Last night, I was watching an episode of Tribe with Bruce Parry where he's helping a local tribesman to hunt for a Cayman alligator. Parry comments that the Cayman has barely evolved since the time of the dinosaurs. In one sense I thought, yes, it is the perfect creature for its environment, but then I reasoned that the only reason it hasn't evolved is that it's environment hasn't changed to necessitate such a change. In one sense, the alligator is frozen in time because it's environment is broadly frozen in time. Likewise for humans. Jones' idea that 'a grand averaging is slowing evolution's power' makes sense, but there is no reason to think the rate of evolution will not change as the world changes, and we can be sure that the world will one day experience massive change just as it has in the past.
His final semi-positive comment is that 'Health, birth control and the healing power of lust all conspire to tell us that, at least in the developed world, and at least for the time being, evolution is over. So, if you are worried about what Utopia is going to be like, cheer up– you are living in it now.' From one perspective, I disagree wholesale with this comment, but it's more of an issue of definition. Now that we are delving deep into evolutionary mechanics with the tools of genetic research we are already able to tweak the genome in such ways that chosen traits and improvements are passed on to future generations. It may not happen in our lifetimes, but I reckon that we'll soon be juicing up evolution and better tailoring the human to it's environment better than ever before.
Relating the rate of evolutionary change to what is happening in the markets, I am led to wonder whether those living fossil creatures that have remained unchanged over the millennia are less able to change to changing circumstances. In trading, there are operators who become hard wired to old regimes. And so it is for banks and other institutions, where a successful model embeds itself ever deeper in to the biology of the company, making it more susceptible to a sudden change. Also, just as bacteria evolve at a much faster rate than larger creatures, the same seems to hold true of companies.
John White remarks:
Evolution is not a force unto itself. It is the description of the result of natural selection. Organisms that have genetically unique adaptations/mutations that provide an edge in reproducing have a higher probability of passing that adaptation/mutation along to their offspring. Humans' unique adaptation is our brain. Our highly sophisticated brain gives us the capacity for reason, and specifically, the capacity to test. The technological advances that have been produced by the scientific method have mitigated our environment’s impact on our ability to survive, reproduce, and raise viable offspring. While physical attributes will always play a part, the effects of natural selection on humans will be seen more and more in our intellectual abilities as time progresses. The corollary for business is that while balance sheets will always play their part, management and culture will become increasingly important. The question for the spec is how to measure that.
(Photo above: the late Professor James H. Lorie (1922-2005). An obituary appeared on this web site in August 2005.)
My experience with "false gestures" reached its climax at its inception as I accompanied Jim Lorie when he showed prospective University of Chicago professors to the Hyde Park neighborhood. He'd stop at The Unique Deli and conspicuously leave the keys in the car. The prospect would say "I thought it would be very dangerous here" and Jim would say "it's so safe here that I don't even have to worry about the car."
A highlight of my observation of false gestures came when I saw a distinguished Objectivist scholar, always dressed in formal suit and tie, stoop to play with a child at a lecture he gave where all the questions had to be submitted in writing in advance and I couldn't even ask him about the identical twins. The gesture was so false, so contrived, he was so obviously uncomfortable with kids that it was a laugh.
A third experience was watching a Japanese movie where the blond American proprietress of a Japanese wine shop spoke in Japanese to all the Japanese customers. It was so hilarious, so out of whack, that you understood immediately why Japanese think that any American who tries to speak their language, no matter how good his accent and grammar, is an utter charlatan.
A recent experience came when I asked an attorney whether it is good to look at the jury when testifying or look directly at the questioner. He said " the juries hate it when you look at them because they know you're treating them like sheep" and they really don't believe you're that much more sagacious and truthful and a man of the people than they.
I wonder what the significance of false gestures in the market is. It's almost a Googlewhack with just nine out of context, unrelated conjunctions of "stock market" and "false gestures." The move on Monday that's reversed on Tuesday comes to mind, or the move from 2:30 to 3:00, like today, up 1% on the Bear Stearns increase rumour immediately followed by down 2% on the Oracle shortfall of 1/3 of 1% on revenues. Yes, but the real ones are part of the "I'm the greatest" bag. They come when companies fudge the real reasons for their shortfall of earnings or insiders fudge their real reason for selling out – "it was just estate and family matters."
The whole subject calls for quantification and further examples in all fields related to investments.
Jeff Watson adds:
False gestures are the mother of all deceptions. From political campaigns to fire and brimstone preachers, all use false gestures to achieve their ends. The wheat market players have been known to use false gestures in the form of buying up three or four whole trainloads of wheat well before the futures market opening. When the cash board shows a smaller than expected amount of cash wheat coming to market, it can cause the futures market to move up, mostly retail driven. A savvy purchaser of the small cash position can sell a lot of wheat in the futures market at a higher price and also resell the cash position at a premium. Sometimes it works, sometimes it doesn't.
John White writes:
On many occasions the market has been referred to as “the market mistress.” I find this to be an apt moniker because she shares many qualities with women. She’s complex, mysterious, seductive, and just when you think you’ve got her figured out, she surprises you. With that in mind I thought some observations from last night’s carousing with a friend (in celebration of a birthday) might shed some light.
One only need sit in a singles bar for an hour or two to observe hundreds of false gestures. Looking back on the mating rituals from an anthropological standpoint, it seems to me that the market (women) falls for, then identifies, and finally renders obsolete false gestures. Pick up lines are useless. Sending a drink across the bar is passé. “Do you come here often?” usually elicits a mocking laugh. Fortunately for market participants (men) there seems to be an unending supply of original false gestures due to everchanging cycles. Pick up lines are now a contest to see who can come up with the most outrageous and are obviously a joke. I have sent a drink across the bar, but it was a glass of water. The response was a playful tossing of ice back across the bar and a subsequent invitation for a conversation. When it comes to these false gestures, the key to success seems to be originality and timing. An original and unexpected false gesture can move the market drastically.
My final observation is that even the successful false gesture is merely a crutch. If there is no substance to back it up, the market reverses. It is useful for getting a date (trading), but not for getting a girlfriend/wife (investing).
Steve Leslie explains:
The classic false gesture in poker is the check-raise. Example: you are in a hold-em game and the flop hits your hand and you get a set. You are the first to act. Rather than bet the hand you check. An aggressive player behind you, who might have the top pair comes out swinging and forces the action by putting in a sizable bet. Now you come back at him, and reraise. Properly constructed and carried off, it is the most powerful and profitable play. I find that the player who has been reraised usually knows at this point that he is beat but just can't get away from the hand, and calls the reraise and you take down the pot.
Mike Humbert replies:
Whenever I listen to someone telling me how easy something like this is, e.g., winning at poker, picking winning stocks, etc., this scene from "Get Shorty" always comes to mind. BO CATLETT is Delroy Lindo; CHILI is John Travolta.
BO CATLETT: You know what I'm thinkin'? (leans forward) You wanna make the girl older. I don't like the ending. We could do that, you and me, sit down and write the script over where it needs it.
Chili fips through the movie script a moment . . .
CHILI: You know how to write one of these?
BO CATLETT: There's nothin' to know. You have an idea, you write down what you wanna say. Then you get somebody to add in the commas and sh*t where they belong, if you aren't positive yourself. Maybe fix up the spelling where you have some tricky words… although I've seen scripts where I know words weren't spelled right and there was hardly any commas in it at all. So I don't think it's too important. Anyway, you come to the last page you write in 'Fade out' and that's the end, you're done.
CHILI: That's all there is to it, huh?
BO CATLETT: That's all.
Chili sits forward, stabs out his cigarette, exhales into Bo Catlett's face . . .
CHILI: Then what the f*ck do I need you for?
Eric Blumenschein writes:
False gestures in speculation are not the same as in poker. In poker, you can see the card holders. The equivalent in trading would be six traders sitting in a circle at their screens and you six are the only traders of that particular instrument. Now imagine watching the other five and your screen. Watching price break a new low and looking around to see if anyone is squirming or sweating while others are looking back at you. In trading you don't see the other card holders. It is more like trying to play poker in a dark room around a huge table with only a match to see your hand and the flop is the Fed. So how do you play the game now? The commitment of traders model alone is not enough. I could go bankrupt waiting for them to break the trend. I can't see the game they are in? Are they hedging another kind of trade? What table are they at? What is the flop they are looking for: Housing Starts, Industrial Production, inverted yield curve? Does that make their hand? Now imagine in poker the dealer lays down six different flops to play and after each bet he may or may not make changes in a few cards in the different flops. Would you call that game poker?
1. Sharp market downturns from highs are more often false positives than signs of impending meltdown.
2. Timing matters in making a market or economic prediction. If you miss a relief rally you miss the biggest gains. A relief rally is a stock rally from the foresight that fear, often of a recession, is abating.
3. Recessions do not always yield large, long term stock meltdowns. Big and long; pre- and post- recession meltdowns are not a given, just because that's what happened last recession. A paradoxical corollary: If most people think it will happen, it won't, it is already anticipated.
4. Wealth, if measured by real assets and growth of real assets (including human capital), makes the USA a very hard long term bet to beat.
5. Conspiracy and market manipulations are two-way streets. Just as stock market cheerleaders may have ulterior motives, so do the prophets of doom. Except, alarmists and media have a symbotic relationship. And journalists don't have worry about geting sued for causing you to worry too much. "Smart money" has a way of becoming "dumb money" when everybody is following the same guru and strategy. What are those strategies and who are the gurus?
6. The Fed's increasing money and Fed's decrease money may cause credit cycles but the Fed's diverting the normal flow destroys wealth. In a credit crisis few real assets are destroyed; only values are reassessed. Money, eventually, will flow to what is valued, not just what is safest, if the government does not divert that flow.
7. When you hear politicians talk of "change" the first thing you should ask is whether they are talking about downsizing or increasing government's power.
8. These topics will not be highlighted by the media.
Lon Evans asks:
Are you possibly one of those who reassured the herd that the NASDAQ meltdown of 2001 was merely a “correction,” and that smart money would hold for the rebound? My opinion differs. This market is nowhere near its bottom.
I’m personally holding 1460-strike S&P 500 puts. I plan to ride them all the way down to 1200. With all the fraud and chicanery relative to the sub-prime mess, this is not the moment for optimism.
Russell Sears replies:
I did fine in 2001, but it may have been beginner's luck as this was my first year of running an S&P options portfolio, professionally. 2002 was not as good but OK.
I would agree that the market will get hit on those days where market senses “chicanery relative to the sub-prime mess” but we may disagree on how much of it is “fraud” and how much of it is uncertainty of the outcome, at least on the part of the banks. And note, the title was for all of 2008, not the next quarter.
Congrats on the 1460 puts. You sound like you did better than I in 2007. But I no longer run an options portfolio — perhaps this kept me out of too much trouble.
John White writes:
1 - Define sharp. -9.5% from 10/9/07 to 1/14/08 took three times longer than -9.4% from 7/19/07 to 8/15/07. Sharp upturns in a bear market are more often false positives than the start of the next bull market.
2 - Timing does matter, but how much depends on your investment horizon. Timing strategies differ significantly with investment objectives, e.g. retirement funding vs. meeting quarterly numbers on the trading desk at Golden Slacks vs. putting food on the table for your family every night. If you miss a bear market you miss most of the losses. A bear market is a re-pricing of equities from the foresight that growth in corporate profits will slow/go negative in the near term.
3 - Recessions never yield large long-term stock meltdowns, depending of course on your definition of large and long-term. Depressions do and I sincerely hope we never have enough depressions to develop a statistically significant correlation. One was plenty enough. A question for your corollary: Most people think the market will return an average annual compound growth rate of around 10% over the next 20 years. Does that mean it won’t happen?
4 - And? What’s your investment/trading horizon? Q1, 2008, 2028?
5 - Exactly why I’m responding with the “other side of the coin.” And anyone who listens to journalists for advice on trading or investing has already lost regardless of the bear or bull.
6 - Agreed with the added comment that the government often does divert the flow, the anticipation of the diversion can be profitable, and being oblivious to the diversion can be destructive.
7 - When you hear politicians talk, the first thing you should ask yourself is, “Are they a soggy #### sandwich, or just a #### sandwich?”
8 - The mainstream media are often a contrary indicator. By the time it is reported on the front page of non-financial publications, or parroted by talking heads on non-financial news shows, everyone always knows and a reversal is often around the corner.
Personally I think the S&P will have a greater return in ‘08 than it did in ‘07, but I thought I’d play devil’s advocate.
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