it more likely that it is a necessary feature of markets for the reasons described by Bacon. Some can do better but nothing can work for everyone at once.

Victor Niederhoffer writes: 

One would have thought that this post came from Mr. Conrad rather than you, who has been exposed to the drift.

Bud Conrad responds: 

Mr. Niederhoffer mentions my name as suggesting I might be bringing negative opinions about the future for the stock market, but I have been relatively quite on this list in that nature in recent years. My base for stock market valuation comes from the view of comparing the potential return from the stock market earnings to that of long term government bonds. For several years and continuing to today, the returns from stocks as measured by dividing earnings by the price (E/P ratio) have far exceeded the returns from fixed income, so I have been a bull on stocks, despite the many worrisome commentaries about the general economy. The Chair and others will recognize this general approach as sometimes called the "Fed Model" for stocks. My summary comment is that "The stock market is the best game in town", sort of like the comment on the dollar compared to other currencies as "The best horse in the glue factory".

I have been bullish stocks for the first half of 2015, but with caution that there are other forces like the Fed raising rates, a slowing GDP for the general economy, a disastrous collapse in the oil and gas fracking that will cost lenders huge sums, and continuing trade and government deficits that make me be more concerned that the outlook for 2016 is possible for a down turn. I'm interested in extending that watch for a turn in stock market optimism as others find quality analysis.

As to the specifics of the flows in the chart from BofA ML, I notice that the 2013 down turn in flows didn't hurt this bull market, so the indicator may not be capturing some of the drivers, like possibly foreigners that are even less enamored with their domestic prospects, who may be finding dollar denominated assets much safer than say those in the declining Euro. As a related note in my local area: Palo Alto is supposedly 20% owned by foreigners, mostly from China. Real estate prices are booming in Silicon Valley, and there is plenty of inflation in asset prices here.

Anatoly Veltman writes: 

This was an interesting point, reminding me of a disaster of a trade I had in 2005. Copper, for the first time in history, eclipsed its decades-long resistance of Fibonacci $1.6180 level at the COMEX. It was clearly driven by developing China demand, and I wouldn't stay in its way. I had good luck picking up Longs at the other Fibonacci end around 61.8 cents just six years prior…

But as the 2005 rally progressed beyond the $1.6180 breakout and all the way to the un-phathomable $2.000/lb round - I could hold myself off no longer. My Shorting reason was that throughout the 2005 rally, COMEX Open Interest figures have declined(!) dramatically. Classical technical analysis states that a commodity's prolonged upside run, when accompanied by progressively declining Open Interest - must be Shorted!! The reasoning is very compelling: in zero-sum game, such event can only mean one thing - that the pricing is extremely over-bought, while progressively more-and-more Shorts have already covered!! Thus, as a new Short, you're getting the greatest downside potential in history, while the risk of potential blow-off to the upside is now severely constrained. Well, I'm still a huge believer in this indicator, except…

…2005 happened to be the first year of an unprecedented GEOGRAPHIC shift in Copper inventory. Away from the COMEX in US, and in favor of the LME in London as well as a brand new physical and derivative market born in China and vicinity. While the COMEX Open Interest was going through temporary decline, the pick-up overseas was enough to feed the demand and put further increasing stress on supply. Thank goodness for my catastrophic COMEX stop-loss above $2.0025 - that trend roared unabated straight to the next Fibonacci extension of $3.62!

anonymous writes: 

Some people are going to believe what they want to believe, hear what they want to hear, and avoid information that contradicts what they already think or believe. These are the people who find comfort with a group-think mentality. On the other hand, there are those who love to fade the market, for the sake of being contrarian. These people cannot resist doing the opposite of popular opinion and possess a mindset toward reactive devaluation. This forum strives to operate on a level where useful information is transferred from one reader to another; often times from the extremely knowledgeable (victor, rocky et al) to the less-so (myself included). We all strive to reach independent conclusions based on a reasoned process. We ignore popular opinion, and do not take anything at face value. We keep open minds, organize and filter our ideas to determine what is relevant, yet allow conflicting ideas to generate new conclusions.

In an effort to promote and perpetuate this practice, I still find myself sanguine about the prospects for the market. Real short-term rates are still negative. The fed maybe tightening, but the yield curve is steepening. GDP has averaged 2.25% per year since 2009, and yes, real GDP growth in q1 was weaker than expected; but that may only serve to be a down-tick and not the beginning of a nascent trend, as as was the case last year. Growth is there, but it has been stultified by the Obama administration's policies. If we were to see tax rates and regulatory burdens rolled back with a new administration, we could see a renewal of corporate investment and risk-taking and an acceleration in productivity and growth, and a much higher market yet.

Jeff Watson writes: 

Many are overthinking this stock market and are missing out on the move. Trying to fit events into one's belief system can be very costly in the long run. Sometimes, like in surfing, you just gotta catch the wave because it's a groundswell, and the waves are stacked up like corduroy all the way to the horizon. Plenty of opportunities here.



 Guaranteed paydays in boxing implies there is no inherent risk premium, so taking larger risks in prizefights does not provide larger returns. Accordingly, Floyd "Money" Mayweather took very little risk last Saturday evening, and fought "not-to-lose".

Both traders and fighters are susceptible to being emotionally enticed into behavioral patterns that adversely affect their performance, so while Floyd's approach may have appeared to be "uninspired", his strategy was based on reason rather than emotion.

Throughout the night Mayweather displayed superb technique, pacing, discipline, patience, and emotional symmetry.

In the end, the punch count was close to even, but Mayweather landed more "big" blows. It may not have been an exciting fight to watch, but asymmetric punches were the difference.

Mayweather exploited Pacquiao's weaknesses while staying away from his opponent's strengths. Even though Manny was the aggressor, Mayweather took the fight to Pac-Man and pressed at the right times. When the openings weren't there, he covered up and rested.

The chair exposed naive analysis of the markets for the pseudoscience it is; with technical mumbo-jumbo, spurious correlations, and causal urban myth making it a negative-sum proposition for most to try to predict the market.

Even for non-pugilist tacticians who can make a variant perception of the market look like anything but rocket science; without proper execution, an ever-changing and idiosyncratic market will quickly render any prescient analysis less than effective.

A trader sits down in front of his screens, and faces what is arguably a much tougher and more formidable opponent. At times his opponent is very predictable and easy to hit, but the majority of the time, his opponent is extremely unpredictable and elusive.

The trader will know his opponent's tendencies and have a plan, but just like the fighter, the trader will ultimately rely on a dynamic assessment of price action and adjust his strategy accordingly.

In either game, no matter how well you have sized up your opponent and tested your strategy, you still have to go out there and fight-your-fight.

Jeff Watson writes: 

Gary, great post by the way.

I might add, the "not to lose" habit is the most important characteristic of any successful speculator. When winning, one presses their bets, and when losing, one takes the losses with alacrity. Managing the losses with strict discipline will allow the wins to take care of themselves, provided one knows how to take a win. Winning is not as easy as it sounds or looks.

Gary Rogan writes: 

Once again diversification is an alternative to taking losses "with alacrity", at least in some markets. If what you are buying or selling has no known intrinsic value than perhaps there is no choice but to let the market be your guide. But as the well-known metaphor of "Mr. Market" indicates, in some areas "he" is not rational and should be taken advantage of instead of being used as a guide. I know that's not how you operate Jeff (and what's the intrinsic value of onions when not in a burlap bag?), but there are alternatives.



Here is a very important website all about Darwin's smarter cousin Sir Francis Galton, one of my top 3 heroes. The website contains links to everything he ever published. One cannot stress enough the importance of the works linked here, and it's all online, free, and in the public domain. I plan on re-reading everything Galton ever wrote, starting yesterday, and finishing it this summer.



 "There is one good thing about Marx: he was not a Keynesian."

-Murray Rothbard

Stefan Jovanovich writes: 

Marx also agreed with Rothbard about central banking: "Talk about centralization! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it." (Das Kapital, Volume 3, chapter 33).

They also shared - along with nearly everyone else - the notion that money was something other than the unit of account that the people with guns and official uniforms accept in payment of taxes.

Neither they nor the best current historians on the Constitution (Rakove, David. O. Stewart) understood the full genius of the Federal answer contrived by a collection of planter debtors, merchant lenders, lawyers and army pension holders in 1787:

1. The country would have only coin as money because no other form could avoid the cheating that can be produced by the stroke of a lawyer or accountant's pen or the vote of a State Legislature

2. Congress had the power to define what the Coin would be, provided that the unit of account for both U.S. and foreign money was a specified weight and measure

3. What the States and people and the Federal government did with their freedoms to get, borrow and spend was up to them



I was discussing the stock market today with some perma bears who complained that this market does not reflect reality while giving a hundred reasons why it should go down hard. I commented that the market reflects reality, just not their personal reality. Profitable traders look at what is really happening, not at what should ideally be happening.



 One of the most frustrating things in trading is when you research a (qualitative, not a systematic) trade, stay up late figuring out how you want to express the idea to maximize gain and minimize loss, and then the next day when you want to put on the trade that stock is up near 3%.   

Considering it has done nothing for months you figure, "I will wait till to buy on a decline a bit lower".  Then the next day you see it is up 8% and the options you had looked at were would be up 60% in a few days had you conceived of the idea just 1 day sooner. 

I think at such times (similar things have happened to me 3 times so far this year) one is very prone to going on tilt, such as finding some other market to chase, or otherwise do something out of frustration that is not logical and end up losing what you would have made had you been one day sooner.   

I am wondering if there is any way this sequence of events can be generalized beyond specific circumstances of one trader, to general market phenomenon, maybe even events that lead to predictable circumstances.

Jeff Watson writes: 

Whenever I go surfing, I miss a lot of good waves. I either am in a wrong position, miss it completely, or just blow it off thinking a better one will be behind. I never feel bad about missing a wave because there will always be another wave sooner or later. I look at trading exactly the same way I look at surfing.

John Floyd writes: 

Agreed, put another way as someone once said to me “there is a bus every 5 minutes”.  Also importantly in terms of the limits of time and energy don’t spend it worrying about missed moves, focus on what is ahead.  

I read a poignant quote recently in The Joyful Athlete: ”Second tier athletes tended to beat themselves up for mistakes, while the champions simply noted their errors and moved on, wasting no energy on self-recrimination.” 

Stefan Jovanovich writes: 

I have the same problem. Sometimes I wait on a trade too. I think it is greed, the desire to seize the least/highest perfect. So I remember: "Luke, trust your instincts!"

Anonymous writes: 

I strenuously disagree with the philosophy that "there is a bus every five minutes." (My late great father used to say, "there's always another street car.")
This is a rationally flawed analysis. Because it treats an opportunity cost as economically different from a realized cost.  The reality is that the P&L from an opportunity cost is real, and it compounds over time. And this is true so long as one is consistent regarding timeframe, methodology and performance benchmarking. The most pernicious thing about this street car delusion is that it can be hidden,  rationalized and forgotten.
By way of example, our fellow Spec Lister and Bitcoin Booster, Henrik Andersson declared on March 12: "Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this cant possibly be 'good' news. Couple this valuations close to ATH  and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything." 

Since this declaration, the SPX, Dax and Nikkei have all risen between 3 and 6% — and the DAX is at an all time high.  If Henrik measures his performance on a daily or weekly basis, this is a bona fide opportunity loss of substantial note. But if Henrik measures his performance on a long term, multi-year basis, it is way too early to render a verdict and this opportunity cost may well morph into an opportunity gain.

John Floyd comments:

Point well taken and a good one. I was afraid my quick comment might garner the need for elaboration.   The point I was trying to make is if you “miss” a trade you should learn from the experience and move on, while trying not to repeat the same error in the future. Juxtaposed against expending energy lamenting the perceived lost opportunity, which also has a cost. Assuming this is done with some degree of improvement I think it is both rational and sound.  In this way the opportunity cost is treated as real and minimized over time. If there is improvement made then returns are compounded in a positive fashion as opposed to a pernicious one.  In anonymous’ example that might even mean Henrik recognizes what may or may not have been an incorrect thesis and “buys” everything the minute he read anonymous’ post.  

Sushil Kedia writes: 

My two cents on the table:

Opportunity costs as well as realized costs are both known and quantifiable only after the market has moved. At the instant of a decision as to whether to decide to take a trade or not, both are unknown.

Since a real P&L is a progression of a series of unknown infinitesimally sized but infinite number of moments, it is likely a flawed debate to undertake whether or not opportunity costs compound, since if those said opportunity costs actually turned out to be realized losses they too would compound.

Transliterating approximately what the Senator has said often in the past, the purpose of a trader is not to be in the market, but to come out of the market, one would like to tune one's mind to focusing on how much could one gain without losing beyond a point. For each this is a unique set of numbers despite the market being same for all. This uniqueness comes not only from different skills, but different restrictions on the types of trade one is allowed to take, the different marketing pitch each has to use for garnering risk capital (oh we keep transaction costs low), the different risk tolerances each must remain within etc. etc.

So each needs to focus on how one will travel from an infinite series of infinitesimally small pockets of time in deciding when to not decide. 

Paolo Pezzutti writes: 

With regards to missed opportunities, I have two observations.

Firstly, I think our mind is biased in focusing on the good trades that one could have made. We tend to forget the bad calls. It is true, however, that if your trading methodology is systematically not "efficient" then your performance will eventually be sub par.

Secondly, if you continue to miss opportunities, you may have an issue in pulling the trigger when it is the right time to do it. I have a long way to go to improve my trading and I think I have to work on both these areas. My trades are inefficient, because I can spot good entry points but my exits too often get only crumbles that the market mistress is willing to leave on the floor after a lavish dinner. Moreover, one tends to be afraid of taking the trade right when the risk/reward is more convenient, that is when fear is the prevalent sentiment in the market, the moment when you should "embrace you fears" as Larry Williams would say.

As a final comment, I have to commend the market mistress for her naughtiness and deceitfulness. The employment report on Good Friday released with markets closed saw prices of stocks plunge seriously (20 pts in 1 hour) to get 30 pts back on Monday.  Many opportunities during the Easter weekend in stocks, bonds, currencies, commodities because of ephemeral end deceptive moves. Who knows if they were orchestrated or simply "random". 

I went short gold on Thursday at the close (1715) at 1202.6. The first price  printed on Monday was 1212.7. I eventually took a loss later that day of about 14 points. After 2 days gold was down at 1994. Focused on my potential loss, I did not exploit the huge opportunities offered. Afraid of even bigger losses, I liquidated my position instead of trying to close the big gap printed at the open. Moreover, I did not buy stocks or bonds to trade the obvious lobagola move. Double damage.

It is a matter of mindset.  There are coincidences, situations; there is the ability of a trader to translate into action tests, statistics related to these conditions created by the market mistress. The more extreme the conditions, the more compressed is the coil, stronger and more powerful it will be the reaction in the opposite direction. Much to learn.

Duncan Coker writes: 

I have always had a hard time reconciling opportunity costs/gains with realized costs/gains, though I know in economics they are comparable. For example, a casual friend offered me a private investment opportunity which didn't smell quite right and I declined and I left the money in cash earning -1% real rates. Shortly thereafter the enterprise went bankrupt and all would have been lost. I suppose on an opportunity basis it was a huge success for me, 100% gainer, and yet my cash account is the same earning -1%. Every day trading is a missed opportunity to be fishing on a nearby river which is easier for me to grasp and adds to the overall cost of the trading endeavor. Being able to forget and move on is a useful thing in trading. A swim or run at the end of the day does it for me.

anonymous writes: 

I do believe one can go broke from taking profits. Maybe if one has very few positions at a time this could take a while to notice (the benefit to marketing a long term strategy of any sort– few observations) but everyone will fail.

Think of football, a defense might determine that if they can hold the other team to 17 points that they have won their part. What if the offense deploys their secondary after 14 points? May your successes be larger than your defeats.

We are playing an unbounded game, we have no idea the amplitude of future gains or losses, let alone their frequency. Taking profit when unwarranted may not give us a chance at tomorrow.

As for opportunity, we all balance the fear of missed opportunity with the fear of loss. The more successful traders I've known are slightly more fearful of leaving money on the table than losing money. Slightly.

But that depends on the difference between the value and utility of the opportunity. Duncan, you bring up the ultimate question about the purpose of life. Way to make this a deep conversation.



A floor trader from the Merc was replaced by a computer algorithm. His life after the pits was documented in this fictional series of short videos. Every stereotype of traders and ex-traders is touched in this comedy.



A surprising number of SPU 500 stocks are between 95 and 100 having fallen recently below the round. JNJ, MCD, AON, GPC, GILD, HSY, ITW, NKE, PVH, PEP, PNC, R, SWK, PLC, SBUX, INTU, CME, MCO, MJN, it will be interesting to see how many of them and in what duration climb above 100 and whether this is non-random or not.

Jeff Watson writes: 

Corn and beans went through their round. Wheat is hovering above it…for now.



 What are the odds of playing Texas hold'em, getting a pat straight flush on the flop and losing to a higher straight flush? What are the odds of driving a new car out of the car dealer's lot and having it totaled by a truck? What are the odds of your wife, who has never made a bet in her life, sweeping nine trifectas in a row(3 of them paid four figures) at the dog track? What are the odds of seeing four people get bitten by sharks within thirty minutes while surfing at New Smyrna Beach? What are the odds of playing the best golf game of your life with a hole in one, three eagles, two birdies, yet still losing by a stroke? What are the odds of both grandmothers dying exactly a year to the day apart, same time of day, in the same hospital room? What are the odds of losing forty two copper trades in a row? What are the odds of standing in line to buy a scratch off lotto ticket, and the person ahead bought the same ticket the wife requested and it paid $120,000. What are the odds of going to Publix, and within ninety minutes, running into three people from different periods of your past? What are the odds of running into a guy from first grade while waiting for a train in Morocco? What are the odds of winning two first prizes in two separate drawings at the grand opening of a mall?

None of this is good luck, bad luck, or is unusual because people beat long odds all the time and it's easy enough to explain. Life presents thousands of opportunities/happenings/events every day. Multiply that by thousands of days, and there are millions and millions of opportunities/happenings/events every lifetime, and the total distribution will show a number that could be described as long shots.

One's chance of facing and beating long odds(for better or worse) in one way or another during a lifetime is near 100%. Repeating the mantra that beating odds is not always favorable, as failure has odds too.

The markets offer the player all kinds of odds, changing all the time, all day long, every trading day of the year. For every few thousand 3:2 plays, there will be some that offer 50:1, 100:1, 1,000:1 or maybe more. It is likely that the participant will stumble across many of these long odds scenarios in a career. Looking at the chart where an option traded for a quarter, it is important to remember that someone bought that option which immediately went to $85, and somebody also bought beans at $6.00 that doubled. Conversely, someone sold that option, and sold the beans which possibly caused them great harm.

All in all, it's important for the spec to develop good skills and learn to handicap everything in life and the markets. Although cliche, it's necessary to expect the unexpected. Keep to the high ground when the 100 year flood shows, and don't get cocky when three inches of gold unexpectedly rain down on the street.



This is a very interesting paper: "Grand tree of life study shows a clock-like trend in new species emergence and diversity"



This is an excellent article on deception with many applications to our field where deception is needed at all levels to stay ahead of competition.

Gary Phillips writes: 

We're not only susceptible to being deceived by the narratives of others, but by ourselves as well. We take a linear view that doesn't lend itself to the complex systems described above. We see something happening in the market, and we can't help but create our own narrative to explain what's happening. Traders are very good at linking cause and effect, often incorrectly; thereby unintentionally deceiving themselves.

However, you can't understand a complex system, by simply looking at it's individual parts. There are multiple heterogeneous agents that make independent decisions that evolve over time. These agents will interact which leads to emergence i.e., the whole becomes greater than the sum of the parts. and, emergence will disguise cause and effect. Therefore, it may be difficult to determine if deception would have an effect on the outcome, or not.

In hindsight, it's often the hidden factors that one did not anticipate or even consider, that were the drivers behind a move. So, even a move built on the back of deception or misinformation, may still be an actionable event, if one if one practices good trade management.

Jeff Watson writes: 

I remember back in the pit days when I'd want to shake out some weak hands by trying to fake a rally…..I'd start, then after 5 minutes I'd start believing my own fake out.



 One's reading material for his trip to Florida to say hello to Irving Redel were 3 chemistry texts: Principles of Chemistry by Michael Munowitz, The Extraordinary Chemistry of Ordinary Things by Carl Snyder, and Science 101 by Denise Kiernan and Joseph D'Agnese.

I'm too aware of my ignorance to try to devolve the million things we can learn about markets from chemistry so I'd appreciate my more erudite colleagues here to suggest things. However, I found the tendency of all elements and molecules to form Octets very resonant of moves to the inextricable move of markets to round numbers, and their stability as of the noble gases once they reach there.

Also, one found the discussion of catalysts and inhibiters very resonant as some recurring things like aluminum chloride a catalyst like Janet Yellen or employment and inhibitors like enzyme inhibitors and the quiet before announcements also very common.

What are the acids and bases of the market? The activators? And how does total energy stay constant in markets in a closed system and what predictive value does it have like when the Greek news was very bad, the potential energy was so great for a move to the upside. An ignoramous like me poses these ideas and solicits some erudite thoughts and possibly paths to reduce his ignorance.

And of course, the most salient of all chemical relations. What is the periodic table of markets about. Which are the groups of similar behaved ones? Which are most reactive. Which combine and reduce and increase et al?

Jeff Watson writes: 

As of late, the equity market has been chugging along, with a bias to the upside but within a narrow range. News and reports that one would expect to wreak havoc and change on the market have not made it budge. One could compare the equities market to a buffer solution. A buffer solution is composed of a weak acid or base and it's conjugate acid or base in an aqueous solution. A buffer solution readily withstands a moderate amount of strong acid or base added to it where the pH will only change a little. Consider the market to be the buffer solution and the added acid or base to be the news or reports. Bad news does not make the market go down that much but conversely, the good news doesn't make it rally hard either. Along those lines, one would consider the buffer capacity to be the most important characteristic and measurement. The buffer capacity is a measurement of the resistance of a buffer solution to pH change with the addition of hydroxide ions. This can be easily quantified, and the formulas can be found in any quantitative analysis textbook. The buffer capacity of the market can be defined as how much resistance the market will have to change, given the amount of good or bad information supplied it.



"I'm healthy, and I'm competing with guys who are literally half my age or less. I don't personally tie anything to that. I don't care what my age is. These are my peers, and I'm surfing against them. If they have a problem that I'm older, then go ahead and beat me." — 42 year old surfing great, Kelly Slater.



This is a very good business lesson from Frank Zappa.



 Try playing this hold'em game mano a mano against the computer which has solved limit games with two people using artificial intelligence.

Ed Stewart writes: 

This article has an interesting quote perhaps relevant to our field:

"Another change (In the algorithm) involves skipping the usual step of averaging the latest strategy with all previous strategies; the algorithm just uses the most recent strategy.

"The algorithm goes from three steps to two steps," Burch explains. "We throw away the final step."



 Media advice is of little worth, except for a fade perhaps. After all, the primary purpose of the typical financial reporter is to make his/her quota in inches. Quantity over quality. The purpose of the financial media is to sell ads, make money, and hook you like a fly fisherman casting a fly at a trout. The TV financial media has been taken over by guest experts(touts). I avoid reading or listening to them like the plague as I prefer to make my decisions looking through my own lens, not the lens of others(who are observers, not players), second hand.

This broken down old grain trader looks at the financial media with a very flinty eye, much like one looks at the guys at the track who sell tout sheets when you walk past the turnstyle. Make your own decisions, keep your own counsel, and play your own hand. If you need advice, there are private subscription services, for a high price, that might, sometimes be worth listening to, but unless they have skin in the game avoid them like the plague.

Craig Mee writes: 

Everyone is now a salesman trying to justify themselves…listener beware. Funny how the country boys seem to do less talking and more listening and see things more clearly. I suppose that happens when you're not selling your soul on every deal as a means to pay the rent.



"The race is not always to the swift, nor the battle to the strong, but that's how the smart money bets."

-Damon Runyon



Really thin markets are always controlled by total insiders, that's why they are thin by design. Avoid them like the plague, because as the Chair has been known to say, stay out of markets where there are only a couple of market makers to take the other side, and they will only let you out at their price, not yours, or the last tick for that matter.



 The film version of Guys & Dolls is often repeated during the holiday period. It contains some sage advice on gambling, handicapping and, if you so desire, how to run a floating craps game without getting caught. It features a thirty-year-old Marlon Brando at the height of his acting powers as big time gambler Sky Masterson. Brando was born in Omaha, Nebraska and so the financial advice should be reliable.

Here are some apposite quotes:

I know it's Valentine, the morning works look fine

You know, the jockey's brother's a friend of mine

And just a minute, boys I got the feedbox noise

It says the great-grandfather was Equipoise

I tell you Paul Revere, now this is no bum steer

It's from a handicapper that's real sincere

I'm pickin' Valentine cos on the mornin' line

The guy has got him figured at five to nine

So make it Epitaph, he wins it by a half

According to this here in the Telegraph

Nathan: Not Sky. He doesn't lend money. He bets money! So why don't I bet with him? Why don't I bet a thousand with him on something?

Nicely: You would bet with Sky Masterson?

Nathan: I am not scared. I am perfectly willing to take the risk, providing I can figure out a bet on which there is no chance of losing.

 Nathan: Offhand, would you say that Mindy sells more cheesecake or more strudel?

Sky: Going strictly by my personal preference, I'd say more cheesecake than strudel.

Nathan: For how much?

Sky: What?

Nathan: For how much?

Sky: Why, Nathan! I never knew you to lay money on the line. You always take your bite off the top.

Sky: Nathan, let me tell you a story. On the day I left home to make my way in the world, my daddy took me to one side. "Son," my daddy says to me, "I am sorry I am not able to bankroll you to a large start, but not having the necessary lettuce to get you rolling, instead, I'm going to stake you to some very valuable advice. One of these days, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, you do not accept this bet because, as sure as you stand there, you're going to wind up with an ear full of cider. Now, Nathan, I do not suggest that you have been clocking Mindy's cheesecake.

Sky: But if I wish to take a doll, the supply is more than Woolworths has got beads.

Nathan: Not high-class dolls.

Sky: There's only one class: interchangeable.

Nathan: A doll is a doll?

Sky: All dolls, any doll. You name her.

Nathan: Any doll? Will you bet on that? Will you bet $1,00 bucks that if I name a doll, you can take the same doll to Havana with you tomorrow?

Sky: You've got yourself a bet.

Nathan: I name her.

Sky: Her?

Nathan: Sergeant Sarah Brown [head of the Christian mission].

Sky: Daddy! I got cider in my ear.

 Arvide: What are you unhappy about, son?

Sky: Gambling.

Sarah: Apparently you're a successful gambler.

Sky: Is it wrong to gamble, or only to lose? I'll come back for help when I'm broke.

Sarah: Don't misunderstand. It's just so unusual for a successful sinner to be unhappy about sin.

Sky: Besides, my unhappiness came up very suddenly. Maybe it'll go away again.

Arvide: We can keep you unhappy, son. Give us a chance. You don't look like a gambler at heart. What made you take it up?

Sky: Evil companions. Evil companions who are always offering me sucker bets.

Sarah: Just what is a sucker bet?

Sky: A bet that is reserved for suckers. For a gambler to get sucked in on such a bet is most humiliating. But to lose it means that you are marked for a very long time as a chump. You must go all out to win it.

Sarah: Is that so terrible, to be marked as a chump?

Sky: Among my people, being a chump is like losing your citizenship. A chump is an outsider, a yokel who will buy anything with varnish on it.

Sarah: Like a solid gold watch for a dollar?

Sky: This is a real chump.

Sky: Only one thing has been in as many hotel rooms as I have - the Gideon Bible. Never tangle with me on the Good Book. I must have read it a dozen times.

Sarah: If all that was no help to you…

Sky: Who says it wasn't? In one of my blackest moments I came up with a three-horse parlay: Shadrach, Meshach and Abednego.

 Big Julie: And since I've been cleaned out of cash, I announce that I will now play on credit.

Nathan: Big Jule, you cannot imagine how exhausted they are. Especially on a non-cash basis. Me, personally, I'm fresh as a daisy.

Big Julie: Then I'll play with you.

Nathan: But I am not a player. I am merely the operator.

Big Julie: You been raking down out of every pot. You must have quite a bundle.

Nathan: Being I assume the risk, is it not fair I should assume some dough?

Big Julie: Detroit, I'm gonna roll ya, willy or nilly. If I lose… I'll give you my marker.

Nathan: And if I lose?

Gangster: You will give him cash.

Nathan: Let me hear from Big Jule.

Big Julie: You'll give me cash.

Nathan: I heard.

Big Julie: Here's my marker. Put up your dough. Anything wrong?

Nathan: "IOU one thousand. Signed X." How can you write "one thousand" but not your signature?

Big Julie: I was good in arithmetic but I stunk in English.

Nathan: Here. This'll put you through Harvard. Big Julie: I'm rollin' the whole thousand. And to change my luck, I'm going to use my own dice.

Nathan: Your own dice?

Big Julie: I had 'em made especially in Chicago.

Nathan: I do not wish to seem petty, but may I have a look at those dice? But these dice ain't got no spots on 'em. They're blank.

Big Julie: I had the spots removed for luck. But I remember where the spots formerly were.

Nathan: You are going to roll blank dice and remember where the spots were?

Big Julie: Detroit… do you doubt my memory?

Nathan: Big Julie, I have great trust in you.

 A lady wouldn't flirt with strangers

She'd have a heart, she'd have a soul

A lady wouldn't make little snake eyes at me

When I've bet my life on this roll

So let's keep the party polite

Never get out of my sight

Stick with me, baby, I'm the fella you came in with

Be a lady Luck, be a lady, Luck, be a lady Tonight

Jeff Watson writes:

Those are such great quotes. Runyon once said that all life is 6:5 against. You can make a hundred billion dollars like the Walton family has done, but Runyon's 6:5 grind ensures you will ultimately lose.



 American Exceptionalism. I have always hated that phrase and the perverse doctrines that accompany it. The American Constitution is remarkably exceptional; one wishes it were still followed. But the idea that we Americans were born or (equally bad) become endowed with some special grace is one that makes me look for the Exit sign in the hall every time I hear it.

It also reminds me of the disastrous presumption that infected so much of the period that Stern writes about and led to WW I.

Ed Stewart writes:

I notice that every time I start believing that I am an exceptional trader (like I did a few weeks ago), a large loss is near at hand. Best to curtail commitments at the hint of that feeling– the opposite of what the feeling suggests to do.

Gary Phillips writes: 

Success is more destabilizing emotionally than failure.

Ralph Vince writes: 

Failure is absolutely necessary–in fact, nothing is more necessary, in all aspects of life.

For one, it teaches the individual not so much not to do what caused the failure, but how to regroup, reassess and recover from failure. The lesson of failure is about what you do afterwards.

Many things in life require failure. No one learns, say, to lift a lot of weight, to solve a differential equation, or do a backflip on pavement, without failing many, many times. There is no may to accomplish many things in life without enduring the requisite and many failures required.

Jeff Watson writes: 

Failures teach you much more than successes which can lull you into complacency and hubris (like when you have 10 successes in a row). But you must attention pay attention to and analyze the failures inside and out. You have to ask yourself "why?". Ralph hit the nail on the head with his post.

Ralph Vince replies: 

The 13-year-old boy looks around the gym, struggling to lift pipsqueak weight. Failing.

I point to all the old smellies, putting up ungodly amounts of weight.

"You see those guys - every one? Every one of them failed at every increment, every 5 pound increment between what you are failing at and lifting what they lift and they failed at every increment over and over. That had to keep trying, eventually, sneaking up on it. Failure, repeated failure, is part of the process."



 It has been said by many biologists and vets that wild and domestic animals will appear to be healthy while they are really sick or terminally ill. It's a survival mechanism of the most basic order.

Reptiles often exhibit this type of behavior, within a 24 hour period going from relative calm to death spasms, then death. How many players in the markets put up fronts that all is well, while keeping their hand over a cut femoral artery because they are bleeding so badly.

Humans and animals use the same defense mechanism. Animals don't want to get eaten, and traders don't want the competition to know the weakness of their hands, so they act strong.



"It's easier to die when you have lived, than it is to die when you haven't. So I say to all of young people: go make memories, beautiful memories. When the time comes for you to go, you will not go alone."

-Dorian 'Doc' Paskowitz



 An all seeing eye could write a novel about what happened today. Some lessons seem to cry out. Buy on the announcement of the bad news. Gold lost the vote in the mountains, and oil lost the OPEC meeting amid talk of 40 buck oil. They both sent up 10% or so from low. The first day of the month is the most bullish day. Great. Too many people know it. Great time to sell when it don't open the right way. Bonds, nas, and dax finally went down after 12 or 13 of the last 15 up. Nothing goes up forever even stocks and bonds. Gold's price up 50 bucks from its overnight low has nothing to do with deflation. It's beautiful, useful, and a hedge against evil. When the battleship is leaking, that's the time to buy. Commodities all around at 5 year low. They're up 3 or 5% today.

What other things do you see that the all seeing eye should note?

anonymous writes: 

The sneak attack has to come at night, on a holiday, when the Americans, and only the Americans, are eating turkey and on holiday, stuck in airports.

Ken Drees comments: 

The grains at the end of the summer–indeed. 

Gary Rogan writes: 

Something needs to be done to avoid the supposed "government shutdown" by Dec. 11. Talking about it could provide some mild market-related entertainment.

Steve Ellison writes: 

Silver made both a 20-day low and a 20-day high on Monday. Going back to 2006, I find no previous occurrences of such an event.

Craig Mee comments: 

It would appear the commodity turn around was a function of a Friday Monday suicide run created by combined single factors and then astute cover, not by a function of any meaningful low being in and a return to global meaningful growth.

Duncan Coker writes:

March Chicago wheat had a robust move to the upside almost at limit on Monday, which in this case was not mimicked by the other grains, in other words grain spreads got a lot wider.

Jeff Watson comments:

Yesterday, the spread between beans and wheat narrowed, and is still narrowing, while the spread widened with corn. Spreads in wheat stayed pretty much in line. Due to arcane exchange rules for the delivery in grains, there is much gamesmanship in the front month that's ready to expire. The gamesmanship comes from the cash side of the business.



 Dorian Paskowitz was the patriarch of America's first family of surfing. He died last night at age 93 as a result of complications from a broken hip. He surfed until last year. He was a Stanford educated MD who chucked it all and raised 9 kids in a succession of beat up old 24' RV's traveling to wherever the surf was good.

He did not believe in formal education for his kids, and preferred them to learn from wise people wherever they went. Money meant nothing to him. He was a health guru, and also ran the Paskowitz Surf Camp, which his kids run to this day. He did more for peace in Gaza than any politician by introducing surfing and teaching Palestinian and Israeli kids to surf, and to surf together.

I ran across him and got to know his clan over a 30 year period, and found him to be a perfect gentleman who was always willing to share a wave. Some of his kids are close friends of mine, and it looks like I might be making a quick trip to California for a paddle out in honor of Doc, whenever that happens. Doc and I fundamentally disagreed on everything political and economic, but he still had my respect.

Some notable quotes from Doc regarding health are as follows:

"Some of the most profound realizations that I came to about health did not derive from medicine, but derived from surfing."

"Health is a presence of a superior state of wellbeing, a vigor, a vitality, a pizzazz you have to work for every single day of your life."

His book Surfing and Health is one of the best books on health I have ever read.

RIP Doc.



 The dollar is strengthening. I remember when I was young in the 50s and 60s and the dollar was worth 350 yen, and 7 Francs. Bank accounts paid 5%. The world was a great deal. I wonder if that world will return.

David Lillienfeld writes: 

That was the world in which Jews and blacks couldn't own homes in some neighborhoods and could be refused service at will by any business. It was a world in which someone could be denied a job because of his/her sexual orientation, ditto for renting an apartment/buying a house. It was an era in which when women worked, they were expected to earn a fraction of what their male counterparts did, particularly if they were married since they weren't (it was assumed) the primary source of income for the family. It was a world in which a physician might not inform a patient of a diagnosis of cancer or pressure a patient to participate in a research study after the patient had declined to do so—in some instances, declined repeatedly. It was a world in which a black man with syphilis in a government study would be denied treatment in the interest of learning about the disease's natural history, though without the man having given any consent to be so studied. Ditto for Guatemala men and women, who were infected with syphilis by the US government with the same aim of learning about the natural history of syphilis. That world included an American government which didn't hesitate to listen in phone calls as it pleased and spied on persons as it pleased.

I could go on. There were lots of aspects of that world that were good economically, it's true, but there were lots of downsides, too. Maybe the level of discrimination is the same as back then—just less visible, but I'd like to think that we've matured as a society, as a country, such that there's been a reduction, ideally a significant reduction.

Is today better? Worse? I don't know that I can given an answer other than to note that it's a different world. Would I like our economy to be such that we had the dollar at 350 yen and 7 francs. You bet. But as for the rest of that world, I'm not so sure.

Jeff Watson writes:

But we live in a world where the poorest of the poor can own a smartphone and have the access to information greater than the library at Alexandria, in fact they have all the information of the world available to them. I'm very optimistic for the human race. Our poor are better off than Louis XVI in almost every way.

anonymous writes: 

The central conceit of many well intentioned people is that the poor are dumb and can't find their way around anything. We think the poor need help, and they need our money transferred via politicians to be made whole. As the Chair drums the cadence in our heads, it's "the idea that has the world in it's grip." That conceit needs to go away as it is just wrong. The war on poverty has cost enough to give every poor person a couple hundred grand, but the money has gone to programs, not the recipients. Not all poor are dumb at all, they are victims of circumstance. However, the war on poverty will continue, as will the war on drugs, terrorism etc as there's really big money in it for the insiders. 



 There is kind of a nice but terrifying symmetry in the chart looking at the last two days, with a big red line in the middle.

In candlestick theory when the open and close are the same, it shows some sort of balance between buyers and sellers forming a doji pattern. These kind of things are testable. Also supposed to evidence change in direction when it occurs after a decline or rise.

I imagine in the old days in feudal Japan they would paint their charts for the rice warehouse receipts with a brush and ink while sitting in the tatami mat room in a kimono warmed by a charcoal brazier.

Jeff Watson writes: 

This is a good accompaniment to Sogi-San's mention of rice: Dojima Rice Exchange.

Jim Sogi replies: 

The Seventeenth Century Japanese rice traders relied on horse riders and runners to get the news of the crops and the buying and selling. To beat the time delay one enterprising trader rigged a series of flags on hilltops to relay the info to him in town so he would have the info he needed to place his orders ahead of the other traders. Definitely our kind of guy!

Jeff Watson writes: 

The Japanese taught old man Rothschild a thing or two 50 years before his coup in London. Hail to thee who can get and act on information quicker than the opposition.

Etali writes:

When living in Hong Kong, I learned of the story of an early British banker anxiously awaiting on Victoria Peak for signs of arriving ships from London. Apparently , the banker and shipping crews had worked out a flag signalling system. Certain flags signalled that the business news from Europe was good. Upon seeing the "good" flag, the banker rushed to the exchange to get his buy orders in before the ship from London docked. Other flags indicated the news was bad and of course, the baker dumped shares before anyone else had the news. This particular banker went on to found one of the beginnings of a highly successful British merchant bank.

Balzac: "Behind every great fortune, there is a crime!"



 Finally Ag Commodities are getting a little break after months of straight down. Coffee up 7%. What was the explanation? Strong dollar dampens ags exports. Note that the yen and Euro are getting a little bounce today too after both being in downtrends for months. They are really driving the yen down.  

Jeff Watson writes:

But the question remains…Is Dec corn going to break 3 and are Nov beans going to break 9? Commercial hedging companies sell and deliver if necessary. The selling pressure from hedging companies is a real headwind in your face, even in a bull market. While one has enjoyed a respite from the continual decline in prices, one wonders….has the form changed, is this a bottom, or is this a selling opportunity? For the past year if you sold into strength in the grains and held for a couple of days, you made a very serious return. That's been the form and one wonders if it's changed. I recently got faked out in the grains around an important price point, and left 40% of the money on the table had I cashed in on Friday. Oh well, things could be worse…I'm a terrible poker player, and Ceres is very stingy. 



Trader, from Jeff Watson

September 22, 2014 | 2 Comments

 44 years ago, the Beach Boys went through a major shift and produced some incredible material. One of my favorite songs of theirs is the antithesis of who and what I am. It is called, "Trader," and blames the decline of everything on the spread of people willing to trade goods and services for the mutual benefit of both sides. Still, I love the song because I am above pettiness, will continue to love it, despite the message. My first summer girlfriend in San Diego, turned me on to this when I was 16, and if you saw her you would capitulate also.

Trader sailed a jeweled crown
Humanity rowed the way
Exploring to command more land
Scheming how to rule the waves.
Trader Trader spied a virgin plain
And named it for velvet robes
Wrote home declaring,
"There's a place
Where totally folks are free
(Happily completely)
Nourishment fills the prairies and the hillsides
And animals stalk the mountains and the seaside
And fish abound the lakes and birds the skies
Signed sincerely."

Trader found the jeweled land
Was occupied before he came
By humans of a second look
Who couldn't even write their names shame
Trader said they're not as good
As folks who wear velvet robes
Wrote home again and asked, "Please help
Their breasts I see; they're not like me
Banish them from our prairies and our hillsides
Clear them from our mountains and our seaside
I want them off our lakes so please reply
Signed sincerely."

Trader he got the crown okay
Cleared humanity from his way
He civilized all he saw
Making changes every single day say
Shops sprang over the prairies and the hillsides
Then roads cut through the mountains to the seaside
The other kind fled to hide, by and by,
And so sincerely

This song is the antithesis of what I believe, and how I run my life, yet I love it and it will always be on my playlist…maybe for sentimental reasons, who cares. As a side note, when this song was recorded, the author and singer of this song, Carl Wilson was a 20% shareholder in a $150-$200 million dollar value enterprise.



Grains, from Jeff Watson

September 11, 2014 | 2 Comments

 One must note that the grain market is on its contract lows. 6 months ago, the mention of $5 Dec wheat would have gotten you laughed out of the room, and we're almost there. Same thing with Dec corn closer to $3 than to $4. Nov Beans blew through the $10 the other day and hasn't looked back yet. The gravitational effect of the nearest buck in the grain markets cannot be over-emphasized. Furthermore, the fundamentals like country movement, crop size, carryover, demand, and a few other things support the lower price theory. When beans were at $10.75, I joked that when they got down to $10, I would probably not want to own them at all. Same thing with $5 wheat.

anonymous writes: 

I have very few kernels of knowledge on the grains. But, hidden in Jeff's note I think are some essential points that apply to markets. First, the power of sentiment/positioning and the force of the subsequent shift or reversal of the same. Second, while moves often take time to develop when they do the move is often faster and farther than expected. Third, the momentum in prices that can be generated and the signaling indicators within those price changes and levels. Fourth, the fundamentals and/or perception thereof and the confluence they might have with other supporting factors. Fifth, how does the psychology and risk around such a situation develop and best be handled in terms of adding, cutting, reducing, etc..

Prospectively we might ask what other markets might display similar conditions now to the grains a few months ago?



 The book The Power of Habit by Charles Duhigg, a journalist, is about the formation and the neurophysiological basis for habits and how to change them. I've been interested in this since I was younger. My essay to get into Reed College was about the neurophysiological changes in the brain of the Buddhist monks who meditate for hours everyday. It would take another 25 years before experiments shed any light on this subject. I've also followed behavioral psychology and thought there must be more to it than behaviorists documented.

Apparently the Basal ganglia, a primitive organ in the brain responsible for reflexes is changed when habits form. Habits form on a behavioral feedback loop where there is a cue, a routine and a reward. The habits are subconscious. There is no simple solution because habits are created in a complex environment. It's not always clear what the cue, the routine, or rewards are, and often they're not what first appears.

The author talks about simple habits, experiments with brain damaged patients, about alcoholism and AA, and habits of organizations. Everyone who reads the book wants a simple answer and cure to change their bad habits. It's not that simple. One has to look to see what the cues are and what the true rewards are. The book was a good read, and well documented with notes and sources.

Alston Mabry writes: 

The Power of Habit is a very interesting book. I would recommend, along with it:

Willpower by Roy Baumeister and John Tierney and The Brain That Changes Itself: Stories of Personal Triumph from the Frontiers of Brain Science by Norman Doidge M.D.



 What can be learned from the ice bucket challenge–the challenge task itself, how it has spread, why people enjoy watching it, and how when you search for "ice bucket challenge" on YouTube the next suggestion is "ice bucket challenge fail". The ice bucket challenge fail video reminded me of a stop-stop order that has skidded out of control and exits much worse than expected.

Jeff Watson writes: 

Patrick Stewart has a most elegant way of handling the ice bucket challenge. This meme is transferred similar to a way the Chair described years ago.



 This goes with the chair's admonishment to never play poker with someone named doc. Never play poker with a magician either, you will always lose.

Larry Williams writes:

There is this trick I've seen which is perhaps the all time best card trick. I call you on the phone
a million miles away, you cut a deck and choose a card. I tell you what the card is. 

Seems impossible, until you know how it's done and that's a lot like trading.

Jeff Watson writes: 

Larry, bravo, but do you think
you should let the masses in on this trick? That trick is the bomb and a
variation of that is my current bet of the moment at the 13th hole of
my club. I try to be hush-hush about profit centers like these nice
little bar wagers, and any other prop bet, including wheat, which seems
to be at the center of the board on the craps table lately. The wheat
market's been asking how may ways does it take for the pass to be made 4
times in row with the dice?(I know the answer, just trying to provoke
some good insight from the readers).



This is an enlightening article written in March about crop insurance that should explain some things to the layman.



 In the grain markets, if you don't know who all the players are and what they're doing, you have no business playing. If you are gambling, the grains are just as good of place to lose your money as anything else. Even the best gamblers in the grains are, at minimum playing the pass line, and the house still has that hard to overcome 1.414% edge over them. Is the identity of the players and what they are doing as important in other markets or does the total size of those markets dwarf the individual or commercial? Can an individual move a financial market, for an appreciable time, anymore? In the grain markets the commercial interests expect the speculators to do all the heavy lifting, then skim off the creme and leave the whey to the speculators. Need to check the market in whey, I guarantee there is one.



I would posit that every time an equity market set a 10% correction, defined in some quantitative way, it was a good time to buy. Often the definition of a correction is very fuzzy depending on whether one uses intra day or closing prices, and much latitude is often taken to try to prove the point.

Anatoly Veltman writes: 

Yes: if you are a perpetual Bull, a 10% discount can't be worse than a lesser discount. But that was the question I posed yesterday: are there market junctions, where such discount may be justified, and more discount is likely coming?

My proposition: yes, such junctions are quite possible in the markets. Temporary factors (like sub-prime credit, or ZIRP, or QE) might have produced such overvaluation at market peaks that a one-third price correction (and not just a 10% correction) is required to bring prices more into line with economic realities. In the process of such "one-third correction", you may still get a quick bounce off of a 10% level or any level. Is such a bounce a "good play"? Your stats may well agree. Yet others will prefer to use your bounces as a shorting entry point to continue position themselves within a greater decline phase. Both may be profitable plays. During a decline phase, "Short and hold" will prove profitable. But quick bounce-ups will also prove profitable, because they will be sharp. You are already having an over-20 handle bounce on some Friday short-covering, an odd Putin tweet, all kinds of mumbo. Yes, there are ebbs and flows for both sides.

On the precise sampling of "10% declines": why buying into a twentieth "10% decline" is supposed to produce the same success as buying into a seventh "10% decline"? Given the progressively increased valuations (which might have not been supported by corresponding economic growth), such study makes no sense to me. I only hope someone proves me wrong, and I am anxious to find out exactly why my reasoning is worthless.

Jeff Watson writes: 

While the sky is falling among the retail class of trader, and they are getting quite bearish, the fact is that the S&P is only off 4.22% from it's all time close on 7/24. Hardly any reason to shout "Fire" in a movie theater. We're nowhere near correction time yet. And when it does come, there will be great opportunities for the nimble minded trader. I've been in a bear market in the grains for months and am quite enjoying it, but then again I'm one of those who learned the ropes in a decade long bear market.

Gary Phillips adds: 

It all depends on one's time-frame. As a leveraged trader, one makes short-term decisions/trades, manages the risk/ keeps draw-downs to manageable levels and occasionally turns short-term winning positions into longer ones. Since early 2013, the average spx one-year return has stayed above 5%. Today's low was at the ~4% level and at major technical support, i.e., the highs of the previous 3-month-long trading range, so a bounce back to 1950 should not be overruled. Nevertheless, p/c ratios, breadth, and volatility indices, remain on sell signals, leaving the market intermediate term bearish. Long term, everybody knows the " bubbly" situation, yet even the valuation bears see the market going to 2250, and as long as Japanese funds continue to diversify out of the yen, Chinese investors continue to park their money outside of China, Draghi's narrative is accepted, and interest rates don't rise dramatically. The final tipping point is probably years away.

Jeff Watson replies:

Everyone knows the "Bubbly Situation"? I guess I need to be more enlightened because I don't see that at all, or am unable to see the forest for the trees. Anyway, one has seen the effects of a market where "everybody knows." In those kind of cliche cases, everybody usually gets a hard kick to the gonads from the Mistress. Since the stocks as a whole haven't been going down as much as "everybody" thinks they should, I wonder who is on the other side of the trade, buying? After all, the Fed is working 24/7, 3 shifts a day creating money that the flexions get first crack at. That should be pretty bullish for stocks. But then again, I am the absolute worst stock picker on the planet and what do I know? 



Pure random sequences are difficult to artificially generate using computers or algorithms. Some random number generators use natural phenomenon, such as a flame to generate a random sequence. Looking at the ocean waves, or sand dunes it is fair to think of the patterns a being random in the sense one cannot predict where a particular peak or valley will be at a particular time and place. Sailors know this all too well. However, there is an underlying process with its own set of internal rules that generates the the so called random pattern. For waves it is the dynamic between wind, the water surface and the water surface tension and viscosity, the length of the fetch and speed of the wind. Even with such a seemingly random pattern it is possible to predict certain aspects of wave generation such as size, direction with information of the wind speed and direction and duration. Applying the idea to markets, if one could identify the underlying functions would it not be possible to have some predictive ability on the wave size, or in markets volatility as to size time and place as is possible in wave prediction. The navy and NOAA has spent considerable sums on creating models for waves as it is used to time war attacks, landings, how it affect shipping, oil rigs and other industrial needs. Weather prediction is one of the main forefronts of computer science and modeling due to the large number of people affected, and the risks of life and property. Surfers happen to benefit being able to quite accurately predict waves, timing, arrival and size.

What are the winds that drive the markets? Fed stimulus, currency moves, economic forces, upward drift, regulation, bank policies.

Jeff Watson writes:

It is much more difficult than one would think, to generate truly random numbers.

Gary Rogan writes:

While there is no mathematical proof, as far as we know the digits of pi while of course truly deterministic also form a truly normal distribution.

Orson Terrill writes:

How would that be? It seems to me that the 10 digits (0 to 9) would merely have an irregular distribution for any stopping point, but would approach the same number of observations as the number of digits observed approaches infinity. Therefore, the digits would form a uniform distribution, no?…


Min.   1st Qu.  Median   Mean   3rd Qu.    Max.

0.000   2.000   4.000   4.443   7.000   9.000

691 decimal points.

Mr. Isomorphism writes: 

Getting arbitrarily long π is pretty easy with the Berkeley Calculator.

$ echo "scale=2222; a(1)*4" | bc -l > pi.2222

(    a(1) == arctan(1) == quarter-circle     )

then in R:
pi.2222 <- scan('pi.2222', 'character')
slice.pi <- strsplit(pi.2222, "")

  .   0   1   2   3   4   5   6   7   8   9
  1 199 229 230 204 219 230 223 217 227 245

One is then limited only by patience….

It's unclear what a 'normal distribution' of digits would mean, since the normal is defined on [−∞,+∞] and most of its mass is between [−3,+3] … it's not defined on {0,1,2,3,4,5,6,7,8,9}…. I think that Ï€ is actually a normal number, which means the digits are distributed uniformly.

Another nice artefact of using bc -l is that with obase=2, obase=16, etc one can play with the question a bit more, as 10 digits is not sacrosanct. The binary expansion of pi


should have a 50/50 distribution of 0's and 1's if the decimal digits are evenly distributed, and higher bases (imagine base 12837687622234) would count what appear as "longer patterns" in base 10. I believe it's this way of thinking that leads people to say eg the works of Shakespeare are encoded in pi.



"The general welfare"–where would we be without its defenders?

"TLC Wrongly Accused Hundreds of Being Illegal Cabbies in the Past Year"



For 6 years I kept up a daily blog "Masteroftheuniverse" on which I shared a few insights. The blog was well crafted and I had many feature areas. Sadly, family and political pressures made me take it down. One of the areas, my free books download, has been demanded so many times that I resurrected it. If you have any ideas of links to books to add, please send me a PM and I will try to add it.



Here is an easy read. The paper is courtesy of the Kansas City Fed, on the history of agriculture, the booms and busts, other cycle changes, and agriculture's role in the economy, past, present, and future. For a layman, this represents and provides great value.

"Agriculture's Boom Bust Cycles: Is This Time Different?"

Ed Stewart writes:

Thank you for sharing. I wonder to what extent REIT and other capital markets investors will be adding fuel to this cycles' boom and bust experience.




Has it ever occurred to you that it is better to have no market instincts than the ones you think you might have? Just curious.



 Even I am starting to take note of the moves in the grains, logabola and then some.

Like the taxi driver commenting on stocks he is buying unsolicited by passengers, this must be some sort of indicator and I offer it as a free fade to the pros on the site.

Jeff Watson writes:

When you think about it, Ceres is the most important market mistress, because everyone has to eat. Even the insiders tread lightly around her, the medieval devices of torture she still employs are very painful.



My dad died on April 6, and I miss him quite badly. He was my best friend, mentor, partner, and confidante. His death has been the hardest thing to deal with in my life, ever….and I have dealt with death before. Father’s day was always an event in our house growing up, even bigger than Mother’s day. It was equal to Mother’s Day in our adult house, and my lovely wife and son always made sure I got a decent amount of swag.

Before my dad died, I spent a lot of time with him reminiscing, and just getting to know him. Over the few months while he was waiting for Charon, he offered much valuable advice. Here is a very tiny sample of some notes I collected, but some tidbits are very apropos for Father’s Day.

1. “Lying to protect someone’s feelings isn’t lying. It’s called empathy.”

2. To my son, “someday during a job interview, the HR guy will ask you “What’s your greatest weakness?” This isn’t an invitation to be honest. This is a test to see how well you can answer a stupid question.”

3. “Debt is oppressive and can be evil if done for the wrong reasons. If you’re going to go into debt for something, make sure it’s worth it.”

4. “Always go for women you think are out of your league… will be pleasantly surprised.”

5. “Compliment her shoes.”

6. “Always stand to shake someone’s hand.”

7. “Nice guy’s don’t finish last but the boring ones seem to”

8. “Never allow the little head to do the thinking for the big head.”

9. “Treat the woman of your life like a queen.” “Worship her.”

10. “There’s always money out there, but you need to hustle for it…’s not going to drop in your lap.”

11. “When you are forced to do something, don’t complain, the work won’t get done any faster.”

12. “The first one to mention price in any negotiation usually loses.”

13. “When asked for a loan from an acquaintance, respond with, ‘My banker told me he would not invest the bank’s money in grain futures if I would agree to not loan my money out.’ Then hand the acquaintance the banker’s business card.”

14. “There is life outside of business.”

15. “The first one to get angry loses in everything.”

16. “Personal thrift in all areas of life will pay big dividends later.”

17. “When I’m gone, the entire family is your responsibility… fair and just.”



I found this article very interesting but highly flawed: "Why Smart People Struggle".



As you might know, my dad died on April 6, and I miss him quite badly. He was my best friend, mentor, partner, and confidante. His death has been the hardest thing to deal with in my life, ever….and I have dealt with death before. Father's day was always an event in our house growing up, even bigger than Mother's day. It was equal to Mother's Day in our adult house, and my lovely wife and son always made sure I got a decent amount of swag. Before my dad died, I spent a lot of time with him reminiscing, and just getting to know him. Over the few months while he was waiting for Charon, he offered much valuable advice. Here is a very tiny sample of some notes I collected, but some tidbits are very apropos for Father's Day.

1. "Lying to protect someone’s feelings isn’t lying. It’s called empathy."

2. To my son, " someday during a job interview, the HR guy will ask you “What’s your greatest weakness?” This isn’t an invitation to be honest. This is a test to see how well you can answer a stupid question."

3. "Debt is oppressive and can be evil if done for the wrong reasons. If you’re going to go into debt for something, make sure it’s worth it."

4. "Always go for women you think are out of your league… will be pleasantly surprised."

5. "Compliment her shoes."

6. "Always stand to shake someone's hand."

7. "Nice guy's don't finish last but the boring ones seem to"

8. "Never allow the little head to do the thinking for the big head."

9. "Treat the woman of your life like a queen." "Worship her."

10. "There's always money out there, but you need to hustle for it…'s not going to drop in your lap."

11. "When you are forced to do something, don't complain, the work won't get done any faster."

12. "The first one to mention price in any negotiation usually loses."

13. "When asked for a loan from an acquaintance, respond with,"My banker told me he would not invest the bank's money in grain futures if I would agree to not loan my money out." Then hand the acquaintance the banker's business card.

14. "There is life outside of business."

15. "The first one to get angry loses in everything."

16. "Personal thrift in all areas of life will pay big dividends later."

17. "When I'm gone, the entire family is your responsibility… fair and just."



 Heller wrote in Catch 22:

Seven-cent Maltese eggs cost the sellers in Malta four and one-quarter cents each to procure. Milo is actually buying the eggs from himself in Malta, which means that as a seller there he is making two and three-quarter cents each egg. After he resells the seven-cent eggs to the mess halls for five cents each, he is still making a three-quarter cent profit per egg.

However, it turns out that Milo's Maltese eggs are actually one-cent Sicilian eggs which he has secretly shipped to Malta to drive up their value, yielding him another three and one-quarter cents profit per egg.

In short: in all these dealings, where Milo is the producer, consumer, and middleman (twice), he can afford a two cent per-egg loss, because overall the syndicate is making six cents revenue per egg. And everyone has a share.

I'm involved in a cash grain deal that is turning into something like this.

Duncan Coker writes: 

I can only fictionalize (a la Heller Catch 22) what arbitrage Jeff has in place and the exotic transport involved. Buying Ukraine wheat shipped via ex-Russian military transport vehicle to the Black Sea, to load into barges to go down the Bosphorus to Istanbul. Then by freight via the Suez to Singapore for delivery against the Hong Kong futures sold for August. Just one possibility.



I found this hour long video on why gambling is so bad highly entertaining.



I have now read the paper sent me by a momentum fan. Our friend, Mr. Zachar, has a poignant phrase to describe such papers: "your own man". The paper consists of a series of hypothetical critiques of momentum, which he then debunks. Somehow he concludes that value beats growth. But all the prospective studies in the last 5 years, show that growth beats value.

The problem with the studies from my viewpoint is that they don't take account of ever changing cycles. The results from the 19th century don't really affect the current, since the strategy was not followed. The problem with studies of value from the past is that they use retrospective studies in one form or another. And the results are highly dependent on trying to find the few 10 bagger stocks that didn't go bankrupt that are still in the files and remain in the lowest decile of price to book.

The other problem from my viewpoint is that they don't take account of the Gordon model. The return on stocks comes from making a high return on capital say 15% and the compounding effect. Momentum and value go against this in one way or another. There are several fund that try to track trend following funds in real life. There's an ARQ managed futures fund that tries to replicate the performance of momentum funds. It's down 7% this year. The fund was started in 2010 and it's down from there. But it still has 6.3 billion in it.

I believe Dimson tried to track the performance of the best versus worst stocks in a year, and found that in 2008 the best performed 80 percentage points worse than the best. Such results would give one pause. I previously reviewed a study from France where the regression results of trend following showed no practical significance, i.e. a strung out beta of 0.03. I would have to study the Fama french data much more closely, to see how much retrospection is involved. But since the results don't hold up in the real world, I will not review the errors in such, too closely. All this is from memory, and I will have to check all the references to get the figures and references correct.

Jeff Watson writes: 

Lots of grain managed futures guys are closing shop. The managers just don't, as Lack says, "get the joke." There's so much liquidity in grains, I would think fund managers would be jumping at the chance to pick my (and C@rgill's) pocket.



There are many market lessons in this article: "Anarchy and Surfing".



This is a great article on the similarities between surfing and entrepreneurship. Some market lessons are included.



 Back in the day in the pits, if one could predict when the market was going to go from half bid to half sellers with a 90% confidence rate, one had a huge edge. That was not uncommon either. Since all the visual and auditory clues have disappeared, along with open outcry, things have changed because of the screen. But it is still possible to tell when a market is going from half bid to half seller's and the edge remains for the patient. To capture the edge, you need to adapt and think outside the box. It's not as easy as when we traded against order flow, but it's not impossible.



 Time is unidirectional and relentless. We can never go back. There are no Mulligans. Music performance is good training to understand time. Music has a beat or a framework and the notes have to fit in in time. Beginners have difficulty with tempo and keeping up with the framework. When they make a mistake they try to stop and go back and redo the part. It doesn't work. The show goes on.

A curious thing about real time is that it fluctuates in tempo. In markets opens, closes, night all have different tempos. When you're in a trade, time seems different. When you're relaxed time is different than when stressed. When you sleep, time disappears to you. Time, in reality according to theory, is relative to speed. Delay or lag in a correlated system is very difficult for people to make proper adjustments to achieve a steady state. This is the thermostat problem. This is the FED's Problem as well. This is a portfolio balancing issue too.

Jeff Watson adds: 

And time only has a circular definition.

anonymous adds: 

"Nature does not hurry, yet everything is accomplished." — Lao Tzu



 We need to analyze this. She is unconventional, chatty, attractive. Does she throw the competitors off?

"Victoria Coren Mitchell makes poker history with San Remo victory"

Now Victoria Coren Mitchell has made history by becoming the first two-time winner of one of poker's most prestigious tournaments.

"I think I'm quite quirky in poker because there still aren't many women playing big tournaments," she said.

"I have another job and I sit at the table drinking wine and chatting. Poker's a strange game because it's face-to-face combat and we're trying to knock each other out and take each other's money but at the same time we're all friends."

Ross Jarvis, editor of PokerPlayer magazine, said Coren Mitchell's win came at a time when professional poker veterans are fighting it out with a new generation of online whizzkids, many of whom have won millions before they turn 20.

"You have players who are the best in the world who are well-known in poker, then there are so many young players who you won't have heard of until they burst on the scene. Within the hardcore, there are people as famous as Victoria but when it comes to the mainstream she's in a league of her own," Jarvis said.

Jeff Watson opines:

In my opinion, a good poker player that happens to be a woman will beat up most men. Women scare me at the table and I generally play around them. If they're semi hot, flirty, and charming, they have an significant edge provided they have solid poker chops. Their edge exists because they are in control just because of what and who they are and by virtue of this, can manipulate the opposite sex. It's a spectacle to see a solid woman poker player slice, dice, and chop up her victim. And many men believe that these women are just lucky since there's still that core belief out there that women aren't as good as men in poker. 

Ed Stewart writes: 

 A man's competitive instincts start to shut down around a beautiful woman. Competition goes against the natural order that furthers the species in a beneficial direction. Chivalrous notions emerge, good business sense quickly erodes. One can't fight that instinct for long, in my opinion. It is a lost cause.

In the old days when the workday was more segregated men were protected from this weakness. Now it is open season on us and the other side knows it. If a brokerage salesperson with a very sensual and attractive voice asks to make a face-to-face presentation, just say no, as difficult as it is to do, summon the will to do it and you will be thankful.

It could be that this is why men practiced some forms of workplace sexism. It kept us from becoming fools on a consistent basis. When our main work conflicts are with men we are energized. It feels natural. Not so much the other way. A women might read this and be extremely disturbed and think, "think with the big head" but it is easier said then done. Modern mores are constructs, conditioning, overwhelmed by the most simple flirtation, and every good looking professional woman knows this.

If we try to avoid the attractive woman we might be in violation of laws, so self-preservation is now illegal too. 



I cannot even count the number of trading lessons in this Bruce Lee video.



Let's assume the HFT does take a 1/2 tick out of the market per trade. But reflect back to the good old days when you would call in your orders to the floor. Then the locals would sit on the order for 1-2 minutes allowing plenty of time for front running, and other evil dong, then charge execution commissions of .50bp to 100bp. This was all before decimalization so instead of spread of .01 or .005 on stocks you had spreads of .06 or .25, higher by a factor of 5x. For a stocks or futures trader I will go with current electronic age even with those pesky HFT algos. If I was a floor broker, sure the old days were a lot better, but if you are sitting upstairs today beats by a mile.

Jeff Watson writes: 

But the trouble with the electronic market is that it's harder to know the size of the market (ie: how much wheat is really for sale in the pit). Plus, the electronic market eliminates the visual and auditory clues that one would get in the pit. The feel of the grains has changed significantly since electronic became the mainstay, but a bad fill is a bad fill, and your market order can get you a bad fill.

Gary Phillips writes: 

Floor brokers in the bond pit were under extreme pressure to provide institutional customers with good fills

Brokers were only as good as their last fill…

Good fills were taken for granted, but fills that were perceived as bad, were always acknowledged and then contested.

Adjustments for bad fills were de rigeur, if a broker wanted to retain his business.

But when a broker had an error, he had to eat it himself.

The risk /reward was definitely skewed against the floor broker.



Here's an interesting article for the layman regarding the use and misuse of P values.



 The grains (especially wheat) in the after hours are reacting to the Ukrainian situation. Big move to the upside that kicked in late last week when the commercials started buying. Grains tend to show sensitivity to events in the Ukraine.

Vince Fulco writes:

One wonders if the "seeds" for this were in the fertilizer firestorm a few months back? 



 I've been thinking about failure. There are several kinds. One is inevitable: the failing of organs leading to death. Everyone fails in this regard. I suppose it is the manner of living, style, and health before that defines whether death is a failure or the end of a good life. Failure of health is bad. It's important to take care of health. It's the most important thing there is.

Another kind of failure is  failure of judgment. We've all had them. These are mistakes, failure to see the train coming at you. Looking back, they are usually pretty stupid in hindsight, but very hard to see in real time. If you learn from them and grow, and let them go, they won't ruin your life.

That brings up the next type of failure. Failures in a career, a marriage, a relationship, a friendship, an investment, or a business are serious and not easily overcome. More than one is very bad. Sure Ray Kroc overcame failure dozens of times, but most cannot. The odd thing is that some people don't see why they failed. They don't see what they did caused their failure. This is the bottom half that thinks they are better than most, the rationalizers.

I look back on my failures and see they are from personal defects. I can only try to work around the defects. I'm not sure its possible to correct personal defects even if you recognize them.

Jeff Watson writes: 

Personal defects are so ingrained, they need to be worked around…..I have not seen any credible evidence that they can be corrected. I trade around my demons every day.



 The latest contestant on the popular game show "Jeopardy" has found an unorthodox way to beat the game. Using game theory, Arthur Chu has managed to win 4 times in a row. His unorthodox methods have traditional Jeopardy fans upset as he follows the rules, but goes non traditional, and hits the big money first, then searches for the daily double. In fact, in one daily double, he found it in the category of sports (which he has little knowledge), and bet only $5. His style of play is to deny his opponents the big money, just like we try in the markets.

Anyways, Chu has upset the apple cart and won over $100K. Fans, along with the host Alex Trebec are visibly upset, but Chu is playing to win, not appease viewers or the host. This reminds me of speculators who get upset and blame HFT, flexions, the other side, etc. when they lose. They were mad at old man Rothschild when he had news of Wellington first and scooped the market. I'm sure that in the future, there will be many boogeymen to blame things on.

I applaud Mr. Chu for his out of the box thinking, and wonder why nobody has done this before, considering Jeopardy has had a 30+ year run. Mr Chu can teach us many valuable trading lessons.

Andrew Goodwin writes: 

This guy is a close friend of my gf. He has garnered much anger from the crowd. He has won four times in a row and is now being called the "Jeopardy Villain" by the press and fans of the show.

This is a take from the net describing his methods:

"What is Chu's game theory, exactly? While most players opt to stick with a single category and work through it from lowest to highest prize amounts, crossword-puzzle style, Chu begins with the most difficult clues in an effort to solve the Daily Doubles and doesn't hesitate to lay down the big bucks when he finds them in a topic he's familiar with. If the question belongs to one of his less-practiced knowledge categories, like sports, he'll only wager $5 and throw it away, knowing that it's off the board for his competitors. He also spat in the face of the $1-over wager tradition in Final Jeopardy, in which the extra dollar prevents a tie; instead, Chu intentionally bet to tie twice, though only once did he and his competitor (Carolyn Collins) both answer correctly and move on. This is not a humanitarian move, by the way, but it is a clever one (Keith Williams, former Jeopardy! winner and obvious math person, breaks it down for you in detail here.

Playing to tie increases your chances of advancing both because of game theory and mind-fu—- your opponent ("if your opponent knows you're going to wager for the tie, he might disregard a rational wager and go for broke in an attempt to tie you"). Chu is also quick to buzz in, which is perhaps the most useful Jeopardy! skill of all."

Chu has already won four games in a row and gets to compete again on Feb 24th. He is using game theory and statistics to beat the other opponents and has mastered them all so far using his unexpected system.

I suggest we watch to see if his play changes the behavior of the next opponents so that they match his tactics and alter the game show for good. This is the live popular culture version of the theory of ever changing cycles at work for all to see.

Far from a game of mere trivia knowledge, Jeopardy now is a game of greater complexity than thought previously due to the skilled tactics of Arthur Chu. Granted, I understand that Chu was considered a genius back in college, but he is not winning like Jennings in knowing all the trivia.

Adam Robinson would really enjoy this story.

Best regards, Andy



 Slater won the Pipe yesterday. Check out this minute and a half video of a perfect 10 on a wave he rode. Even a non-surfer would regard this as a perfectly ridden wave. What other moments in sports are comparable? What trades are comparable?

Jim Sogi writes: 

Perfection. It's rare, but when it happens, it's the best. Yesterday the surf here was perfect. Same size as the pipe pictures, west swell, perfect form, no wind, perfect size. It was like the cover of a Beach Boys album.

There were only about 8 people out, all of whom I knew. I caught many waves and didn't fall. Caught them right on the peak, in the pit, dropped in, the wave walled up and then kickout on the inside. Just a perfect day. Everyone was hooting and hollering and smiling. A pretty girl in a bikini paddles by and says the waves are so good she feels like she's on drugs. Just perfect.

The other great thing is the perfect day of powder snow, sun, no wind, new snow, no people, untracked lines.

Another great thing is the perfect trade. Great volatility, good entry in size, and good mental condition to ride the trade to a good exit with no pain.

All very rare, but just the greatest thing. You have to watch and wait and then be on it when it happens.

keep looking »


Resources & Links