Sometimes I wonder whether our kids are just a little overprotected. These are things I did unsupervised up until the age of 10 in the Adelaide Hills of Australia:

–Played cowboys and Indians in the forests and gulleys amongst the poisonous snakes and spiders.
–Blew up ant-hills with gigantic firecrackers (got matches and firecrackers somewhere)
–Basically played with firecrackers at will with dry grass all around.
–Climbed tall trees
–Played in the railway tunnels of the main Adelaide-Melbourne railway line.
–Put stones on the tracks to watch trains crush them. (very stupid)
–Had stone-throwing fights. (also very stupid)
–Flung ourselves off the end of the log-swing in the schoolyard at full swing to see how far we could fly.
–Played with real bows and arrows.
–Picked and ate mushrooms.
–Walked around by myself for hours our hung around the railway station in Blackwood several train-stops away from home playing hooky from Sunday school.
–Played beside a neighbor's deep pond trying to catch crayfish (didn't know how to swim).
–Picked and ate honeysuckle and prickly pears and other local vegetation.
–Walked several miles to and from school by myself every day from age 5 — involved crossing railway tracks every day at the Eden Hills station.
–Basically ranged far and wide in an around the neighborhood, which was relatively undeveloped hilly terrain.

And then later in Canada my parents wouldn't get me a bicycle because they thought it was "too dangerous". Had they only known…

I'm surprised I'm here at all when I think back on it. I was a real Darwin candidate back then. I can guarantee my kids have never done any of these things.



I saw GB on TV talking about the 3G. Fear mongering, yes; self interested, yes. But some of it made me think. A Reader.

Modern currencies are no longer based on physical assets — rather, they are a proxy for productivity and an extremely convenient and efficient medium of exchange. Expanding money supply when population and productivity is also expanding is not such a big deal — and in fact is necessary, as long as the money supply doesn't excessively exceed the productivity (wealth creation and improved standard of living). Case in point is that in the last couple of decades we've seen huge credit expansion without significant inflation. In having adopted capitalism, BRIC countries are currently new global growth engines doing a large part of their trade in US dollars, the world's reserve currency. Their productivity, and the rise in standard of living of increasing portions of their populations, counts hugely in the overall productivity equation, because we have a global economy. And certainly don't count out the US. It still has the largest GDP in the world by far, and it may not be growing much right now because of the credit readjustments currently under way, but it can certainly hold its own at wealth creation when things settle.

Also, inefficient government spending isn't necessarily waste. That money goes somewhere — payrolls, goods and services procured from the private sector, investment by the private sector, etc. It participates very actively in the broader economy, if for no other reason than providing a market for more efficient private sector big businesses and small enterprises. If people did nothing but hoard it, then that would be more problematic, but typically it's either spent or invested.

Medicare/Medicaid — Health problems work counter to productivity, either directly by taking people out of the work force, or indirectly by pulling them away to care for sick loved ones. If the medical system can keep more people on their feet and in better health, that takes some strain off productivity as well. Medical coverage would alleviate an enormous amount of stress about health and financial concerns for millions, which hurts productivity and even exacerbates it by causing health problems. People are resources too in the productivity equation, and maintaining these resources in good operation condition helps overall productivity. There is a cost — understood – but there is a payback too.

At issue here may be how some of these major shifts redistribute wealth. Doing it by force by targeting specific groups for taxation (e.g. the "rich") and political vilification is counter-productive because it sends the wrong message about how wealth is created it disincents risk-taking and wealth-creation. And too much stimulus may cause inflation and cause the debasement of paper asset-based savings. (Too little and you have deflation, choking off the ability to finance wealth-creating resources and activity, and the markets for the goods and services created.) Too much debt could ultimately lead to a default or devaluation, but I doubt that even that will cause the end of the financial system as we know it. Many countries have seen their currencies go worthless, and then have bounced back with a new one (you personally just don't want to be holding a lot of paper when they go down). Even that is not the end of the world.

I don't know if the current medical coverage plans are "affordable" or not, or whether the stimulus debts are too big; I just want to make the point that it's not all one-sided and all-bad. You have to look at both sides of the ledger and try to see how it nets out.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.

Gary Rogan replies:

What’s wrong with deflation? Some of the best years in American financial history happened while prices were decreasing. Is anyone concerned with deflation in computer prices? Is it good that the dollar lost 95% of its value since 1912? Why can’t you just keep some money in a savings account and have it maintain its long-term value? Wouldn’t that give a sense of security to millions of people? There is absolutely no reason for expanding the money supply by any “unnatural”, meaning non-free market ways. Even in the problematic fractional reserve banking system, supply and demand are perfectly capable of setting interest rates and the money supply.

And government waste is just waste. It means that people who could be doing something productive don’t do anything productive. That’s a loss of potential output, which is pretty much the definition of waste.



 What is the significance for markets of the fact that only 5% of major league baseball games are completed by the starting pitcher these days versus 50%, 50 years back? And that relievers like Rivera average 1 inning a game these days?

George Parkanyi writes:


Lack of accountability

Symptom of the money spent on distracting the general population with sports, entertainment etc.

Counting — playing the percentages (right vs left-hand, hitter's success against specific pitchers etc); running baseball more like a business

Sensitivity to starting pitchers' self-esteem

Phil McDonnell adds:

In the 1970s a Professor of Statistics studied the game of baseball and noted several things:

1. Starting pitchers tended to be less effective somewhere between the 5th and 9th inning. For most pitchers a pitch count of over 100 is where the trouble might begin. Maximum pitch count is somewhat specific to each pitcher and can vary from day to day. The prevalence of radar guns has made it easier to measure any decline in pitch speed as the innings go on. Clubs also use a variation on a Shewhart chart to track the ratio of strikes to balls to quickly identify any loss of control.

2. He also noted that a pitcher who had thrown more than 2 innings was not as effective the next day. Thus the strategy of short relief and closer was born. Pitchers who only pitched 1 inning maintained a high level of effectiveness the next day. Even with only one inning of work on two consecutive days they still need a day off on the third day.

3. It was also discovered that by using relief pitchers for 2 or 3 innings starting around the 5th or 6th inning that the odds of winning improved. These short relief pitchers could also play again in that role after a day or two of rest. In contrast starters who pitched more than 100 pitches (usually about 5 innings or more) required about 4 days of rest.

Baseball, like trading, has evolved because of Counting and is getting more competitive every year as people learn to play the game more intelligently.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Stefan Jovanovich replies:

No wonder Dr. Phil and I keep doing Rodney King and the LA cops over baseball. On this subject I don't think we will ever "just get along". Baseball in 1970 was going through the transition from being the childhood national sport to being 3rd choice behind football and basketball. The result was that most of the culture of the game was being lost. In the 1950s and even the early 1960s pitchers were still expected to know how to through at least 5 pitches for strikes. Even Bob Feller knew how to throw a knuckle ball. As a result pitching was something that had no specialization, and pure journeymen like Don Larsen could throw complete and perfect games even in the World Series. (Check the news reports of the time — 1956 — and you will find that no one thought the complete game remarkable at all; it was only its perfection that was significant.) By 1970 the culture of the game that Larsen and hundreds of thousands of other professional players had grown up with was gone. Pitchers no longer had the experience of learning the game from uncles, cousins, fathers who had played in the military or in the minor leagues. They were the products of Little League. They were lucky if they had 3 pitches they could throw for strikes, and they had no experience with varying speeds and/or arm angles for the same pitch. Most were straight 2-pitch pitchers. It was hardly surprising that the "modern" pitchers had no surprises left by the end of the 6th inning. Some had none left by the end of the 1st. Since the essence of the game is keeping the hitters off-balance, the only possible solution was to bring in another 2-pitch pitcher the batters had not seen before. Hence, "relief pitching".

What is fascinating now is that the money has gotten so good that pitchers are realizing they can extend their careers by adding pitches to the repertoire. Lincecum - the back to back Cy Young winner for the National League — is the most remarkable example. He learned/was taught the change-up after he was in the major leagues. (If he learns a 4th pitch, he will be Christy Mathewson reincarnated.) As Hayek would have reminded us, the thing being counted — the "game of baseball" — is not a thing that can be quantified in the same way that the mining and smelting of copper can be. An pound of copper in 1970 is the same as thing as one produced this morning. Human activity not only varies; it also changes. Statistics applied to what people do without a knowledge of history easily becomes an exercise in counting what is no longer there.



 I was wondering if one could be taken off the street, with no experience, and taught to be a profitable trader. My father says no, with a few added conditions. He believes there's a genetic component combined with many early childhood predictors that indicate a propensity for success in trading. He cites games, sports, competition, and the willingness to accept risk as major predictors of success. He also believes that if one doesn't exhibit these characteristics by adolescence, it would be very improbable that one would become a successful trader later on in life. He also says that mentors are not enough if you don't have a "fire in your belly." My uncle, on the other hand, says he could take a monkey off the street and teach him how to trade successfully within a year. What do you think?

George Parkanyi responds:

I think the question becomes can you teach creative thinking, self-motivation, self-discipline, courage, patience, and self-confidence? If you believe that these can be taught (which I do, but it's not simple or easy), then I believe you could teach someone to successfully speculate. Good ideas and opportunities abound in speculation and are recognizable to many people, and the mechanics of trading are fairly straightforward. But actually implementing them and managing the risks are altogether something else.

Also I think that to be good at anything you just have to do it — warts and all, and make the necessary adjustments as you gain experience. You would never be able to teach the things I mentioned above without a heavy dose of hands-on application.

Paolo Pezzutti writes:

I agree that being good at sports and in particular at sports competitions is an indicator of predisposition to trading. Determination, ability to remain focused, to implement a game plan, to understand weaknesses and strengths, the self-confidence that allows to take reasonable risks with a winning attitude and so forth. However, that there is not only the "fire in your belly" component. I do not think that one can trade only by instinct or intuition. There are also analytical qualities that are more intellectual and less related to the guts. Can technology help somehow? However, if one is a great mind and finds certain market inefficiencies that a computer can exploit, does one need to have the great athlete's qualities? Those who develop successful algorithms need to to have the "fire in their belly"? I am not a trader so I cannot say for sure, but I tend to believe that mechanical trading can be successful. Besides that, if your father believes that he could teach a monkey how to trade in a year, I think I am better than a monkey and if he wants he can try with me!

Craig Mee replies:

No doubt a few of you have heard of Dennis and Eckhardt… these days different rules, different times, maybe if there had been tasty markets for it, before the rules of ever changing cycles kicked in. I believe Richard Dennis has struggled to replicate his results.

Dave Goodboy replies on behalf of Michael Covel: 

M Covel"Whether you agree or disagree with my book The Complete TurtleTrader it is one of the most unique "training" experiments ever conducted on Wall Street. It is the true story of literally taking novice traders off the street, injecting them with trading rules, and then watching millions be made. 25 years later it is also interesting to note which of the originally group thrived and which imploded. As far as the genetic component debate goes there are some great books out now about "talent" (see: "The Talent Code" and "Talent Is Overrated") making a very convincing case that success is far less genetics and much more about deliberate practice –which backs much of my research."

- Michael Covel



I looked at my little COT summarization service and the conclusion is one has a pretty one-sided speculative long trade in commodities.  Funds are buying, commercials are selling.

Here are the markets that, in the past 18 months, large specs have never been as net-long, and commercials never as net-short as of this past Tuesday …

  1. Cocoa
  2. Gold
  4. Platinum
  5. Lumber
  6. Rice
  7. Soybean Oil
  8. Mexican Peso
  9. Hogs
  10. VIX
  11. Swiss Franc

And the ones that are only slightly off the extreme polarization — within the 10% percentile…

  1. Yen
  2. Cotton
  3. Copper
  4. Orange Juice
  5. 2 Yr Treasuries
  6. Australian Dollar
  7. Kansas Wheat

Expand to the 15% percentile and you pick up…

  1. Crude Oil
  2. 10-Year Treasuries Canadian Dollar
  3. Silver

Within the 10% percentile going the other way — commercials substantially net-long and specs substantially net-short are just…

  1. Natural gas
  2. Interest rate swaps
  3. 30-day Fed Funds

A couple of interesting things:

2 year and 10 year T-notes are very popular with specs, while the 5 year notes are substantially the other way — big divergence. (What — 5's an unlucky number?)

Both commercials and large specs are substantially long against small specs who have a very large net-short position in S&P e-minis.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.



 Yesterday Rocky and I had a little phone chat and we were talking about gold and looking at different scenarios. Gold was well over $1200. Then he said with the conviction of 1+1=2 — "One thing is for sure though, you will see gold back at … (pauses to check something) … $1157."

So today, I've still got the munchies from my post-colonoscopy Valium high, I turn on the TV in the kitchen and there's gold on the crawl at $1156! I just about fell off the stool.

I will now be praying five times a day towards Connecticut. If you too would like to join my new religion, here's Rocky's blog.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.



 I like to browse online for goods that I want to purchase, but I rarely buy things online. Sure, it's handy to have goodies end up on my doorstep and on occasion I'll go this way. There is a lot of downside to ordering things online that I think people should keep those things in mind. A local store in my community, chain or otherwise has several things going for it. They pay taxes and employ my neighbors. This improves my local community in a variety of ways, usually including keeping property taxes low. Without employed residents, the quality of life for everyone in my community is reduced — think Detroit, and parts of Appalachia.

In a real store I can walk in and complain, and/or get answers or action to make things right. If the product is defective or otherwise unsuitable, as is often the case by mail, the return process is immediate, and I save on shipping costs and time. Local merchants also try to maintain goodwill, which cannot be matched, even with those discount codes the online retailers try to lure you in with. Those discount codes are something else, they seem to work on every item in their virtual store except the particular item I want.

If I make a purchase online, few if any taxes go to my local community. Nobody from my town is employed, with the exception of the FedEx guy. The online company has lower margins as they primarily need only warehouse workers and customer service employees. Your local big box retailer probably hires more employees per store than many of these internet companies do for their entire operation. By reducing payroll, it saves the online retailers a great deal of money and is good business for them to cut costs as much as possible. Good for them, but what does it do me?

What do I, the consumer, get out of the internet experience besides convenience and a little saved gas? Online retailers often offer discounts of 5%-20% off retail. Cool! After the purchase is made, then the shipping costs must be added in. These costs are never what the company really pays for shipping and the shipping markup is another profit center to be managed. So the online company saves 30%-60% on operational costs when broken down for each item, and for that I get a measly few percent discount (maybe) after charges.

As the consumer, my job is to maximize what I get out of the purchase. After shipping I end up in many cases having paid roughly the same had I kept my purchase local. My purchase benefits the online company but does little for me or my community. In fact it can be considered counterproductive for me, given the loss of jobs and taxes to my local community.

All in all, I think it's best in most cases to take the time to stop by the neighborhood store if only for the exercise value. If Amazon wants to give me 35% off on the grand total including shipping then we should talk. In the meantime the money that is allegedly saved that doesn't go into my community or my pocket goes to some company outside the community. No thanks from this student. This holiday season, I'll hit Barnes and Noble, where I can have a cup of coffee, a seat, and check out all of the books I want. If you don't have a compelling reason to avoid stopping by a local store, why not give your local economy a boost and ignore those online retailers who offer you no real incentive to shop with them?

Spending money for Christmas in America equals love, and remember that when you shop. Love for family is important, but so is love for your neighbor who might happen to work at that big box retailer. Spend locally and watch the community grow.

Ken Drees comments:

When you walk into a store you may see or check something out that you didn't intend to. You may notice something featured that you never knew about. Maybe now that item you cared nothing for is suddenly appealing. You may interact with other shoppers, ask questions and find out about something even better. You might see something that you forgot that you needed. Reading a physical newspaper is similar, turn the page and suddenly you may find yourself reading an article that you would never choose from an online menu. You may even like the article. You may view a black and white display ad, that would never had appeared as a targeted pop-up on a digital version.

I went to the library the other evening, waiting for my son who was enrolled in a local library program about black bears. I just walked through a stack and found a book about Chicago underground homeless who thrive in their underground, off the books, existence. I read the book for a half hour, forgot about time — found myself thinking about totally non-typical choosable topics. I would not have chosen this book from a list, but there in the library on a random walk, I found a nugget. Digital and virtual are funnels — dropping you into niche. Stores and newspapers have their place. Libraries too.

George Parkanyi adds:

Yeah, and try haggling online…

'Fifteen dollars for a video! Fifteen? What man with a family can afford this? If I had two children maybe, but I have four. And a sick grandmother. My wife would not have s_x with me if I paid $15. A serious person might think about their own grandmother, and consider asking something more like — nine dollars.'

This doesn't even fit in an eBay feedback comment block.



It would take decades if ever to train Afghans, when many cannot read or write, to become soldiers. Our distorted views on political correctness will do nothing but get more of our soldiers killed or injured. Our generals if given a free hand win wars not the politicians. 

George Parkanyi comments:

I agree we (Canada is in this too) have to move in force on this. But it is a complex situation — too much force (excessive collateral damage) and you radicalize other parts of Islam; not enough and the existing infestation simply spreads like cancer. The Taliban are already destabilizing Pakistan. Giving them back free rein in Afghanistan will, I believe, seriously and rapidly exacerbate that, making India all the more nervous, never mind the rest of the world. India and Pakistan have nuclear weapons, so allowing the Taliban and their ilk to access even a small portion of these is totally unacceptable.

911 let the genie out of the bottle; the radical element in Islam has seen the possibilities and smelled blood. We don't have the appetite to go on suicide mission after suicide mission - they unfortunately do, and we're in their house. They are not going to give up and will quickly fill any void we leave behind - so withdrawing really is not an option, at least not a sensible one. In that respect we're stuck, and have to finish this thing. I don't necessarily agree that training locals to defend themselves is that futile or being done merely in the interest of political correctness. A key (but not only) element in our strategy must be to continue to embrace and support moderate Islam, help them with resources - both economic and military, and let them get fed up enough with the extremists so that THEY fight back to preserve their way of life (and have plenty in hand to fight back with). They ultimately are the only ones that can permanently resolve this - at least within the borders of Islamic countries.

Stefan Jovanovich adds:

The Pakistanis are in an unenviable position - their sworn historical enemy, the Indians, are richer, better armed and now closer to the Americans. In the past they could rely on the Cold War rivalry and the Congress Party's infatuation with Marxism to keep the Indians separate from the Americans; now, with the financial and military collapse of the Soviet Union the Pakistanis have no choice but to be at least civil towards the Americans and to hope that our desire to "get Bin Laden" will continue to blind us to our real interests in the region. The references to the Taliban are irrelevant; the "rebels" in Afghanistan are now no more political than the ones in Columbia. To the extent that there is a political issue now in Afghanistan, it is purely an ethnic civil war that has always existed between the Pashtuns and the Tajiks and the other minority tribes. There is no likelihood that the Pashtus will "destabilize" the Pakistanis, the majority of whom are not the Pashtuns from the hills but Punjabi lowlanders. Think Scotland in the 17th and early 18th century. For all of their struggles against the English, the lowland Scots never once made common cause with the Highlanders.

Alan's comment about generals also needs a rebuttal. All generals are "politicians"; what we want are ones who are smart politicians. The current bunch are disappointingly short-sighted; they are afraid to tell the truth - namely, that we can largely leave Afghanistan to the Afghans and simply maintain the kind of armed oversight that we have kept in the Balkans for over a decade now. The Punjabis in Pakistan will make certain that the Pashtun faction does not gain the kind of control of Pakistan's own borders that the Taliban once had. (The Pakistani security forces are now doing more of the fighting and dying than anyone else in the region for that very reason.) The truth is that the smaller our presence the more the Punjabis will be willing to reassert their own control over the area without having any temptation to return to flirting with Arab notions of Jihad. The Pakistani's long-term concern is that we not leave them completely at the mercy of the peaceful neighbors in Delhi, who have not forgotten their own recent experience with terrorist bombings or who was behind them. But, it is impossible to imagine that any of our current masters of the Pentagon would be shrewd enough to come to these conclusions. For one thing, there wallets argue otherwise. For years the Democrats have been arguing that "the real enemy" was in Afghanistan; our current generals can't say we have already won. That would risk losing what few appropriations they still hope to get from a Democratic Congress. After all, big money for a pseudo-war is better than small money for an intelligent strategy. What our country needs is to have some 4-stripers put their careers on the line about the real strategic threats (the revolt of the Admirals that occurred in the Truman Administration would be my model), but I doubt very much we will see anything of the sort. On the contrary, the present crop of egg salad warriors are sufficiently dim-witted politically and militarily that they will probably be in favor of bringing back the draft in the name of economy and "national service".



 I read an interesting post at The Disciplined Investor on the Natural Gas ETF UNG.

If you bought the “natural gas” fund assuming that it would follow the commodity’s performance you would be wrong. Since last September, in fact, UNG underperformed significantly the spot price of the commodity. This is because it follows the percentage change in the price of the commodity’s front month contract. The problem is the market is in contango. In this situation longer-term contracts are priced higher than near-term contracts and the fund will underperform the underlying commodity. The result is quite impressive and disappointing (for some at least).

I have no idea why the divergence in behavior started in September and why there is such a wide contango in gas. The post proposes two scenarios. One where "UNG will come back in line with the natural gas pricing when (if) there is a the contango spread reduces to historic levels". The second where as the fund is "too big and because futures roll every month, there is no way that this can ever catch up".

Quite interesting example of product "inefficiency".

George Parkanyi writes:

I’ve been trading in Canada a similar ETF called Horizons BetaPro Natural Gas Bull+ ETF (TSX:HNU) – a double-long ETF. That’s also been in an abysmal bear market, having completely imploded after the commodities collapse in the second half of 2008. If you’re buying and holding a double long or short ETF (much worse for the short ones), a long one-way move against pretty-much wipes out the value and you will never recover if you bought at the higher end. However, for an active shorter-term trading strategy, you can still get very good moves out of these. HNU rallied from about $8 to $17 in September and October just recently. That’s a pretty good move if you can catch it. (Although its back down around $9 again now.)

You are right about the contango. As soon as they roll into the front month, it immediately goes down. Keep doing that every month… I have a large gas weighting in my portfolio and that’s my main concern as well.



 The best books on deception are the best books about the market. The best book about the market according to Martin Shubik is Ben Green's Horse Trading. I would add that there is a good section on deception in EdSpec. And I would point out that a systematic categorization of deception is essential and this is available in the ecology literature following J.R. Krebs's citations on deception in various species, especially monkeys.

Adam Robinson says:

Of course, as I've eulogized no end, The Farming Game by Bryan Jones also has much to say on deception in the buying and selling of livestock, and does so with wit and insight.

Alston Mabry recommends:

I like A Treasury of Deception: Liars, Misleaders, Hoodwinkers, and the Extraordinary True Stories of History's Greatest Hoaxes, Fakes and Frauds by Michael Farquhar.

Russ Herrold re: The Farming Game:

I purchased The Farming Game on your recommendation and enjoyed it.  It was a bit dated as to price examples (they look like a series from the mid 1960s to the mid 1970s), but the underlying principles remain sound. The book starts a bit slowly, setting up some stereotype character sketches, and then strings them together a bit, a bit later in the book.

Kim Zussman writes:

Here is my Deception reading list:

Stocks for the Long Run, Siegel
Irrational Exuberance, Shiller
A Random Walk Down Wall St., Malkiel (efficient markets)
Beating the Street, Lynch (inefficient markets)
Trade Like a Hedge Fund: 20 Successful Uncorrelated Strategies & Techniques to Winning Profits, Altucher
The Intelligent Investor, Benjamin Graham (value)
Common Stocks and Uncommon Profits and Other Writings, Fisher (growth)
Futures: Fundamental Analysis, Schwager
Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications, Murphy
Contrarian Investment Strategies - The Next Generation
, Dreyman
Trend Following: How Great Traders Make Millions in Up or Down Markets, Covel
Momentum Stock Selection: Using The Momentum Method For Maximum Profits, Bernstein

(eigenvector = deception)

Vince Fulco adds:

To Dr. Zussman's excellent list, I would add another one very much off the radar screen. In Hostile Territory by Gerald Westerby is purported to be written by a former Mossad agent and profiles his adventures in Africa, the ME and Europe.  I consider it of the best books written on the manipulation of human perceptions, mental flaws and frailties.  I try to read it once a year to condition myself to avoid the traps. It is right up there with Cialdini, but the dynamic and life threatening challenges faced by the author are much more entertaining while providing extraordinary lessons on the subtleties of behavior.

I found the walk through on structuring a diversified [here: agri-]business very approachable, and anticipate lending it out to give context for further discussions to some I work with and mentor.

Jeff Watson comments:

The best book I ever read on deception was called The Game by Neil Strauss. This book is the holy grail for pickup artists, but the lessons easily translate into all areas of life from sports to trading to games. It was very entertaining and well written, znd Strauss gives point by point instructions on how to manipulate, deceive, obfuscate, hypnotize, and control your opponent or object of desire. Strauss takes time to delve into the science of how to pick up women, and believes in rigorous testing and the book surprisingly isn't as misogynistic as one would expect.

Bruno Ombreux writes:

One absolute classic is Arthur Schopenhauer's The Art of Controversy. It also goes by a different title: "The Art of Being Right". Here is a Wikipedia article with the full list of stratagems. And it is available for free at Gutenberg.

Kim Zussman writes:

The most respected investment books of the 20th century all have eigenproblem of hidden utility. Even when authors are intellectually honest, it's hard to understand how they could escape distortion induced by rewards.

Some are selling their strategy (read my book but invest with me), talking their book (I'm deep into growth or value, so please buy these), pandering the academy (status as published professor), making a career of teaching how to trade, increasing status, creating a legacy, etc. This is similar to the more general, "how many friends do you have who don't profit from you?"

Bruno Ombreux responds:

I haven't read all the books in Dr. Zussman's list, but among those I've read, I think two are not deceptions:

A Random Walk Down Wall St., Malkiel (efficient markets)

Most investors would be better off reading this book and stopping there. Also:

The Intelligent Investor, Benjamin Graham (value)

I haven't finished this book because after the first two chapters I realized it was just a watered down version of the first edition of Security Analysis, from the same author + Dodd.

Security Analysis is an excellent book that makes excellent points for the era it was written in. Their technique of looking into detail at companies accounts is similar to detective work, which itself is an application of the scientific method. In my opinion, this kind of financial analysis is a valid way to proceed.

Nigel Davies comments:

The nature of deception may be much deeper than many authors make out. I would say that the origin of all deception is in fact self-deception and that the supposed 'deceiver' is doing nothing more than moving into the vacant space within our understanding.

George Parkanyi writes:

 There is a saying.  "Fool me once, shame on you.  Fool me twice, shame on me."  To me it's just a given that traders, particularly those trading in size, use techniques to mask their intentions.  And sure, those that have knowledge of them, run stops.  That's just one of many influences that make financial instruments wiggle on a day-to-day basis, and you would not only have to sort out what is "deceptive" behaviour vs stupid vs herd behaviour, but whether the deception was or was not in your favour.  Unless you have a large network of people you can call on the inside that can give you information that helps you take the temperature of a given market, I don't see the point of trying to personify this market move or that market move as "deception", especially in a big liquid market that is essentially a non-linear system subject to multiple influences. If there's a pattern that you detect and can exploit then so be it.  But does it matter if it is "deception" vs. sentiment or just a big whale moving through?

Don't get me wrong. Reading about deception is certainly interesting. As a Scout leader, Arthur Baden-Powell's role in the Battle of Mafeking during the Boer War is an excellent example.  In fact, BP's entire early career was based on deception.  But I personally don't see the value in getting overly concerned about deception in the markets, though I understand that others do.

I think if you have a general sense of the day-to-day character of a market that you have researched and trade regularly, and do some research to try to anticipate macro influences on that market that might cause it to trend, the rest can be handled with money management.

Stefan Jovanovich replies:

Baden Powell's energy as a commander was probably the decisive factor in having the deception succeed:

From British Battles:

Baden-Powell conducted the defence of the town with great energy and resource, leading the Boers to believe there was a larger garrison than was the case. In November 1899 Baden-Powell launched a series of raids on the Boers lines that caused him some casualties but made the Boers wary of the garrison.

Initially the Mafeking garrison had no artillery. Baden-Powell improvised various items to look like real guns and trains, while engineers manufactured a gun, known as the "Wolf", from a length of steel pipe. The Boers used the 2 two inch guns they had captured from Dr Jamieson to bombard the town. Dud shells fired from these guns were reworked and discharged at the Boer lines from the Wolf. An officer found an old muzzle loading naval gun serving as a gate post. This gun was christened "Lord Nelson" and drafted into service. Dynamite grenades were manufactured and thrown at the Boer lines and a small railway line was built across the town.

In sharp contrast to the indolent Ladysmith garrison, Baden-Powell kept his men constantly on the move, raiding the Boer lines and keeping the besiegers on their toes.

Scott Brooks adds:

Atlas Shrugged not only speaks of deception, but the deceivers are open about their deception. The deceivers/looters are like gangsters who are in complete control in kick sand in the faces of the producers, daring them to say A is A and damning them if they do, all the while fooling the masses with their A is B pablum. The parallels to our world today are stunning.



T o t U SThe Tomb of the Unknown Soldier covered in red was quite a site to see, almost completely buried in the little red poppy pins that everyone wears leading up to Remembrance Day in Canada every year. Legionnaires and veterans organizations distribute them to fundraise for Veterans. In the bright sunshine of a crisp and beautiful November 11th morning, they truly looked like the real thing. Why November 11th? Armistice Day in 1918, the 11th hour of the 11th day of the 11th month, when World War I finally ended. It is at this moment every year that we all stand for one minute of silence to remember those that gave their lives. And the poppy is now the powerful and widely recognized symbol of Remembrance immortalized by John McCrea’s beautiful poem “In Flanders Fields”

In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.

We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved and were loved, and now we lie

In Flanders fields.

Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.

Our poppies were on that tomb. Shortly after the final wreath was laid, and before the general public was allowed back onto Confederation Square, each of us of the 63rd Ottawa Scout Troop stepped up, one at a time, laid our poppy on the tomb and saluted, as had the military personnel before us. The kids looked great doing it too, each having their own special moment at ground zero of the Remembrance Day ceremony. When we laid down our poppies, there was just a smattering of them, like the first fall leaves. After the public was done, the Unknown Soldier was warmly shrouded in both poppies and love.

Before that we started the morning by meeting at our agreed staging point, where, in short order, we invested 3 Scouts, Nicholas M, Dylan, and William, who had missed investiture night the week before. (H1N1 is going around the city and many were off sick.) I told them it was a “field promotion”, and had them recite the law, promise, and motto directly under the statue of a large bear on the Sparks Street mall. As official Scouts, they then eagerly jumped in with the others to distribute programs to the crowd. This is part of our role in the ceremonies every year.

After exhausting our supply of programs, we crossed the security cordon for the last time and took our place on Confederation Square, about 30 feet from where the Prime Minister, the Governor-General, and Prince Charles, currently visiting Ottawa, would take their place before the Tomb of the Unknown Soldier during the formal part of the ceremony. After the minute of silence, the 21-gun salute, anthems, a couple of commemoration speeches including a beautiful one by a local rabbi, came the laying of the wreaths.

When I had arrived at 9:30 AM two of my more enterprising Scouts, Alexander and James, were already across the street in the square, and had somehow arranged themselves to be involved in the wreath-laying, despite not actually being in the plan. So throughout the ceremonies they stayed in a separate area from the rest of us amongst all sorts of dignitaries, with the officially-selected Scouts. As it turns out, it worked out. Although two other Scouts laid the wreath for Scouts Canada, Alexander somehow ended up laying the wreath for the Jewish National Congress, and James a left-over wreath from an organization whose representative failed to show. Now these two are always scheming something, and to their credit, I don’t know how they did it, but they ended up hob-nobbing with the Mayor of Ottawa Larry O’Brian, the leader of the New Democratic Party Jack Layton, and a number of foreign ambassadors. Alexander even got a wink from the Prince of Wales. It so reminded me of the Woody Allen movie Zelig, where the main character keeps turning up fortuitously in the middle of major historic events. (This device was also later used in Forrest Gump.) At our luncheon afterwards at Eggspectations (all eggs, all the time) I turned to Alexander and James and dubbed them Zelig 1 and Zelig 2.

Others in our party who attended were Scouter Steve, his friend Brian, his ex-boss Scouter Cal with daughter Erin, Scouts Tyler, Brandon, and Nicholas P (my son) and Venturer Thomas P (also my son). It was a very memorable Remembrance Day on many levels.

John de Regt comments:

I was in Montreal today. There were very many poppies in lapels, and this in a country not at war for its existence for more than 200 years. We all need to wake up and recognize the good fight and the very real enemies around us.



I am in awe of how much a group can accomplish, if there is one dedicated member who works hard without protest nor attention need. People flock to help him out. I see it frequently in markets and our Scout troop. It also works in the opposite direction, unfortunately. I wonder how to quantify that individual… Atlas if you will… who drags others along by strength without yelling. It's also in the markets, but I can't get a handle around how to quantify the lack of need for attention. Singleton played this game masterfully at Teledyne. Yes there are generals, but how do you define the majors that actually embarrass them (and others below them) into bravery?

 George Parkanyi responds:

Why would you even want to quantify such an individual? Quantifying andcounting isn't everything. Some people are just a life force, and you knowit because you can't help but recognize it as soon as you meet them or seethem in action. These people are so effective because they point the way to possibility,fire the imagination, and scoff at obstacles as mere details. And othersthen follow because who wouldn't want to be part of something that isunique, infused with energy, and helps define them in some special way?Everyone wants meaning in their lives. Show people how to create it andthey (well at least some) will rise to it. Also, not everyone has a clearsense of where they want to go, or if they do, haven't figured out how toget there. Give them an interesting destination, and/or a plan, and they'lloften be more than happy to throw in time, effort, and resources and goalong for the ride or even better, adventure.



What must have been the attributes of some of the exceptional achievers who have undergone, survived and then thrived away from persecution? Was persecution just a common co-incidence or did it induce certain specific abilities in these achievers?

Extensions of this core query naturally arise as to what market behaviour is highly persecuting in its nature and how would it than affect the persecuted traders? One of the potential talents of a market at inducing persecuting behaviour is perhaps the density of gaps or a larger tendency for price jumps. Hang Seng China Enterprises Index (HSCI) comes to mind as perhaps one major contract that has more opening gaps than any other in the world. This imagination doesn't seem to be related to improving the abilities of traders by way of punishing them. So, what kind of market features tend to be extremely tough on its participants but still bring about the best out of them?

But most importantly, first to decipher the specific attributes of the persecuted that turned them into achievers.

George Parkanyi says:

I don't know much about persecution and the markets, other than most of us traders probably feel quite persecuted, among other things, when what seemed like a good idea at the time goes so horribly wrong. But my first guess as to why Hong Kong gaps a lot is time zone. The Asian markets, like others usually follow what goes on in New York. If you're down, oh for example 250 points here, odds are you're going to start the following day in Asia with a free haircut at the opening bell.

What kills me still is how the commentators on BNN act surprised when the Asian markets get drubbed after a bad day in New York or do well after a good one.



A while back I pondered how some of the Beatles songs might have worked out differently had the lads been bitten by the trading bug. Would they have written:

All You Need is Cash

Don't Mark Me Down

When I Saw Her Shorting There

Day Trader

Hey Crude

Bet it, Lee

Dear Prudent (Man)

Penny Stock

Sgt Peppers Lonely Shorts Club Band

She's Leaving Home (Depot)

You've Got to Hide Your Dogs Away

I Am the Wall Street

Norwegian Wood (a good day on the Scandinavian bond desk)

Hello, Good Buy!

Maxwell's Silver Outlook

Backing the USSR

With a Little Help From My Friends (more recently the Galleon company song)

The Long Unwinding Debt

Get Black (popular with compliance departments)

Here Comes the Stun

RICO Raccoon

Can't Buy Me Bonds

Help! (works either way)

Broker You're a Rich Man

I've a Got a Feeling / Hurl (medley)

If It Fell

Sum Together (also known as The Settlement Song)

Act Naturally (also known as The Audit Song)

Things We Shed Today

Everybody's Got Something to Trade Except for Me and My Monkey

Helter (Tax) Shelter

When It's at Sixty-Four

We Can Work It Out (margin call set to music)

You Never Give Me Your Money (second, more urgent margin call set to music)

and finally …

Fool on the Till



ScoutsJust got back today from our annual fall area Scout Camp, this time at the Foley Mountain Conservation Area on the Rideau Lakes.


And things turn out better. The forecast was cold, and rain. Last year was all rain, all the time. I felt sick on Friday and, without being able to find a replacement leader to cover our 2-adult minimum, was about to cancel the camp. But I decided to medicate my way through whatever was coming over me and just press on. We got a little wet on Friday, but the weather dried up Saturday afternoon for the outbound hike, and we have lovely sunshine on Sunday for the inbound. And it turns out all I ended up getting was a cold, and I managed fine.


On the outbound hike on Saturday, one kid in particular forged ahead if the rest of us by himself. It struck me that he was not doing this out of competitiveness, but sheer curiosity. He just wanted to see, almost urgently, what lay ahead. On Sunday morning, one of the kids came to me and gave me a plastic bag to throw in with the rest of the garbage. The contents looked very unfamiliar, and for a split second I thought it was vomit. I asked him what it was. He said it was his pillow. The day before he had been foraging around in the milkweed and had asked me for a plastic bag. I thought nothing of it at the time and gave him one. Well, this is what he did with it. And it was not a bad pillow at that. For the final lunch, to get us out quickly I just boiled water at the base camp to give the kids a quick single-serving of ready-made noodle soups. All the utensils were already packed, and no-one wanted to dig into their packs for them, though a few finally did. When some of the kids asked me how are we going to eat the soup, I bent down, picked up a twig, snapped it in two, grinned, and said "Chop-sticks!" And began to eat my soup. Well the kids all thought that was great and entertaining and continued with whatever they were doing, except one, who called out "Look Scouter George, I'm using chop-sticks!" It was the same boy as the pillow-maker and our uber-hiker. Some people, even at a very young age, just make you sit up and take notice.

Oh yes, another improvisation, this time by my co-leader. Morning breakfast was oatmeal, the hot drink (to get warm), a big vat of hot chocolate. I was about to start boiling water for the oatmeal as well, when he said "Why not just use the hot chocolate in the oatmeal?" Why not indeed? "Hey kid, come here, try this." He loved it, and so did the rest. Another innovation of the 63rd Ottawa (which immediately virally mutated when one of the kids also added some of the leaders' left over coffee to this new successful combination).


Hiking outbound, the call came in. Troops, the road to the far camp has been washed out (remember the previous day's rain), and we can't get your gear to the far camp site. It looks like you'll have to return. We discussed it with the other two troops hiking with us over our lunch break at the 3.5km point, and decided to leave our packs and go see the "Act of G_d" (I did build it up somewhat) anyway. We finished our lunch first, and off we went, just our troop. It was a lot further than originally advertised by the organizers (they had misread the map), but 3km later we arrived, and sure enough, a flooded stream was pouring over the road with foot-deep water. We then started back, and passed the other troops still on their way out. After a few quick quips to keep up their morale, such "makes Niagara Falls look like a big waterfall", we continued back, and they on. Well, by the time we were almost back to where our packs were in the woods just off the road, we learned from the organizers driving by that the water had dropped and the 36th had somehow crossed the stream. The far camp was on again! But, in fairness, as the kids had already hiked the total distance they were supposed to, we drove them and their stuff to the campsite - a farmer's field. But for a moment, they had the experience of what can happen when the things you take for granted fail.


We all had to be ferried to the far camp in two runs because of numbers. So while lying around by the side of the road, to both fill the time (and actually assess the damage), I announced "Right men, foot check - shoes and socks off on the double!" This surprised them a little, but stirred all sorts of conversation and laughter as I went from one foot to the next, bandaging whatever blister needed to be bandaged, and even loudly pondering an amputation or two. Although the repairs went a little further than expected when we noticed that one of the boys had been sitting in a major pile of (fresh) animal droppings the whole time. That required using up quite a few antiseptic wet-wipes before we were truly car-worthy.


We set up and took down camp twice this weekend, and hiked 20km - a good portion with full packs. Most of our Scouts were first-years, who normally just stay at the base camp for this particular event and don't do the hike part. Would they do it again? "Y-E-E-E-S!"


I ended up with a splinter in my index finger, which became increasingly annoying. With a pin from the sewing kit I was able to break the skin, and then with the miniature tweezers cleverly embedded in this particular flavour of knife, I was able to pull out the splinter. I cannot tell you the number of time a Swiss army knife has solved one of life's many little problems.


When we do a camp, we collect the registration fees from the parents, and then use the cash to pay for supplies and the site fees to the organizers (for the bigger multi-troop camps). This is all very efficient. The payments are settled, the crests and ribbons as may apply for the participating troops distributed to the troops and then to the youth, and at camp's end, the books closed. No lingering obligations. For there is always the next camp. Where you have an event-based, or a commodity transactions, it made me think about how useful it is to just settle everything then and there - cash - so you can move in with no further overhang. Compare that to credit-default swaps, 10-year warranties, 30-year bonds, and unfunded pensions and government programs. How much unnecessary complexity (that needs to be tracked and managed) have we, over time, brought upon ourselves?



I noticed the last couple of days when riding to work and back home again that no matter what the direction, I always had a head-wind when crossing the MacDonald-Cartier bridge over the Ottawa River. The curved bridge has quite a rise to the half-way point, and it takes much huffing and puffing when the contra-winds blow. Sometimes I have to gear all the way down to second gear from the normal fifth or sixth to fight my way up the rise, and even pedal not to lose speed down the other side. This is frustrating, and on these days I grumble and curse.

But when the winds are with me, as they have been in the past, each pedal stroke surges you forward, and over the rise you begin to fly like an eagle down the other side.

For a while now my trading account has faced a strong head-wind with little respite to rest weary legs. The drawdown is not large, but the grind feels relentless. And although the system is mostly passive, the lack of success feels like effort, weight, resistance. Thankfully lower gears (low leverage and spare cash) keep me moving and leave me with resources to make it over the rise. I persevere because I know the wind will change, and for a time the weight will be lifted, and I may even fly down the other side.



SunspotsIt is likely that the Sun is entering a cooling period of 20 to 30 years according to some scientists. The current sunspot minimum is the longest and most severe in roughly the last 100 years. The NASA site has more on this.

We hear dire predictions that the Earth's temperature may drop 1 degree C over a certain number of years. The question arises as to whether this is a normal fluctuation in the Earth's temperature or not. Scientists often speak of the Solar Constant. It is the mean energy output of the Sun. In fact it only varies about 1% up or down. This doesn't seem like a large deviation. Based on an average room temperature of something like 20 degrees C this sounds like it would mean an average temperature variation on Earth of about .2 degrees. Clearly the global warming prediction are much larger that this by about a factor of five. Most global warming proponents simply ignore the variation in the Solar Constant as too small to be relevant.

All such thinking as the above is based on a simple numerical fallacy. If the Earth was a rock in the middle of space and not near any star such as our Sun it would have a temperature of about absolute zero which about -273 degrees C. Almost all the heating to about 20 degrees C is due to the Sun's energy hitting us. Thus the Sun generates about 500 (~273 + 20) degrees C of heating on the Earth not just 20 degrees. But when we remember that the Solar Constant can vary by 1% during normal fluctuations we realize that these variations can cause 3 degrees C worth of climate change, having nothing to do with man made causes. Suddenly the dire predictions of 1 degree cooling seem relatively modest compared to the natural cycles of 3 degrees. This calculation is consistent with the fact that the highest temperature on record over all the Earth was 1998 and it has been cooling for the last 11 years.

Then the question for speculators is how to trade these fluctuations. If one believes we are in a cooling cycle then buy land and stocks in Southern areas perhaps even South of the US. Certainly one would consider selling the same in Northern latitudes. If one believes that the warming proponents are right then buy Northern land and Canadian stocks.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Canadian trader George Parkanyi responds:

I've been monitoring the sun-is-cooling chatter as well. Here in Canada, anecdotally it certainly "feels" like cooling. We've barely had to use our air conditioner the past few summers - and Ottawa used to have very hot, muggy summer days in August and July. None this year.

If we have a 3 degree dip in the average temperature of the earth, it's going to get very uncomfortable. That may be mitigated somewhat by warming effects from greenhouse gases. However, the C02 is causing other problems, like raising the acidity of the oceans, killing reefs and plankton etc. Carbon emissions are not just a climate-change issue. They're also a pollution issue.

As to whether this is tradeable? Long-term perhaps, because the changes are slow, but which scenario wins out? And how will you be able to tell which climate effect is temporary, and which part of a long-term trend?

Cooling will pressure agriculture, as might excessive warming (droughts). Agricultural commodities could become an either-way bet. Either scenario would also force significant infrastructure changes/adaptations. Basic materials?

With cooling, energy would be huge - carbon or otherwise. Natural gas will be interesting to watch if we have a colder winter than last year. Alternative energy would be a winner as well, less so biofuels because of weather vulnerability. Nuclear could become quite important again out of necessity.

Certainly a lot of food for thought here.

Tristram Waye replies to George: 

Thanks to global warming you and I get a chance to live and travel this land. Canada was covered by ice some 10-18 thousand years ago. The great mountain valleys and bountiful fresh water are lush nutrient rich plains are a result. I am thankful for global warming myself. Especially when I take that boat cruise across Waterton Lake to Goat's Haunt, Montana. 

I think the problem with the debate on global warming is that it is one-sided, myopic and short-sighted. We live 90 years and therefore we lack the perspective of thousands or millions of years. Where I am sitting was covered with many feet of ice at one time; but its melting seems unrelated to certain large vehicles, cow exhaust and people in general.

The idea that warming is bad is unproven. The idea that more CO2 is dangerous lacks credibility. The belief that men can change the temperature of the earth presumes that we can even get the weather forcast right three days in a row, and five days out. One has to laugh at the concept of climate change, otherwise known as the four seasons. Even Vivaldi knew about that.

The notion of man made global warming sets man apart from the planet he lives on. It presumes that we are not of the earth, but gods of it. Tsunamis destroy villages and lives. Hurricanes can not be predicted, eradicated or steered beyond harm's way. And yet there are those that believe we can change the climate of the whole world when we cannot even predict it five days out? Who should decide the optimal climate for the world? Imagine that debate at the UN. If we are cooling, will we receive subsidies for driving F-250s? I can't wait to hear that answer.

The investment thesis here should be focused on the premise that too many people and governments are on one side of this idea, and have sold their souls to it. There is no turning back for many of these ideologues.

A cooling trend will badly damage many careers, organizations and individual reputations. Perhaps all of the money currently being wasted on a natural process will find better uses elsewhere. Perhaps they will turn water into wine, or get blood from a stone for their next great cause to save humanity.

Craig Humbert remarks:

Sunspots have picked up the last two weeks, so maybe this is the upswing predicted for the last three years. This is a really interesting year with the Arctic cooler than normal due to the volcanic activity in Alaska and Russia. The tropics are warmer than normal because of El Nino and increased sunspots would presumably add to that. Iben Browning talked about this years ago saying the clash of these extremes whips the jet stream up and down like crazy. El Nino years normally are good for our grain belt but this year should provide plenty of excitement.



What is the meaning of this long, long leg, low volatility but directional, with many up consecutive days? Maybe we have to see it as a sign of decreased strength to move to the upside. Maybe it is just a market where bears are still fearful to step in. The down gap of Monday was another lost opportunity for a correction. When will it come, what event will trigger it?

Steve Ellison laughs:

The correction will begin five minutes after you decide you can't stand it any more and buy at market…

George Parkanyi urges caution:

Well, if we muddle into the next earnings reporting quarter in October, the bar was so low last year that we'll probably see more "surprises" to the up-side. I'm not sure you want to be short that. I'm not sure I want to be short that.

Vince Fulco reports:

Sitting at a fancy bar/restaurant I rarely frequent here in the Midwest, have had the chance to listen to ancillary conversations at other tables. Helps to have been on a trading desk with two phones to ears while talking to a third person besides. All the talk is about the dreck stocks– AIG, FNM, BSX, et al. I feel like I am back in 1998 when the 'concept' stocks went gangbusters while liquidity remained too loose. I hate concept stocks like the plague but you know you are getting old(er) when the cycles keep repeating.



 This past Friday in my 4-team men’s recreational over-30 soccer league, we wrapped up our round robin play to set the positions for the “final”. As we were the top team in the regular season (Brazil), we also ended up winning the round robin with a possible 7 of 9 points. And we managed to do so without scoring a single goal. How? One of the weaker teams played us to 0-0 draw, and then the next two teams (including our arch-rival Argentina who we now play on the final) defaulted for lack of players. As one of our opponents lamented - “Man those guys are good at showing up!”. And that got me to thinking about … showing up.

Now in this situation the point is not so much the seven points, given that six of them weren’t really earned on the field, but rather that in some situations, simply just participating creates opportunity. We have a berth in the final because enough of our players were committed enough to come to the field and play, and in this case just that was enough. (Personally, I don’t think the voo-doo dolls made any difference.) For so many situations in life, if you don’t show up, “put yourself out there”, or get into the game, the chance for opportunity to present itself is guaranteed to be zero. It reminds me of the joke about the man who keeps praying to God to win the lottery until finally in frustration God answers “Could you at least meet me half way and buy a lottery ticket!”. Sometimes it takes years and painstaking effort to make headway, but sometimes also it can happen in minutes – as in the case of the field promotion. Now you don’t necessarily have to go into battle, but in business for example you might advance because someone suddenly leaves, or you’re the only one around to deal with some unexpected crisis. By sticking it out and continuing to “show up” – both for the same things and for different things - you increase the odds that one day you’ll be in the right place at the right time.

I think that what typically holds people back from “showing up” is often fear, habit, or just simple loss of interest. My experience has been that when I forced myself into a situation I expected not to enjoy, of which I was afraid, or that I would find boring, more often than not - by far – the surprise has been to the up side rather than the down. I’ve found it’s not always so bad to jump into the unknown. (A fun book to read along these lines is “Yes Man”, by Danny Wallace. I highly recommend it, especially for pessimists.)

So what then would be the trader’s version of “showing up”?…

Anatoly Veltman writes:

"None have a gift like Beethoven - trading is a learned skill" Matt Johnson once said…; "the market tells me what to do, and when to do it, all I do is listen and follow."

1. Gold was mired in a tiny range all summer; the chart clearly broke out pre-Labor Day. The most widely-traded spec instrument EUR had carved out a similar chart-pattern; but was held back by the NFP report. Tens of millions of EUR traders were given a chance to prepare for Tue action — did they? (Same, of course, was true about daily CHF chart). I want to point out that trading Beethovens often see much more and much sooner than "efficient markets."

2. In summer of 2005, following post-Katrina Sunday night's "regular opening" fiasco (NatGas gapped 20% and trade was "disorderly") NYMEX announced an unprecedented 10am early open for Sunday following widely-anticipated Rita's land-fall. Pre-opening orders "matched" to what appeared to be little-changed (!) opening print: that's for a contract that just doubled (!) in anticipation of hurricane damage — while Sat reports clearly indicated Rita's miss (!) Seconds before 10am open, I entered offer at $12.299, right through the bid, and got a partial fill. My sale at $12.299 remained that night's high, and at regular 7pm night open the contract was changing hands 4% lower on good volume! To this day, I'm ashamed for participants who didn't show up at 10am that Sunday — although, who knows if I'd get to sell any more size if they did…



P o HOn a recent vacation to Hawaii, we explored some of the history and culture, and ended up at Pu'uhonua o Honaunau, now a small and beautiful National Historical Park on the Big Island that recreates a once-special refuge in the Hawaiian culture. The purpose of these refuges was twofold: sanctuary, and absolution. There weren't many of them in the islands, but as long as you could find a way to make it to the refuge without being captured or killed, you would then be safe, a shaman would spiritually absolve you of your "sin(s)," and you could return freely to society.

I find it fascinating how cultures build in these special exceptions — places where the usual rules don't apply, and formal mechanisms for getting away with breaking serious taboos that otherwise would be punished, or being relieved of obligations. Roman Catholics have the confessional and the sanctuary of the Church, ancient Greek actors could ridicule kings with impunity, the Japanese don't hold against you anything you say while drunk, the neutrality of certain nations, e.g. Switzerland, is globally respected, west coast Indians had potlatches to cancel debts, and even US presidents issue arbitrary amnesties at the end of their terms.

It seems societies need a symbol to remind them that sometimes it's best to just forget it and move on.

I guess the contemporary Wall Street equivalent would be the $33 million SEC settlement…



The period from the decline and failure of the Second Bank of the United States [1833 to 1841] to the discovery of gold in California [1848] is usually written about as a magnificent process of Westward expansion.  The reality was homesteading beyond the Ohio country slowed to a trickle.  Only the most desperate people, like Lincoln's parents, kept moving West; and only the most desperate people from abroad – the Irish from their famine, the German and other political refugees from continental Europe after the failures of the revolts in 1832 — came to the United States during that period.  Unlike the Great Depression that began in 1930 the slump of the 1840s was largely limited to the United States.  Its cause was the collapse of the states and cities' international credit-worthiness after the Panic of 1837 and the shriveling up of domestic credit. The inability to borrow or get actual money explains the extraordinary fever that surrounded every "discovery" of gold during the period and the sense of almost divine intervention that greeted the realization that the California discovery was the greatest in history and – thanks to the Mexican War and the Bear Flag Revolt — it was all ours. The discovery at Sutter's Mill literally allowed the U.S. to get out of hock.

G_d may look after fools, drunks and the United States of America, but He may be busy with other things these days.  In 1929 in the U.S. the ratio of debt to GDP was 190%; in 2000 it was 275%; in Japan in 1989 it was 270%. The pattern has been for the ratio to increase when the credit/speculative bubble bursts and economic growth declines. In the nine years after the height of their bubble, the Japanese saw the debt-to-GDP ratio increase to 350%. In the U.S., since 2000, the ratio has increased to 375%. The question isnot whether the U.S. will now share the Japanese experience of weak income growth.  That seems certain.  What one has to ask is whether the next decade of bust will have the productive result of lowering the overall level of debt to national income.  The current debt to GDP ratio in Japan is 110%. The Japanese have been persistently criticized for not resolving their problems by allowing failures to be liquidated: but I wonder how likely it will be ten years from now that we supposedly hard-nosed Americans have done more to write down assets to their market values than the Japanese have done in the last decade.  Where will we Americans find the pot of gold at the end of the debt rainbow this time?

Gregory Rehmke explains:

It depends what debt is used for. High-yield bonds funding an array of innovative companies in the U.S. might reasonably be purchased by folks overseas looking outside their stagnant economies. Garage start-ups funded with family loans and credit cards increase debt, but shouldn't be mixed up with consumption-debt used for boat-loans, car-loans and loans for vacations. And given that Congress has made it nearly impossible to fund new companies with IPOs, financial markets search for ways to fund start-ups with debt instruments. Of course the easiest place to throw debt was at home and commercial mortgages. As that disaster continues to unfold, will debt now fund new firms that boost productivity by inventing better technologies and products?

George Parkanyi responds:

If it were up to the west-coast Indians, one ripping potlatch would sort it all out. "OK everybody — fresh start tomorrow at sunrise. One loincloth each!"



VestsNow before the more weary and jaded of you parents out there start high-fiving, it was only laser-tag at our local Laser-Quest. It was my son Tom's 15th birthday, and I took him and his friends out to one of their favourite past-times. Since I had bought a package for eight, and we didn't quite have eight, I forced myself to take one of the spots.

The way it works is that multiple groups go into the play area with vests and lasers. The lasers score a hit when they tag one of the flashing sensors on another player's vest. At this point you feel a vibration and you are down for five seconds — you can neither shoot or be shot. A computer tallies all the hits, right down to exactly who shot whom, how many times, and on which sensor. The hits are scored and at the end of the game, the rankings are displayed on a monitor, and each player is given his own score-sheet with their results. At the beginning of each game, each player is assigned a code name of his own selection, which is then loaded into the laser gun with an activation key. Since my first pick "Pooh Bear" was taken, I opted instead for "Hannibal" … What?

The kids, especially the younger ones, just like to run around a lot, often in packs. Knowing this, my approach is basically to lay low and snipe; just wait for them to come to me. A cluster of kids is a "target-rich" area, and you just shoot into it and can score a lot of points if you can keep firing without pause. You hear a lot of "Awwww"'s when they get hit. (Although the downside is that there are a lot of them, and you'll likely get hit as well as they overwhelm you). I like to set up high on the outside perimeter facing inward with a good view of at least two corridors, and also down into the middle of the play area (there are two levels, so its a three-dimensional game). I had a great spot in the first game, just beyond an intersection (good for surprising) and looking down a zig-zagged corridor with diagonal in-croppings that forced player to slowly zig-zag down it rather than quickly go straight. But there was enough of a gap between corners that by steadily firing down it, you hit most of the players trying to go through — either coming or going. I did have a corridor behind me and knew I'd be hit (and was) if someone came up from behind, but there was much more activity in front of me, so I scored hits many more times than I received. Out of about 35 players, I came in second. (Another adult came in first, so its not just me.)

In the second game I was more mobile. Although I scored a lot, it wasn't as many as the first game, and I got hit more often. Even so, I still managed to come in third. There was one group of three little girls, maybe 8-9 years old, that I bumped into enough times, that eventually when they saw me, they would yell "It's him! It's him" and go screaming off in the other direction. So I'd chase them little bit for effect and shoot their rear sensors. I think I scored a lot of points off those poor kids. (And I think one of them was Pooh Bear).

I think I earned a new respect from Tom and his friends. "Why does your dad call himself Hannibal?"

Relevance to the markets? When we were milling around afterward comparing scores, the kids asked me what my hit ratio was. It was 8% in the first, and 7% the second. They were wondering how I got such a high score with such a low hit ratio. I explained to them that it was sheer numbers. When you saw a target, your chances improved if you kept on firing rather than trying to carefully aim and just squeeze off singles. The market analogy would be figuring out how to limit your losses (accepting getting shot occasionally from low-traffic areas), determining your opportunity and edge (concentrating focus and fire on the high-traffic areas), and exploiting the advantage to its fullest regardless of win percentage (firing frequently regardless of the many misses). It worked for this type of game, and would also work for a market trading style designed to exploit a statistical advantage where turnover increases overall profitability.



Most sports games are fought to win early and decisively, given a choice. This painfully obvious comment alludes to the fact that the middle game and end game can thereby be played with less risk for the winning side. However, this must be measured against the opening winners desire to play all out throughout, just with less overextension, not merely maintaining the advantage. Don't let up on your capacity or talent. Some games and teams will require a full force stance, depending on the point lead and in order to play well. What I suggest is not to rest on a gain. I only suggest to reconfigure the risk/reward ratio. Otherwise, playing a completely defensive strategy will destroy the advantage. Further, risk/reward can allow a highly aggressive stance and be defensive by inducing your opponent to expend more than usual amounts of energy and exasperation trying to defend offputting attacks. Inducing is aggressive. These attacks will accompany random, not constant defensive moves on the aggressor's part, allowing just enough of a hedge and freeing up energy from an overly or hardened defensive posture to a game of overall nimbleness, less probabilistic and freeing up energy to explode at will. Thus, the risk/reward ratio is not all about chasing points, but allows for a game whereby opposing points can be thwarted. This alleviates the need and obvious static (stasis?) energy of a defense only strategy, thereby giving the opponent one's game plan.

Entice your opponent to play your game: To play drunken martial arts, which requires enticing your opponent to engage on your terms, running out the clock, angering your opponent, retreating or advancing to entice your opponent to your strengths, or limiting your opponent's moves, , while maintaining full force and adaptability in maintaining a defensive posture also come to mind. (Ali trained to take many a pounding to train for an otherwise superior Foreman in '74 or whatever). One's tactics are freed from having to score. Let the opponent, out of sorts and off their game score for you, in which you make easier points, thus conserving one's energy. The corollary, making one's opponent pay big to even get a point or taking a hit is very offensive. But these are only for the very proficient. These tactics under an overall strategy require or expect the deemed defense having to move, not always true in stocks. (Though Buffet said one can swing when one wants; 4 balls will not get you to first in the stockmarket). An exceptional opponent will not take the bait, but circumstances can force their hand. These thoughts touch on defense as offense. We all know the opposite axiom. As one aside, I'd like to see the drunken martial opponent, and this takes on many variations, in boxing, fencing, racing and war, in which the opponent is enticed to overexthend themselves to the winner's advantage, not move in such a fashion into the opponent's traps. Others may have specific games in mind. I am having the problem of analogizing a specific game; a discrete event compared to the market moves over a term. However, the market moves comprise many a game.

Some of what I consider the more continuous sports are soccer, lacrosse, basketball, hockey, fencing, boxing and tennis, in which one can morph from an aggressive stance, to a defensive one on the fly. Of course, this applies to all sports on a limited degree, like baseball and football where a meeting is called prior to a play. I like the former because the action is more often in play than other games, and therefore the strategy and tactics can be applied with more facilty in real time, of course given prior strategizing. Maybe it's like a free form jazz requiring excellent individual talent that understands the other players, compared to an orchestra with a conductor playing 30 second songs cumulatively. Both comprise professionals. We know the market does both as well.

This writing has suggested employing defensive offense, for example keeping the accent on making high percentage shots that tire your opponent mentally and physically. Do not take undue risks in shooting (offense)and upgrade one's focus on preventing the rival from scoring (defense), rather than setting up your next shot. An advantage within or from a game is anticipating further moves or a later game. This allows for other strategies/tactics to surprise, accumulate to disorient, and induce the opponent to weaken lines in order to defend against all possible attacks. Continuing the earlier discrete game, the early winner can devote more resources to defending the perceived advantage with the above considerations in mind. In fact, the simplistic notion of games is not to take undue risks (this assumes a lifetime of understanding) once victory is achieved, while of course playing all out under revised risk/reward calculations. To confuse things, a good winner will continue to play all out, as that is their best game for cadence and alertness. As a warning, many have lost sitting on a win, confusing defense with merely running out the clock. Resting can beckon atrophy, thereby inviting ineptness.

Another is offensive defense. A penny saved is a penny earned. I would submit that a penny saved costs less than a penny earned oftentimes. Drive to the utmost, but how many feet or seconds does another pit stop cost? Can it be skipped with good preparation and execution being the same car, or is it better to plan for a stop in order to have your best car on the track? A lot of movement in life, like mechanics, etc., has exponential costs, like a rocket liftoff compared to cruising, and the same for other bursts requiring torque, like moving onto the beltway. Make your opponent use torque that require more energy and force pit stops that cost time.

Unlike the stock market, in discrete games, a 2 point win is equivalent to a 50 point win. Can we say that if the 2 point wins accumulate, they will become 50 points and be, just a little little bit easier, to come by?

Defensive offense and offensive defense: do they exits, does it matter, is it semantics? It was just a way to make a point and hint that things occur simultaneously.

In sum, winning big early, frees up an added dimension of facileness, controlling time and moves of your opponent, while increasing one's own efforts to thrive and grow toward an increasing advantage. Maybe all games should be played this way throughout, but an early advantage seems to change the risk/reward analysis. The predators are able to employ this. A good follow up would be to depict what the purported prey would do to become the eventual winner. —Maybe the same? but they seem to have less reward in creating a win from behind by just maintaining the stasis. Advisors often suggest that increased risk is not the answer, until Hail Mary time - at least in a discrete game.

Allan Millhone looks at it from the Checkers perspective:

I am packing and getting ready to head to Grove City, Pa. for a yearly tournament there. There will be plenty of stiff competition with our Three-Move Restriction World's Champion and other top Masters. In tournaments my eyes scan the board akin to surfing and try to find a safe line of play. Like a good wave to ride safely to the King row (water's edge at the beach) . The surface of the Checker board at times can be very smooth as you coast towards an easy draw . Other times the ride is bumpy and can be quite turbulent as your opponent( like the waves) can force you off into uncharted waters. The Market trader needs to be wary and look ahead at all times for ever changing Market conditions much like the waves for the Surfer endlessly shift back and forth. The Checker board starts out even for both sides with twelve pieces each, but soon after the calm subsides and the waters of the board begin to swell . The Surfer tries to Master the wave as the Market trader tries to tame the Market Mistress and gain the upper hand.

Tommy Wiswell said: "Look twice before you move."

Steve Ellison writes:

In many competitive endeavors, simply making fewer mistakes wins many games. Mistakes I have made in the markets include:

- Failing to be aware of changes in trading hours

- Using a limit order to try to save a few dollars when I really did want to enter the trade regardless

- Failing to be fully prepared (with orders placed in advance when feasible) for any events that might set up a favorable trading opportunity

- Entering a trade without knowing exactly what I would do if price moved up, down, or sideways

- Deviating from my trading plan

- Using too much leverage

Roy Longstreet wrote in 1967 in Viewpoints of a Commodity Trader:

Did you watch the Packers whip Kansas City in the Super Bowl? I did and was much impressed by the professional way in which they performed. They did not beat themselves by making mistakes.

A professional makes fewer mistakes than others. That is why he is a professional. He may not have more ability than another but he is superior because he has trained himself not to make mistakes.

I was particularly impressed in watching the Packers throughout the season as they seldom were penalized for infraction of the rules.

On Mr. Longstreet's last point, the Detroit Red Wings have similarly avoided penalties in the Stanley Cup finals. Conversely, the Pittsburgh Penguins, who have probably by now surpassed the aging Red Wings in talent, took a string of penalties in the fifth game after the Red Wings took an early lead. As a result, the Red Wings scored three power play goals and put the game out of reach.

Allen Gillespie adds:

Hawks v Supersonics game I went to years ago - 67-66 after three with only Peyton hustling - Steve Smith scores 33 in the 4th running around like a maniac.  Also, in soccer, most goals are scored very early or very late in a half.

Relationship between time and goal scoring in soccer games-Analysis of three World Cups
Soccer goals and non-guassian distributions

Nigel Davies comments:

Here's another view from a mistake specialist (both my own and other peoples'):

The mistakes we make tend to crystallise around different deeply rooted thinking patterns and attitudes but then change their form when people notice them and try to something about them.

An example might be that of a trader 'taking profits too early', vowing to do something about this and then taking them 'too late'. He could be 'correcting his mistake' but failing to address the real issue of making arbitrary decisions rather than operating according to a tested plan.

Normally you have to go very deep to ferret out the cause of error and then, assuming someone is willing to go there, it's unlikely they'll actually be able to do something about it. But success can come when the number of good moves outweigh the bad, so for those with an innate 49-51 split have hope…

George Parkanyi says:

Making mistakes is not one you can generalize like that. Mistakes are how we learn. If you are not making mistakes you are probably aren't stretching yourself enough. Mistakes also come in all shapes and sizes — some are disastrous, some are benign.

Recovering from, or leveraging mistakes — now there's something.



I was just browsing Laurel Kenner's blog and she has a great post on music there titled "Artaud":

I don't have Laurel's knowledge or depth of sensitivity to the arts, so I think she was making a point through Artaud about how art can get too involved in its form and sometimes lose sight of its inspiration and emotion. For whatever reason an artist is inspired and creates, the art can still impact the individuals that make up its audience in profoundly different ways, depending on the who they are and where they happen to be in their lives — their own specific context. For me, music is often much more than just the music. Its impact on me depends on what is going on at the time. Here are a few examples.

MICHELLE (Beatles)

At age 10, crossing the equator aboard the Italian passenger ship (I wouldn't call it a liner) "Aurelia" — it was playing on the loudspeakers by the pool. I was traveling with my mother from Adelaide, Australia to Genoa, Italy. Learned to swim, learned to play chess, and also played a lot of bingo on that trip. (Also visited the pyramids of Egypt.)

AND I LOVE HER (Beatles)

In my cousin Zsuzsi's apartment in Budapest Hungary, 1966. The first time I ever heard the song; she introduced me to it. I can still hear the blue articulated buses roaring by on Dohany Street five stories down below. (I now play this song with my "band")


Night-skiing as a young teen down the municipal ski hill in Sherbrooke under the stars with the city lights laid out below. They played it through the PA system. Wonderful way to ski. Another song I like to play.

RUBBER SOUL (Album — any song) Beatles

Riding across and beside the St Francis river in a school bus in pretty Lennoxville, Que. on my daily commute to and from Alexander Galt Regional High School.


My best friends and I (high school years) belting this out at the top of our lungs (particularly the falsetto part) riding in Glen's red VW bug to his house out in Buckingham, Quebec.


Riding in Rick Trites' Triumph TR-6 sports car on a Friday night in Algonquin Park at night under a blazing canopy of stars, on my way to the most memorable canoe-camping trip I have ever taken — the Petawawa River.

CLAIR - Gilbert O'Sullivan

As an infatuated 17-year-old, slow-dancing to the song with my cousin's beautiful brown-haired 20-year-old friend at the top of the round hotel (that's what they called it) in the Buda hills of Budapest, Hungary. A magical moment on a beautiful moonlit night.


I actually didn't like that song, but they played it to death on the radio as my friend Glen and I drove to Florida for the first time in 1976, all the way to Key West and back. We sang along with it anyway.


In a club in Vancouver, on a great trip out west (Calgary to Vancouver and back through the Rockies in a rented Camaro) with my good friend Don Parker. Nothing like your transmission falling out onto the logging road halfway up a mountain. Happened near Elkford, BC to Don's friend's jeep as we were coming back down.


The brokerage office at Bache in Ottawa. It was a fun group of guys and gals, and that song was one of the top hits at the time. (That and Strut -by Sheena Easton)


Riding through the Alps on an Intercity Express between Innsbruck and Vaduz, listening to reggae during my trip to Europe in 1986.

LA PALOMA (Mireille Matthieu) and LIBIAMO NE' LIETI CALICI (Guiseppe Verdi from La Traviata)

Sitting on an outcropping with a Walkman, completely alone, on the southern cliffs of Capri soaking up the Mediterranean sunshine and ocean breezes, and gazing out over the azure-blue ocean 300 feet below. What a magical afternoon that was.

HAVE YOU EVER BEEN LONELY (Jim Reeves and Patsy Cline overlay)

Driving to Greely just outside Ottawa on warm summer evenings to my horseback riding lessons. I was in my mid-20's when I took up English riding, and it was humbling to have pre-teen girls kick my butt at every aspect of it. But it was all worthwhile in the end; I eventually got in my fair share of clean jumps.


The top hit at the time when I travelled to Ft Worth Texas for a conference. Now that was a party. I wonder if Billy-Bob's is still there.

EVERY NIGHT (Paul McCartney)

Came on the radio as I was driving along Skyline drive up high in the hills between San Francisco and Santa Cruz, CA. A song I love to play and sing today. I've always loved cruising, and to do it in a place like that…

SHOUT (Tears for Fears)

My most amazing work/travel adventure in Perth Australia. The packed club I was in with my Aussie friends was absolutely rocking to this song.

And so on; this is just a sampling. Great music (and sometimes not-so-great music) anchors great memories. The reason I've selected these fairly old experiences is because they are still so vivid when I hear the music, despite that they happened so long ago.



J RobinsonWhat can we learn from baseball that is applicable to markets?

In looking at how to hit for Aubrey, I focus on posing and gaining potential energy by moving the back foot back or lifting the right foot up before hitting the ball. Also holding the head directly at pitcher, and the trigger point. Also following through the ball with the bat following it on a line before snapping up. I don't know anything about baseball but all this seems applicable.

Please augment. We have quite a few experts on baseball who read this site and the All-American also.

James Lackey replies:

They don't teach you to lift your foot up anymore when you bat. You use a wide stance, and you pivot your back foot towards the pitcher and snap your hips. Some teach you to pivot your back foot on the ball of the foot, with you front foot on its heel while swinging, and you end the swing with your feet pointing to the pitcher. My son's 11-12 year old hitting coach had a hard time retraining my kid. He cut a 1" piece of PVC pipe the length of his shoulders made him stand over it and do a zillion swings to get his front foot down before he could snap his hips. We were all taught to keep your elbow up, use a narrow stance and step into the pitcher.

J.P Highland comments:

Being able to choose the pitchers we want to face gives us a great advantage over baseball hitters. The Nymex's pitching rotation is my favorite. They like to intimidate batters with lightning fastballs but their stuff suits my swing, as opposed to the tough off-speed pitches ES has mastered that have victimized me so often.

James Lackey adds:

My kid was born with a cannon. I knew it at age four when he threw me a hardball. By 10 he could throw from the fence to the catcher. He was a good pitcher at 12, but his coach would always yell at him over the top when he lost control.

Now what I do not quite get is that his football coach yells at him at practice to quit throwing a baseball. It's how quick you release to give the defenders a chance to attack. My son explained to me how it works, but I still do not get the mechanics.

The only good thing to report is I have never been his football or baseball coach only dirt bikes. So naturally he loves team sports.

Tim Melvin writes:

I'm not a much of a pitcher as I have a noodle for an arm and always have, but in the excellent baseball book featuring John Smoltz and Mike Mussina we learn that speed, location and deception are the keys to successful pitching over time. I am not just talking about power speed either. The Nolan Ryans are the one off Soros and Buffets of the baseball world. The ability to vary speed and move the ball around are the key to long term success.

I shall leave you all to draw you own market conclusions as there are many that leap to my mind.

Scott Brooks comments:

Good pitching isn't about overpowering batters and striking them out, it's about throwing the ball so that the batters make bad contact, and then letting your fielders do their job.

Stefan Jovanovich writes:

 Albert Pujols does both old and new school. He has his right foot turned 45 degrees towards the pitcher, the right knee bent slightly, the hands held back and high (at the top of the strike zone), the right shoulder held above the left, with the bat vertical. When he unloads, the left foot and hips do a quarter turn, the right shoulder drops slightly as he throws the bat at the ball, and the bat stays level to the ground for the full travel across the plate. In 4 days against the Giants he made one bad swing: when Matt Cain threw him a 1-2 slider down and away. He absolutely ate Barry Zito alive even though Zito now has game back and had no trouble at all with the rest of the Cardinal lineup. Theoretically, you could throw him changeups and curves down and away; but, when Lincecum tried it, by the 2nd at-bat, Pujols was hitting doubles down the line in right. It was like watching the Yankees try to pitch Williams inside (with his long arms and height, he should have been vulnerable) and watching him take the ball early and park it in Ruth's pavilion. Yo-Yo Ma with a pine bow.

Pitt T. Maner suggests:

This article which I quote from was interesting in light of an optical illusion I had seen a few days earlier on the internet. Many years ago I had read stories of knuckleballers who had pitches where even they themselves were not sure of the ball's pathway to the catcher's (often oversized) mitt.  This story has a bit of that mysterious, "unhittable" pitch reminiscent of Plimpton's April Fool's hoax:

"DiFelice grips the ball across the seams, like a four-seam fastball, and tilts it so his middle finger rests along the red stitching. He squeezes the ball with his middle finger, raises his index finger and throws it as he would a fastball. The result is confounding: The ball spins like a fastball and moves like a slider, and the optical illusion it plays on hitters allows him to get away with throwing an 82-mph pitch the batter knows is coming."

And here is the optical illusion (best illusion of the year in fact).

How would you learn to hit such things? Would you need to learn to selectively ignore information coming from your eyes?

Phil McDonnell writes:

Lifting the front foot high does not inherently add energy to the swing. If you think about it lifting a foot straight up adds potential energy only in an up and down direction. The point of a baseball swing is to drive the ball in the horizontal direction. Any energy from the foot lift is orthogonal to the intended swing and does not add any power.

The real reason for the foot lift is that it enforces a good weight shift. When the foot is lifted all of your weight is on the back foot by necessity. This allows the weight to start on the back foot and shift to the front foot. The weight shift adds power to the swing by starting the twisting motion of the body and the hips. Fundamentally the power is generated by the centrifugal motion of the bat. The center of that motion is the twisting of the hips and body.

There is another subtle but important aspect to batting. That is the need to have a good follow through. The key is the hands. If you do an imaginary swing with your hands you will see that when you fully extend your left hand in a follow through that your right hand cannot stretch out nearly as far as the left (for righties).

This compels two types of follow through motions. The first kind is simply to break the hands. The follow through continues with only the left hand still holding the bat as the right hand is released. Reverse for lefties.

The other type of follow through involves a roll of the wrist. Basically the right wrist rolls over the left as the bat passes to the left of the body. The object of either finish is to keep the bat moving even after it is in contact with the ball.

The one follow through technique that is bad is to keep both hands on the bat without a roll. If you try it you will see that you get a hitch in your swing just about when the bat handle passes your body.

One little known, but good exercise is to simply swing a light bat 50-100 times with your left hand only. The left hand is an important hand for guiding the bat. The left tricep is the important muscle for this motion. This exercise is best started pre-season because it often leaves the tricep sore after the first few times.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Jeff Watson adds:

 With much ado regarding the merits of different pitching styles, and the physics of different type of curves, knuckelballs, fastballs, and sliders, I'm surprised that nobody has brought up the pitches of Gaylord Perry and Joe Niekro. Perry allegedly did wonders with a spitball, and when the heat came to tough for him to bear, he replaced spit with Vaseline. Perry was constantly hounded by umpires his whole career, and had to develop different methods for hiding his illegal substances after the 1968 ruling regarding wiping the mouth before a pitch. The spitball was one of those pitchers that made the ball seemingly disobey the laws of physics, and was hard to hit. Perry and pitchers of his ilk had deceptive moves down to a science, and whether they threw a spitball or not, the batter was never sure. The market has shown similar characteristics in the past and present, where following the rules is winked at. Certain reports are released early by officials to their friends, and nobody really says anything. Naked short selling was allowed until it was apparent that there would be a possibility of the whole financial sector going to zero. The market players just had too much of an advantage over the public and the rules had to change, much like they did in 1968, and much like little things like the height of the hill being modified from time to time. Even after the rules are changed, in baseball and the markets, people still try to cheat. Niekro was caught red-handed by the umpire after he was searched for an emery board, and it flew out of his hand onto the field. That was one of the classic moments of baseball.

Stefan Jovanovich responds:

 Niekro used a piece of emery board to scuff the ball so he could get a better break on his curve. That was what he was throwing away when he was caught. Perry used perspiration from the back of his neck to load the ball so his sinker would have more drop. (He would take off his cap and run his pitching hand over the back of his head and down to adjust the top of his jersey). Baseball, being like the SEC, had and still has elaborate rules that are utterly useless in terms of actual cheating on the mound. For example, the pitcher cannot go to his mouth while standing on the mound (automatic ball to the batter; balk if there are men on base); but he can still walk off the mound and lick his fingers all he wants. However, since saliva doesn't work nearly as well as sweat (which is much heavier because of the salts and dries more slowly), the anti-spit rule itself is pointless. The spit ball was outlawed was the one where the spit the pitchers used was loaded with chewing tobacco.

The idea that pitchers used vaseline is a media urban legend. There is no question that the stuff could be useful; but you would need a towel boy with soap and a basin of water that you could go to between pitches so you could clean off your hands. However, since the batters - who are always looking for an explanation for their inevitable failures - never figured this out (not being particularly concerned about hygiene), Perry and Early Winn and others always made a great pretense of using it. Perry still does; but you can hardly fail to notice the twinkle in his eye whenever he gives his seemingly evasive answer to the latest interviewer.

In my next life I want to hit against the pitchers on Dr. Phil's team. Everything he wrote is wrong. The knuckleball wobbles because it has no gyroscopic balance. It has no gyroscopic balance because it has no spin. The pitch is thrown with the ball held by the nails so that when it leaves the hand there is no friction with the skin. The trick is in holding the ball with the nail of the thumb; that is the part of the grip that defeats most people. (This is why nuckleball pitchers are fussier than manicurists about their nails; they want them trimmed so that they perfectly fit the curve of the ball.) The pitch is called a knuckle ball because when you have the proper grip the knuckles all stick out on the pitcher's hand. That also makes it instantly noticeable so there is no deception whatsoever about what the pitcher is throwing. If the ball has any rotation at all — even the magic reversible one from the "sail effect of the seams" that Dr. Phil has discovered, then the pitcher is in for a world of hurt because the pitch becomes a batting practice fastball (think Tim Wakefield pitching relief against the Yankees in the playoffs). All the other pitches Dr. Phil mentioned — the palm ball, fork ball, split finger — do have spin; they have to because the pitcher has to control their location. The knuckleball and the true 95+ mph fastball are the only two pitches where the pitcher can say "here, hit it" and not worry about where he or she throws it. (Some day some bright woman is going to learn how to throw a knuckler!) What the palm ball, fork ball, split finger all do is change the velocity. By holding the ball against the palm or jamming it down between your fingers, you lose some of the whip from your release. The circle change has the same effect; by holding the ball with all 4 fingers, you lose speed while keeping the same arm action. The cut fastball that Pitt posted about earlier is different; it is like the screwball. You are throwing the pitch with the same speed as a fastball but with a different rotation.

Phil McDonnell remarks:

 Curve balls really do curve. There are many proofs of this but the simplest is the center field TV camera where the resolution is too poor to show the spin, but the curvature is obvious. If the viewer cannot see the spin then it is difficult to explain how it can be an optical illusion.

Basically the curvature comes from the spin of the ball. The easy way to remember is that the direction that the front of the ball is spinning is the direction of curvature. A pitch that is thrown with a right to left spin will curve to the left. A pitch that is thrown with a down and to the left spin will break low and away.

The spin exerts a small orthogonal force on the ball as it speeds toward the plate. This force is governed by Newton's equation:

Force = Mass * Acceleration

Note that the last term is the acceleration not the speed of the sideways movement. The ball actually curves at a faster and faster rate. Thus the most deceptive part of the curve occurs right at the point where the batter swings.

The knuckle ball is a bit different. The idea of a knuckle ball is no spin. What happens is that the seams act as little sails that catch the passing air causing curvature in one direction or another. Naturally the seams also cause a very slight rotation of the ball until the another seam comes around. The effect is that the ball begins to curve one direction and then as the seam changes it actually begins to curve in a new direction. From the batter's perspective the ball can appear to wobble. Other times it can fly off in one direction or another in a strongly curving manner. Even the pitcher does know what it will do. The knuckle ball is not the only grip that results in no spin. Others can be the fork ball AKA split finger fast ball and the palm ball.

Another deceptive use of these no spin pitches is that they can be thrown just like the pitcher's fast ball. If the batter has previously timed the pitcher's fast ball then he will likely start his swing based on that timing only to be fooled by a ball arriving slower than expected. So even if he is not deceived by the wobbles of the ball he may be swinging too early or need to hold up his swing and lose critical power.

In many ways these change up style pitches are reminiscent of the deceptive action of the seemingly dead market last Friday which suddenly exploded to life in the last seven minutes of the trading session.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

George Parkanyi comments:

In pick-up ball where it's pretty easy to hit, I choose the direction I want to go by adjusting my back foot. If I want to hit to the opposite field because I'm being played to pull the ball, then I'll drop my back foot further away from the plate, which turns my torso to slightly lag my swing and "point" the direction of my "power" through to the opposite field. If I want to hit to center I line up parallel to the plate, and if I want to pull the ball, I move my back foot closer in toward the plate. If you connect well with the ball, it will go in the direction of your set-up. Against a professional pitch, I think I'd be happy just to touch the ball — perhaps even just to see it.

Dean Davis writes:

The most critical thing you can teach Aubrey is to avoid moving your head forward (toward pitcher) in the process of moving from a loaded position to the striking the ball. This is often the result of a hip shift which moves weight to the pitcher side of center (this destroys a hitter's power). The timing of hitting a baseball is difficult enough without ceding an advantage to the pitcher by destroying his stereo-vision by moving your head forward.

If you can get him to solidly place his stride foot slightly closed (closer to the near edge of the plate than the back foot), before he starts his swing (done by merely rotating the back heel low to the ground until pointing away from the pitcher), you will avoid him having to relearn the swing when he gets to a select/traveling/high school team later in life.

The Texas Rangers pitchers are taught to throw the circle change where they are attempting to "throw the O" (the circled index finger & thumb) at the target (pushing the index finger down to close the O at release). This means that their middle three fingers are are pointing at one of the dugouts as the shoulders are square to the target. That exaggerates the screwball spin and drop. Index finger should lay across the seam.

I teach my pitchers (age 11 & up with longer fingers) to have the same grip (floating the the middle finger off the ball if possible, substituting the ring finger for stability), throw it like a fast ball (the hand is more behind the ball when coming over the top) and emphasize the index finger pressure through release. They get the same screw ball action and drop as the major leaguers (to a lesser degree). When thrown by a righty to a righty (or lefty to lefty), it is a devastating "out" pitch (thrown on a X-2 count). My pitchers love to see the hitter "corkscrew" into the ground trying to make any contact.

Here is an interesting interview with Mike Basich (gave up record breaking HR to B Bonds) about how pitchers cheat (he names names!)

Steve Leslie contributes:

A great lesson that one learns from baseball pertaining to the markets is in the area of hitting. There are many different types of hitters those who are contact hitters for example and those who are home run sluggers.

Many consider Ty Cobb the greatest hitter in the game. He had a lifetime batting average of .367 over 24 seasons. This is the highest career batting average in the major leagues. He also had 724 doubles 295 triples and 117 homer runs. Through that whole period of time he had but 357 strikeouts. He also stole 892 bases. With the exception of his first season in the majors he never batted below .300 and his peak performance was in 1911 with 248 hits and a .420 average. He also held the batting title 12 times with 9 in a row. Ty Cobb forcused on what he did best which was hit the ball, put it in play and as a result of this dedication maintained a productive career that lasted a quarter of a century.

After his retirement, Cobb was a very wealthy man having been advised by executives and others in the Detroit area how to properly invest his money. He went on to invest in stocks and was a major stock holder in the Coca Cola company.

The lessons for the investor is that success in the markets is a lifetime pursuit. It is showing up for work every day and dedicating onself to the task at hand and utilizing the particular skills and they have been blessed with. Ty Cobb had a very productive and successful career because he concentrated on what he did best and he did it very well. Year in and year out .

Phil McDonnell admits:

Yes, I did pitch for Cal in the PAC-10. We actually won the conference when I played although only slightly due to my minor contribution. Since that time I coached about 50 kids in Little League. Of those, five players were drafted into the Major Leagues for a total signing bonus of about $5 million. Somehow that does not seem random to me.

The wonderful thing about the markets and baseball is that everyone thinks they know all about it. There are many ways to skin the cat. Perhaps I can arrange some batting practice against one of my ex-players next time they visit the A's or the Giants.

With respect to the back foot weight shift, we can do a simple thought experiment. Lift your back foot into the air and try to swing. Did that swing feel powerful? The fact is the weight shift from back to front occurs whether you are conscious of it or not.

The fingernail ball is something I have never taught. However I have never had to pull my starter for a broken cuticle, nor have I ever needed to smuggle an emery board out to the mound for emergency fingernail repair. I have coached the circle change. It is an excellent and easy to learn off speed pitch. My technique is to circle the two fingers in an OK sign, the the three remaining fingers are used to throw a weak pitch. The spin is the spin characteristic of a screwball (curves to the right). But the pitch does not curve because the spin is too weak and the speed is too slow. It is simply an off speed pitch.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Stephan Jovanovich replies:

Heck, Dr. Phil, with my eyesight I couldn't tell you from one of your former prodigies, let alone see the ball. I stopped playing ball at 18, after I went to the Phillies organization pow-wow and met the three catchers they already had in the system and compared the sizes of their hands to mine. The only talented pitcher I ever caught blew out his arm in AA in Odessa; he was from Guatemala, and he had the same stuff Mike Cuellar had. He would have been a marvel. I know enough about the bonus baby mania baseball went through to be unimpressed by the "about $5 million"; it is one of those factoids that is like Clinton's 100,000 new cops - wonderfully round and purposely vague. Hell, even with my puny hands and Molina family footspeed, I was offered $10,000. If you want to post your stats and the stats of your magic kids, I will be more than happy to eat crow and buy you and your camp followers each a bottle of bourbon. Until then, let's call it a draw. You still don't know anything about hitting, but there are few people who do. As for pitching, I would still recommend to the List that they send their kids to Dean's camp, even if his players have never been offered a stick of chewing gum by a scout. He knows far more about this than you or I do, and he lacks your cocoa puffed ego and my bad temper. Neither is a good temperament for teaching people. But - last shot - the most important reason to trust DD (listen up, Lack!) is that he clearly has no interest in any of the kiss-ass rituals that have turned so much of "organized" baseball at the junior level into a game of "my daddy knows your daddy" (out here in the Bay Area it has become even worse than it is in soccer).

Phil McDonnell suggests:

Lifting the front foot high does not inherently add energy to the swing. If you think about it lifting a foot straight up adds potential energy only in an up and down direction. The point of a baseball swing is to drive the ball in the horizontal direction. Any energy from the foot lift is orthogonal to the intended swing and does not add any power.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Charles Pennington demurs:

Potential energy does not have a "direction". Why do batters start with the bat held up high? That's potential energy that ends up contributing to the kinetic energy of the swing, when the bat is low.

Let me add that the pitcher lifts his front foot in an effort to throw the ball fast in the horizontal direction.

Stefan Jovanovich notes:

Randy Johnson did it — at age 45. He became only the sixth left-hander in baseball history to win 300 games in a career. And, like Teddy baseball's final game and last home run (at his last at-bat), it happened while the world was looking elsewhere — before a tiny crowd on a rain-sodden field. Pure Brueghel.



 Trading is toil.

Victor mentioned once: "I never have fun trading. It is too serious".

Trading is toil, especially because it's already hard work in the first place to find a model, a "setup", a strategy that actually works, but then you must adapt it, which is the very hardest part. Once you have a "love" (something that makes your trading profitable), whether it is a strategy, model, parameter, or setup, it becomes very painful to watch your love fade and die.

I know we shouldn't personalize trading, but the fact is we (or I) develop an emotional relationship to our precious tools — every time I come across something worthwhile, after much toil, I feel so glad. I feel a sense of work well done. It's a very pleasant feeling. And I cannot refrain from emotional pain when a market relationship I was profitably trading becomes weaker and eventually non-existent.

To adapt,  one must have the emotional strength to, after much toil, model a strategy, and say to yourself: "you may have no value in the future."

Trading is strange, because it demands skills one would probably not wish to nurture if it wasn't necessary.

Trading is a stoic school.

George Parkanyi adds:

The shorter the time frame, the more frenetic, temporal, and tiring will be any form of discretionary trading. And the greater the need to predict, the greater the effort required as well. You can economize your efforts by researching and planning interim position trades or even multi-year trades, and then letting the positions play out while you comfortably research others. You can also economize by trading statistically –- researching an edge and then mechanically following the methodology you use to exploit it (this is more like a business). Or ultimately you can eliminate the need to predict altogether. You can simply use a passive re-allocation strategy or some kind of averaging approach and let the market sort things out over time.

The sense of toil comes from the feeling of the need to be right, either emotionally and/or financially -– and the market unfortunately is completely insensitive –- nay, gleefully contrary some would say, to that. You will be wrong many times, more so the more active you are, and will have to come to terms with it.

The markets supply a tremendous amount of energy in their own right. If you think of the market as an opponent, as in judo, think about how to use the market’s own strength against it, and to conserve your own.

Newton Linchen replies:

 Great point. I actually practice Aikido, which is a martial art similar to Judo, but with more emphasis on letting the opponent defeat himself.

I'd rather not think of the markets as someone, or as an opponent, since I would have to picture "him" 100 feet high and with enormous muscles. (It would certainly come after me in my nightmares!)

I prefer to think of the market as a force of nature, such as water, fire, or whatever. You can develop a safe approach to it, and make it the heart of a nice hot tub or bath, or get drowned or burned.

And to put together a bath tub is toil, at least for me!



Bloomberg GrabA chart of bonds showing this lowest since November and yields going up is not auguring very well for housing as credit rationing and high interest rates in a declining job market are twin killers.

George Parkanyi writes:

I've lived that chart. I fortuitously put on a double-short Treasuries ETF position on the last day of 2008. The position has been bypassed by my re-allocation signals because it's been kind of a tortoise, so it has slowly evolved into a nicely profitable trade. However, in the last 2 days it jumped sharply to new highs. I believe there has been a tectonic shift in psychology that now puts currencies (particularly USD) and government issued debt on the defensive - due to the downgrade of the UK government. Telling was the sharp drop in Treasuries on the same day as a big drop in stocks. What, no flight-to-kwality?

Just the IDEA of the paper of a major western power suffering a downgrade - the notion that it can happen at all - has started something new in the currency, debt, and inflation-hedge markets. This now gets very interesting.



L JThe end of playoff games were like the market end. Down 10 points in last minutes in stock on Friday. The Cavs beat Orlando by one with a last second three-point shot by Lebron. It was one of the historic moments. "A second is a long time for me. For others, it's very short." said Lebron. The last second of the day, very long for those on wrong side. Last second of last day of 2008. Very long. "I was punch drunk. I was stuck," said teammate Williams who passed him the ball. How many times do we look at screen at end of day with disbelief. That price has to change. It didn't happen. It wasn't fair." That walk. The refs made a great call," said Lebron about a call against him with a minute left that would have iced the game. My goodness. Uncle Howie. Loved to argue with the refs before the game. "You miserable so and so. If you give me one more bad call during the game, because you're a jealous non-entity, I'll give you the beating of your life under the boardwalk after the game. " But Artie would say, "Now, Sam, I'm afraid your judicious decisions under pressure are often not as applauded as they should be. Might we take you out for some Moo Goo Gai Pan after the game?" Who's going to get the better calls? Lebron or Howie?

George Parkanyi adds:

This happened to me last year as well — or was it the year before? I never watch basketball and I happened to change channels and caught the end of a Cavaliers-Pistons (I think it was) game which went into double overtime and was won by the Cavaliers. It was fantastic action which even I as a non-basketball fan found spell-binding, and the announcers were excitedly going on how this would go down in history as one of the great classics.

Last night the Blackhawks-Detroit hockey game went into overtime but I had to pick up my son Tom at the end of his high-school dance. When I got home, the game was over, so I switched over the sports channel to check the highlights for who won. Guess what, it was the Cavaliers-Orlando game, and I got to see live two of the most amazing shots in basketball — the one by the Orlando guy who ran the clock down to one second and then made a beautiful two-point jump shot to ostensibly seal the game, and then the amazing three-point buzzer-beater by Lebron James. The clock was at .2 seconds when he left the floor to make his shot. (Although I can't figure out how one second was enough time for a pass from the sideline, the catch, and then the jump. When do they start the clock?)

Funny though, for some reason I don't seem to magically step into oil-goes-from-$50-to-$150 trades… this one doesn't seem to translate to the markets.

Corban Bates replies:

In basketball, the clock starts when a player in-bounds touches the ball. Therefore, the clock didn't start last night until Lebron touched it. One second on the clock is plenty of time to get a good shot off. In fact, the rules state that there must only be 0.3 on the clock to catch and shoot the ball (anything less than .3 is physically impossible and must only be tipped in). This came into play last year when my team, West Point, beat rival VMI at VMI. We were up one with 0.2 left and they had the ball out of bounds under their basketball. All five of us were guarding the paint knowing they could only, by rule, tip the ball in. Apparently they were not aware of the rule as one of their players called for the ball at the three-point line, caught it, and fired up a three. It went in, the crowd went wild, and they all ran around the court celebrating their victory. The looks on their faces when it was announced that we won were priceless…



 The bid/ask spread is another one of those hurdles that speculators must jump over in the quest for profitable trades. The spread is the instantaneous inside market, reflecting current market conditions, but it also is a product of unbridled free market forces. The bid/ask spread is a profit engine, for those in the right place at the right time, make no doubt about that. Many of the great fortunes on Wall Street were the result of always being able to buy at the bid, and sell at the offer.

In earlier times, people would pay for the privilege of an exchange membership in order to capture this spread. It must have been a worthwhile investment, as exchange membership prices have gone up on average for the last century. Now, in these more democratic, electronic times, it is harder to collect the spread on an all day, everyday basis. Much more confusion at the bid/ask point of the market reigns in this digital age. The mistress of deception likes to have her way with this spread. In today's supposedly open electronic age, where tyros see transparency in the markets, the same ages-old bluffing, misdirection, feints, probes, and stabs rule the inside market, as always. The same deceptive games played in the open outcry market have seamlessly morphed into the electronic markets, but with much more ruthless efficiency. Big players can see the open book, get the little ducks all lined up in a row, then slaughter them mercilessly. The inside market, the bid/ask spread, is tough to trade from anywhere on the outside, especially if you're a small player. Limit orders attempt to avoid the bid/ask spread, but one is really not avoiding the spread with a limit order when you think about it. Market orders give the other side of the trade an instantaneous profit, or return on their investment. No matter what you do, you're going to bump up against the spread, as it's unavoidable.

The bid/ask spread can represent the minimum amount of risk a player is going to assume, or it can cause a maximum amount of pain, it's your choice. Liquidity seems to rule the day in the bid/ask spread, with the more liquid instruments having narrow spreads, and some illiquid instruments (like pink sheet stocks) having up to a 10% spread. The spread can still change in liquid instruments, depending on the free market forces, fear, greed, deception, or any other emotion in nature's handbasket.

Emotions come into play when you are trying to get a trade down and don't get filled because the bid/ask spread won't allow it. Emotions can cause you to chase a market while the bid/ask spread seductively dangles a carrot in front of you. Emotions can cause you to avoid a good trade because of a perceived increase in risk when the spread is wider and you don't want to pay the cost, or assume any extra risk. I like to keep an eye on the spread, as I find that it gives many, many valuable market indicators, especially in thin markets and after-hours. However, like commission, vig, slippage, and mistakes, I accept the bid/ask spread as part of the cost of doing business.

Legacy Daily comments:

Some of the volatility seems to be created to soak up more money from the participants in the form of the spread but even with this money printing-press the houses got slammed in the past year. With their collective voice, maybe they would say that is their cost of doing business but I am yet to fully comprehend the societal impact of a bid/ask spread between a 1% deposit and a 5% loan. 

Phil McDonnell writes:

The bid/ask spread, volatility and liquidity are very much related concepts. When the spread is wide there is usually greater volatility. When volatility is greater the spreads widen. It is difficult to say which causes the other, rather it is safer to reason that they are manifestations of the same underlying phenomenon. In both cases that phenomenon may be liquidity or lack thereof.

The bid/ask spread and volatility are directly observable. But underlying liquidity is a hidden variable which cannot be directly observed. The St. Louis Fed has done some limited research looking for the underlying cause of volatility. In that work they found that consumer liquidity was highly correlated with market volatility. That offers a strong hint that liquidity, spreads and volatility may all be manifestations of the same thing.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

George Parkanyi responds:

The spread is a market price in its own right –- the price of liquidity, and also of laying off risk. If you want to establish a full position immediately, or liquidate one, you pay the price for that convenience. If your small orders can piggyback the action of the big lines in a liquid market, then you don’t have to pay very much at all. If you’re the only guy walking up to the table, it can be pretty-much take it or leave it when things are thin. Market makers maintain a position in the security indefinitely. They can wait you out. Your interest is typically transitory, and you often want to get in quickly to act on an idea, or get out and move on to something else. You don’t have as intimate a relationship with that market. So the bid-ask is in effect a service, for which you pay a price.

I’ve stopped trading certain ETFs because they are too thin. The spread on the thinner ones was sometimes 10%, and even when I was getting a signal I couldn't always execute. This was disruptive, so now I’ve spent some additional effort weeding out thin markets where the spread is too costly, or makes me miss signals that would otherwise be profitable if I were trading a similar, more liquid security.

I’ve thought about and played with spreads a lot, and believe that with adequate capital, you can effectively simulate being a market-maker yourself by maintaining a “virtual” bid-offer. You simply put in limit orders to buy and sell at certain increments. The profitability of your “market-making” depends on how wide you make your “spread”, and how volatile the security. Too wide the spread and you might not get enough action to warrant the risk, too narrow and you may pick up a whole lot of inventory going the wrong way that you don’t want. Looking at the profitability of the specialist system, I believe you can make good money with a strategy like this in a market in which you have a reasonable grasp of the dynamics, although you won’t have the visibility of other limit orders — you’ll have to do it statistically.



 Before 2005, it had seemed that Property and Casualty business was a cyclical business, boom to bust, from the long periods without a disaster and many start-up prospering… to a major disaster, which would knock out some companies, sometimes rather big ones, that happened to be at the wrong place at the wrong time. Some other P&C companies would also be crippled, but not go under.

After the disaster, rates would go up, as the regulatory pressure would be to keep P/C companies underwriting, and the claims would justify higher rates. There also would be a competitive hole left from P/C going under or companies scaling back, either in areas or in total.

But as time progressed without any major calamity, the pendulum would swing back in the other direction.

To understand this cycle further, it helps to consider the Law of Large Numbers and its opposite, diversification. In more normal times much of the P&C claims are small independent events, that is the Law of Large numbers apply. During these times the risk is diminished by underwriting more policies. As you get more policies, the claims experience becomes much smoother and predictable. Like flipping a coin for tails many times you will approach 50% head or tails.

However, if claims are highly correlated as with a wide scale disaster like a bad hurricane season, then the law of large numbers does not apply. Rather than smooth and highly predictable, the p&c companies have concentrated claims all at once. Not only are the number of claims correlated, but the size of the claims also. More policies from even a diverse pool means they can experience a surge of claims. But if there is any concentration, which often is the case, as agents specialize by areas and companies… then the claims can be ruinous.

As we all know the 2005 Hurricane season left huge claims for the insurers to pick-up. However, rather than many going under, 2005 had less P&C companies go into receivership than the long term average P&C companies go under. This can be attributed to lessons learned, more diversification was needed than was naturally occurring. As competitors would often capture high concentrations of the business in various areas.

Further, business in the coastal cities were seen for the risk that it was… highly profitable for many years with a large claim season wiping out many of those profitable years. So companies learned to limit how much exposure they would take. They also analyzed their business for concentration risks. They would trade through reinsurance , risks to various coastal areas. Stop loss reinsurance became a way to smooth out any one area concentration risks.

Yet, risks management can only go so far, if the P&C company does not have a diverse enough lines of business,

Securitization of mortgages was supposed to work the same way. But of course now its clear that it didn't. It has been said that securitization did nothing for the investors, but shuffled the cards around so that everybody could hold the least regulatory capital as possible. That is the sum of the parts of required capital were significantly less than holding individual mortgages separately. However, that is revisionist history, the pooling and the tranching was supposed to give less risk through the law of large numbers and more diversification.

Of course individual home prices have long been vulnerable to foreclosures. Your home price is highly correlated with your neighbor's and your city and area's. If your neighbor forecloses, your city or area has high vacant/foreclosed homes your price would of course be affected. However, spread this risks out across the USA and suddenly it becomes much more predictable… The law of large numbers applies, even in prior recessionary downturns, the risks was spread so the result were more predictable.

Yet, recessions are not like hurricanes, they are caused by mis-allocation of capital.

So the stage is set. The regulators says we've got this conquered. For a large portion of these securities are completely safe. Will only require a minute amount of capital for this portion we call "highly rated"…. In fact if you want to jump through some hoops to set them up right where you'r proving your monitoring the interest rate risks, we won't require any capital for these off balance sheet Structured Investment Vehicles (infamous SIV's).

But the markets disagreed, they gave a healthy spread even as they narrowed to 20-30 bps over treasuries… The ratio of the spread to required capital for these highly rated RMBS was great. Everyone loved their ROC (Return On Capital).

Like those calm P&C claim years, everybody seemed to be making money. The more numbers you added made predicting those risks smoother. Even the recession of 2000-01, those higher foreclosures were spread more evenly and without large surprise. It appeared the regulators were right, they had conquered the risks. Everybody was accelerating…

This of course caused the '30 times leverage' we heard about. Nobody, could get enough of these… hence driving the spread down down down. This made the regulators even happier as home ownership was up, up, up.

What the regulators missed was the First law of investing, if everybody is doing the same trade everybody is wrong. If everybody is booking extraordinary profits… nobody is as wealthy as they think.

That is hurricanes cause real damage of wealth, mis-allocating capital causes book losses. This is true even in a 12 trillion dollar boring mortgage bond markets; the markets can over allocate capital.

Further, its clear, that like the chaotic path of a hurricane, there are tipping points. Over build too much, in too many places and suddenly the well will run dry. Like the path of a hurricane, those tipping points may appear clear after the fact. But given a few more butterfly's or home-builders here or a few less there and who knows what path it might have taken as the areas waters warmed and cooled here and there.

You may have heard of RESTART, ( a fed program to get mortgage underwriting going again)… They can talk about transparency and more due diligence on the RMBS buyer's part. But whats not being said, how much credit support these mortgages will need. And for the buyer how much extra capital will be needed. These questions however can't even begin to be addressed until the current batch of RMBS are sufficiently run-off the books.

The stress test, however, gives us some idea of the new quality levels and level of capital to be required, but the regulators just can't raise the minimum numbers explicitly without feeding the panic.

In short bubbles and panics may be as chaotic as a hurricane, but are man made by over allocating capital. Because of this, their devastation will affect the whole area that has been overcapitalized, not just a region.

Therefore, the only answer, is to diversify more not just throughout the housing markets, but throughout the markets themselves.

George Parkanyi comments:

Your point about over allocation of capital to the same correlated trades and everyone thinking they are more profitable than they are can be illustrated by one of the funnier scenes from the Jim Carrey movie Bruce Almighty. Bruce, who now has God's powers and responsibilities, is trying to answer everyone's prayers, and becomes overwhelmed. Frustrated, he decides to clean up his backlog by granting everything asked for. The next day, it turns out that several million people have won the New York State lottery, which sets off rioting because the shared winnings end up being about $17 a person.



 Someone had said that, "We shall find out when the tide runs out who all have been swimming nude". Now, I want to believe that such wisdom was an advance warning of things to come.

Someone had also said that Derivatives area a weapon of Mass Destruction and I really treasure such pearls of wisdom that can come only from experience & foresight of the coming future.

Someone had also said that one would only buy those companies that were deep in the value and had a margin of safety. One just wishes, why don't experts stick to their expertise only and not experiment with swimming with the sharks in so many novel ways.

One also does not understand if timing never was of any importance, then how a large loss line item can be attributable to "terrible timing".

One also does not understand that if the large horde of cash is finding no good investment avenues and it is not being returned to the stockholders in the most tax efficient way (agreed dividends are a tax leak and hence one never should hope for them) of stock buybacks then that is a good indication of more to come. I see there is a possible argument that hordes of cash can keep one on the optimal risk reward trade-off curve and that a return of such a valuable thing as cash to the investors cannot be utilized by them in any better way including replication because they are not as great investors. But then less than great investors are continuing to hold larger exposure to the big stock.

Something is missing in my logic. I guess I like to think in circular arguments and can never understand the straightforward phenomenon that could explain all this.

Oh ok, it was also said by many that Cash is King. Then so be it. Long live the King.

George Parkanyi responds:

Well, the tide's back in and everyone is quickly swimming to shore to put their clothes back on. Anyway, not every nude swimmer draws the same attention. (I know, my sister-in-law inadvertently set up a family get-together at a "clothing optional" resort. Imagine our surprise, not to mention the kids'.)

Hydrogen bombs and anthrax are weapons of mass destruction. Derivatives are bets (perhaps weapons of mass embarrassment on occasion). Given a choice — I pick derivatives.

If experts stuck to their own expertise, they might not learn to look at things differently and add to their expertise (or, in the case of some, do everyone a favor and answer a new calling).

Timing? Sometimes a grand entrance ends in a face-plant. (terrible timing) People trip over stuff all the time. But they do get up, and the show does go on (then timing indeed does not matter).

If you buy back your own stock, you use up your cash, but if you later needed the cash, you need to go out for financing. In a credit crisis, if part B isn't what it used to be, then your buy-back may look a little foolish. Then there's opportunity cost - what if something you really liked suddenly goes for half-price, but you've used up all your cash buying back your own stock?

There is such a thing as "optimal risk reward trade-off curve"? Do they sell them on E-Bay?

Interesting. What would happen if you ever did get caught in a circular argument? How would you get out of it to think about something else?

Cash is useful. Elvis is King.



 On February 1st, Cassandra picks up the Wall Street Journal outside her door and discovers that it is the paper for March 1st, one month in the future. She does not know what to do with it, and no one believes her story, so she simply saves the paper. The next day, February 2nd, the paper dated March 2nd appears. This continues unabated. Come March 1st Cassandra checks the actual stock prices and sure enough they all match the prices in her originally-delivered paper. Likewise with all of the subsequent newspapers.

Soon Cassandra puts a PC to use and starts ranking stocks on their average 1-month growth rates based on this perfect knowledge. She then partitions her available capital into 21 tranches and each day purchases in equal values the 200 stocks of the Russell 3000 expected (actually "guaranteed") to do the best over the next 21 market days (1 calendar month). This partitioning eliminates any start-date bias. The returns she achieves are the best possible for a buy-and-hold strategy over that time frame. After all, it is the result of perfect look-ahead bias. Returns for this, the control group from 2001 through 2008, are a not-surprising 25.53 times her capital per year.

John B says, if you give a trader any system, no matter how good, in half an hour he will have modified it in an attempt to improve it. This is true even when perfect foresight is present, and Cassandra succumbs to her curiosity. You see, Cassandra is uncomfortable with the decision to buy-and-ignore. And she is correct to be uncomfortable. She has this constant stream of excellent information, albeit for later periods. It has to be worth something, according to information theory. And Cassandra's intuition is legendary.

Cassandra alters her trading in that she will now only hold her positions for 15 days instead of 21 days. She does this without knowing in advance what the prices will be 15 days after her purchases. When Cassie sells the portfolio on day 15, she will then purchase another 200 stocks based on their next 21-day forecast. Now of course, she is investing with sub-perfect knowledge, because she does not know the price of those stocks on day 15. She is using knowledge farther in the future to trade for a date shorter in the future. Intuitively it would seem unlikely that she could tinker her way to a better return than the perfect portfolio. But she can, and does so repeatedly. Strategy A beats Strategy B, where Strategy A consists of more-frequent forecasting and trading with sub-perfect knowledge, and Strategy B consists of less-frequent activity with perfect knowledge. The 15-day recast produces 39.52 times her capital per annum, about half-again better than the control.

Encouraged by the success of active investment management over a seemingly-unbeatable investment, Cassandra shortens up even more. She still forecasts 21 days ahead on the basis of the newspapers, but she only holds 10 days, or half the forecast period. This produces a whopping 138.53 times her capital per year. Recasting every 5 days produces 56.62 times her capital annually, less than 10 days, but greater than 15 days or the control period of 21 days.

Additionally, these experiences were not limited to monthly forecasting. Trying to further game the system, Cassandra subscribed to Investor's Business Daily, which arrived always a calendar quarter ahead. Her control group 63-day (quarterly) returns were 5 times capital each year. But reducing the holding period to 2 months increased it to 12 times, and reducing it to one month produced returns of 10 times. From 5 days out to the forecasted time in both the monthly and quarterly scenarios, the improvements were universal. Furthermore, extending the holding periods beyond the forecast period was universally worse. This is also true for different rate of return ranking processes. That is, it works identically whether one uses exact rates of change or regression rates of change.


There are two possible explanations for the increased profitability. The least obvious factor would be portfolio rebalancing of an entire portfolio every time new positions are taken. Indeed, rebalancing tremendously adds profitability and the more frequent the better. However in this study rebalancing was excluded for any unchanged holdings. In this study new positions would have had an equal value allocation, and existing positions were left alone to grow or decline in value, unchanged in size until liquidated. Thus with rebalancing absent, there can only be one explanation - that more frequent forecasting is more profitable, even better than some forms of perfect knowledge.

What About Risk?

Increasing profits without consideration of risk is foolhardy. It is worth noting as an aside that perfect knowledge does not always produce profits in every period. This is a long-only strategy in which Cassandra is purchasing the top-200 ranked stocks. There are some periods when virtually all stocks decline, or at least when the average return of the top-200 is negative. Thus we must consider the dark side of investing.

One of the distinct advantages of more frequent analysis and forecasting is that losses get cut earlier, providing damage control. Given the inclusion of risk into the equation, shortened time horizons become exceedingly obvious in the role of risk reduction. Recasting our 21-day forecast every 15 days produced an annual return of 39 times one's money, but at the risk of a 30 percent decline in capital. At 10 days the returns were 138 times, but with a 47 percent drawdown. At 5 days, the returns were 56 times, but the maximum drawdown was only 14 percent. Thus 5 days had a reward-to-risk ratio of 391, compared to 292 for 10 days and 127 for 15 days. The monotone progression makes the point. And it is confirmed in the quarterly data as well; the risk-adjusted rewards are improved by ever shorter forecasting periods.

What Are the Practical Applications?

Here we see a situation in which our investor has perfect future knowledge and yet she is absolutely advantaged by re-evaluating her decisions with increasing frequency. This is essentially a conflict of two mutually-exclusive ideas. On the one hand, perfect knowledge has to win, and indeed it will over that exact period. However it is also intuitive that more-frequent information would be beneficial, if one is willing to shorten the trading period. And here we have evidence of the latter's success over a perfectly-chosen portfolio. If active management can improve a portfolio chosen with perfect foresight, surely logic dictates its value on a sub-perfect portfolio. That would have to be proven, but any of those results would be dependent upon a particular investment or trading program. The beauty of this particular study is that it is program-independent. The clear lesson from this is that any financial advisor who tells you to buy an investment and ignore interim news or market action is repeating some time-honored advice that is clearly and profoundly wrong. The buy-and-ignore strategy only works if you or the advice provider is unable or unwilling to devote more time to your investment analysis. Clearly lack of perpetual investment diligence applies to many investors and advice providers, but the costs of that ignorance or intransigence are generally dismissed.

The purpose here is not to suggest a specific trading frequency, but only to suggest that the trading frequency should be a shorter number of days than the forecasting horizon. Over time there will certainly be sweet spots, and one should not assume those to be constant. Some traders will argue that they trade without making any forecasts. However, every trading decision is at least an implied forecast.

Technicians of course practice their craft with increasing analysis frequency, and they should gain comfort with these results. But some technicians also look at less frequent data, and this work should provoke caution in that regard.

Some fundamental analysts would argue that it is not possible to increase the frequency of analysis. Assuming the fundamental variable of Earnings (released quarterly), that would be true. However the Price/Earnings ratio is available daily, albeit based partly on a quarterly number. Greenblatt ("The Little Book That Beats the Market") uses only two ratios as inputs: Return on Capital and Earnings Yield, and produces daily recommendations. Likewise Haugen ("The Inefficient Stock Market") uses approximately 70 inputs (several of which are technical) very frequently despite the fact of some of their precursor variables are only available quarterly.

Furthermore, the rationale for frequent use of fundamental information is abetted by the blurring of the definitions as to what constitutes technical versus fundamental information. Something we have learned as a result of the recent market declines is that at least one of the major credit rating agencies (S & P) reevaluates its company ratings partly on the basis of a company's stock price performance. A big drop in the stock price might earn that company a downgraded rating. Thus daily priced-based activities (a technical factor) become part of the fundamentals of that stock.

What Prompted This Research?

With so many things to be studied, why spend time on such a seemingly esoteric idea? Well, it's not so esoteric. In our research we had attempted to look at longer time horizons, as we wanted to hold our positions longer. The investment community has sold its customers on the concept that more frequent analysis/increased trading must be bad for the investor. The government effectively limits more frequent trading for IRA accounts, although it is allowed for qualified pension plans. Consequently we started crippling our research to make it equal to "industry practice". Every time we did that we experienced declining results. That of course suggested that targeting separate time frames for forecasting and trading could be advantageous to any trading program.

Research Notes

To eliminate survivor bias our list of the Russell 3000 stocks from 2001 through 2008 consists of about 4200 stocks, the difference being those deceased, merged or otherwise eliminated. The constituents were obtained directly from Russell.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Jim Sogi comments:

Absolutely fascinating. The reduction of risk seems to be a main factor as the rate of variance goes down faster than the decline in profits. Is there a sweet spot for maximum risk/reward, or would it go down to the vig as the timeframe shortens? An exercise for the reader?

Charles Pennington comments:

I know it's problematic to use the word "obvious" in mathematics, but isn't this obvious? The un-updated predictions are partly about the past, not the future, and to that extent they don't help you as much as the updated predictions would.

Bill Rafter responds:

Bill RLots of things are obvious and still ignored. And sometimes seasoned professional traders do the exact opposite of what is obvious.

We learned quite a lot from that research and altered our trading process –with definite benefits. Specifically what we did was to have different time periods for our forecasts and trading, and that was not obvious to us at first.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

George Parkanyi writes:

I did a lot of research on re-balancing fixed names packaged into groups of six, trading on the relative price movement against each other over fixed time intervals. I settled on 4 months as "pretty good". The other major variable you need to consider besides the time frame is the volatility. The wider and faster the swings, the more you can compact your re-balancing time frame. The challenge is try to catch as many smaller interim fluctuations as possible but not to sell your winners too soon or to average down on your losers too soon when the stocks are in big moves.

In my research I ran a large batch of tests keeping the time frame constant but varying the volatility range of the randomly seeded stock simulator I developed. I ran a whole bunch of tests using my simple re-allocation algorithm at different volatility bands within which I allowed my "stocks" to fluctuate. These tests generated an average annual compounding increment over buy-and-hold, that, as you might expect, increased with volatility.

What was encouraging, is that the outperformance generated by the simulated data used in the periodic reallocations matched testing I did on real stock data. Theory was confirmed by reality. You can seriously beat indexing (over the long run) with this type of active re-allocation methodology. The trick is to re-allocate individual securities (index components) against each other, not whole asset classes or indices, which are already smoothed out and much less volatile because they are, by definition, averages.

I've published the re-balancing methodology on my blog if anyone's interested — it's not a long read, and easy to digest, but too long for an email or single blog post. The links to the 3 segments are the first three in the blogroll column under the My Portfolio heading.



SterlingA couple of days ago a tour operator called Conquest Vacations failed. From one day to the next the doors were closed and they filed for bankruptcy. Their vacationing, and about to be vacationing clients, and travel agents for that matter, had no idea and did not see it coming. It turns out that a cash crunch killed them. Credit card companies have recently changed their policies with tour operators, not forwarding them the funds until after the clients' vacations are done - for exactly the type of thing that just happened to Conquest. They are afraid of being stuck with some of the losses if a tour operator goes under. So tour operators now need to finance the flights and hotels and other tour costs in advance. Ouch.

So here we have another form credit tightening that leads to business failures that lead to job losses that lead to further credit tightening (through fear of companies failing) that leads to … companies failing etc… It makes you wonder to what extent we are out of the woods yet, if at all.



 What a difference in the complexion of the world markets from last year where at the end almost every market was down 50% with no exceptions. This year as of March month-end the world markets are down a mere 10% and there are exceptions galore, notably Israel up 15% and Russia up 31%. All over, anomalies exist. Norway up 10%. Pakistan and Taiwan up 17%. Indonesia up 10%. All over South America markets up from 10 to 30 % in Peru and Venezuela. Venezuela up 40% from 1999. Recapping the wisdom of Maturin during the French Revolution advising Sophie to buy stocks, a stridency relevant to today shortly.

George Parkanyi writes:

Many a financial network talking head these days pronounces that "buy-and-hold" is dead. Here, or somewhere around here, is the perfect time to initiate a buy-and-hold strategy. This is from where the $3 AMDs and Motorolas of the world go back to $30 or $40 in the next bull market. And what of it if it takes 10 years, not that it's likely to take that long. That's still 100% per year non-compounded. My ex-high-school teacher and stock market mentor Omar Sheriffe Vernon-el-Halawani in the last two decades of his life (he passed away in 2005) did just that for most of his portfolio — buy good companies on the incredible cheap when the opportunities arose, and just put them away. He introduced me to "Reminiscences of a Stock Operator" long long ago, and in his last few years kept admonishing "George, why bother to sell?" (Though he wasn't inflexible either — he did sell Sun Microsystems once it got to $200. A couple of his closer friends rode Nortel back down to nothing.)

Paolo Pezzutti replies:

What if in ten years from now Motorola and AMD do not exist any more because a Chinese or Taiwanese corporation has wiped out these companies in an already mature market of telecoms and semiconductors? Sort of a General Motors and auto industry fate in 2015? In the meantime we have to see if the Western countries will manage to lead the next wave of innovation. It is not a given.

Stefan Jovanovich adds:

Motorola may survive as a defense/government contractor like Studebaker did; but its days as a competitor in the mobile dial-tone device market are long over. It has a legacy business in walkie-talkies, but those devices are now commercial products for — oh, happy day! — the construction and events trades. The "next bull market" will be in businesses that do not need the help or money of the academic/finance/regulatory complex. Some pissed off genius who is dropping out of graduate school right now because he can't stand another day listening to a discussion about hockey sticks will be the guy who creates a viable alternative to the internal combustion engine. The fact that the next Henry Ford did it because his uncle died and left him enough money to allow him to pursue his dream of racing an electric motorcycle will definitely NOT make the history books. Instead, some not-so-bright but perfect resume student of "economic trend analysis" at Berkeley will write a seminal paper explaining how it was all due to the "convexity of the forces of ecological history" (assuming, of course, that CalPERS has not blown all the money and put the University of California into receivership — which may the wildest of all my surmises). On a happier note, the Cal Men won the national swimming championships this week. Go Bears!

Pitt T. Maner III writes:

"Hardened silo" companies, with strong management, that have survived through and handled multiple, steep cycles over the past decades by mothballing equipment as needed, sending seasoned hands "back to the house" when necessary, and which have high barriers to entry (and negative government support) into the particular business would appear value candidates now. High quality drilling and drilling service companies, over the longer term, are appealing at present prices unless solar, windmill, nuclear, and alternate energy supplant the need for hydrocarbons. There are many other groups and companies that probably fit this undervalued, "tough-times survivor" model that odds would favor moving forward.

Jim Sogi adds:

After such a rally, and now when more and more people and pundits are calling a bottom, and I hear news proclaiming a thaw, and I hear talk of people starting to buy, these are the type of things that put my radar up. It's funny that the news media is somewhat stultified in that despite their steady barrage of bad news, the markets are all up. They actually have to change their copy of bit as it's hard to proclaim, markets up 15% on steady barrage of bad news. Obama did make a good call to buy, the day before the low and gave everyone a chance to buy. He knew what was in the govvy cards of course. That was the time to make the big commitment, not now. There should be more chances before they proclaim the next bull market as the market tops.

Legacy Daily writes:

Given things stay roughly the same, I cannot disagree with any of these comments. The challenge right now is that nothing is given.

For people who trade via systems, I have a question.

At which point does one decide to a) modify the system (and to what degree and based on what), b) discard the system (and why), c) continue relying on the system (and for how long); if such a system is producing losing trades more recently but has worked fine for a long time (definition of time scales not relevant)?

Perhaps the answer contains clues regarding our recent government actions (and market reactions) where the scale of the system and the magnitude of its impact is great. The problem is further complicated by control over one's actions but lack of control over [negative] consequences of those actions in a human system.

The second question that does not leave me alone is whether a game of chess (or any other game) can be won if every few moves, the game rules are modified. Does the player quickly adjust and remain focused on winning the game according to the new rules ("queen can only move three squares at a time" for example) or does the focus shift on guessing what the next set of rule changes may be? After a few set of changes and corresponding adjustments, does the player begin to suspect the rule maker in taking one side or the other?



 These days all one hears is hundreds of billions here, trillions of dollars there. It almost seems like the B and T keys must be getting worn out. At the very least any politician who doesn't think in terms of billions is clearly not a visionary. Since we do counting here perhaps a little back of the envelope counting is in order. Suppose the government were to guarantee every sub prime mortgage out there. What would happen and how much would it cost? Clearly every sub prime mortgage would dramatically rise in value perhaps even higher than the value when they were issued. Their value on the bank balance sheets would rise dramatically. In many cases 3 fold to as much as 10 fold. Suddenly the banks would be wonderfully solid and flush with money. This massive infusion of capital into all the banks would come without a dime of Federal capital injection.

Just because the government guarantees a loan does not mean that the homeowners would or could keep making all his payments. Some will certainly default. Suppose also that the Government took over all such homes and kept them off the market for the duration of the current unpleasantness. Real estate would turn around much faster without the burden of more new homes being sold in foreclosure. Foreclosures would actually decline because a rising real estate market would give homeowners more skin in the game. But what would the cost be? There are 109 million full time homes in the US with $8T in mortgage outstanding. Supposing that the average mortgage is about 6% then the average payment is about 0.5% per month. This amounts to $40B per month. But in the 4th quarter Bloomberg reports that 0.83% of all mortgages defaulted. So the government would only have to $332M in new monthly payments every quarter. It is somewhat embarrassing to write a number as small as millions these days. Millions are so Twentieth Century! But the reality is we could save real estate, the mortgage market and banks by just making relatively small payments over the next few months.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Stefan Jovanovich comments:

Our Dr. Phil's definition of "the banks" is interesting. It includes (1) the borrowers and implicitly (2) the counter-parties to Citi and the other Tennessee Williams banks' outstanding swaps, asset-backed paper and other promises and (3) the bond-holders for these wonders of financial construction. The one group that has been left out of the discussion so far have been those terrible villains of the present economy - the people who insist on saving instead of borrowing and spending money - aka (4) the depositors.

The FDIC has made a belated move to acknowledge that their reserve fund and the contributions of the healthy country banks will not be enough to save the money center bank depositors. As recently as November they were still pretending that everything was OK; now they are realizing they better get in line at the Treasury window if they expect to be able to avoid a bank run. The current increased guarantees for the people who put money into the banks expire at year end. The Treasury barely has enough credit left to make good on its indirect promise to the depositors. If, as Dr. Phil suggests, the "banks" and their mortgagees are going to be allowed to have priority, everyone who can will swap their checking account balances for T-bills and cash. (No doubt Paul Krugman will then decide that it is declining velocity that is the problem.) Having already seen the rerun of 1930, we will see 1933 all over again.

The "crisis" is one that businesses face every day but that most academics literally have trouble understanding (it must be that they can endlessly recycle those same old lecture notes) - namely, the market had changed and a lot of inventory has gone bad. You can changing the price tags on the shelf all you want; no one is going to buy them for cash.

George Parkanyi writes:

I agree with Dr. McDonnell. Western governments should guarantee MOST of the paper (not the worst of the pure sub-prime stuff that's basically uncollectable - something needs to be written down) - at maturity, and not buy it outright now. In fact I would make the interest tax-free in the US, and get the Europeans to do the same in Europe. Make them government muni-bond equivalents.

I would even re-securitize them (make them collateral) for essentially new standardized government Treasury mortgage and asset-backed securities - that would then be traded openly on exchanges - with associated derivates like futures and options created (think the T-Bond or T-Note markets) so the owners can risk-manage them. Banks and financials could then move them off their books over to investors, who would have collateralized government securities - ironically now more safe than unsecured Treasuries.

For all the billions being thrown at the problem, surely a billion or two out of that could buy a lot of accounting and book-keeping horse-power to document, track, and value the "collateral" - the income streams from the mortgage and loan payments, and the value of any re-possessed assets. Create a single clearing house for all these securities that come into the program, managed with a war-time urgency as a matter of national security. The current income, and recoveries from property sales, would fund the first waves of re-payments as they come due. This would serve to defer the un-secured at-risk portion of the total package well out into the future, buying time to resolve all this leverage in a more orderly fashion.

Then move toward solving the structural problems. Still allow financial engineering, securitized products and derivatives, but never again unregulated, off-exchange, or off-balance sheet.

Legacy Daily replies:

I just cannot figure out how the numbers work.

According to this, mortgage debt outstanding is about 15T.

Based on this article around 11% are delinquent.

If government guarantees 1.65T, at 6% average that's 8B per month? Ignoring moral hazard (since already ignored anyway), we still have the issue of 11% increasing as a result of unemployment.

Giving a government ability to hold real estate at a large scale is only a leap or two away from certain factions pushing to "increase" the living standards of the proletariat (similar to what created the sub-prime fiasco in the first place) at the expense of others. With all its issues, the current system of private real estate ownership is a key factor in protecting freedoms. I am sorry but I see many negative "unintended consequences" in the proposals mentioned.



 Deep Survival by Laurence Gonzales is good re-read in these troubled times. I've reviewed it before, (see past discussion on the site here) but so many big and small are not surviving. Live a river, a good book is never the same when read over. He has some good advice.

There are two aspects to survival: avoiding getting into trouble, and surviving once in deep.

How to avoid getting into trouble.

Tao Te Ching says, The farther ones goes, the less one knows. There are a number of phenomenon at work that put you in deep trouble.

1. When in danger, the IQ goes down and the mind starts shutting out appropriate input, or goes into a stupor. This compounds the danger and leads to death. 75% of people react this way. Perceptions themselves change. Its very dangerous. Training and preparation help avoid shutdown.

2. We make mental models and as a result of confirmation bias, ignore cues that the model is not appropriate. Experts are especially susceptible to this. Models are simplifications, and complex systems can go way out of bounds. Like the current market situation. Then the models are no longer appropriate but we cling to them, putting us in harms way. Models come from past experience, limited experience and may not be appropriate as new situations arise, as they always do. Here is where humility comes in. A Zen saying,"In the beginners mind there are many possibilities: in the expert's mind there are few."

3. Be able to perceive, change plans, adapt, bail out.

How to get out of trouble.

4. The right positive mental attitude can keep one out of trouble, and allow survival when in deep. Some aspects of the right attitude are humility, awareness. Take personal responsibility rather than blaming outside factors. Surprisingly empathy and taking on the role of rescuer, rather than victimhood helps with survival. Death comes when people lie down and give up.

5. An interesting aspect of survival is friction. More effort cannot overcome friction. It only leads to exhaustion. Plans never go right, there are always delays, at the worst possible moment. Its Murphy's law at work. Its the vig. The cure is to conserve energy. Only go at 60%. Keep a reserve. Exhaustion is often the cause of death. When in danger or lost, people panic, and start flailing about, become exhausted, and lay down and die. Rather, be still, rest, observe. Then start to consolidate and make a plan. Get your bearings. Don't hurry. Get back on path.

Epitecus said, "Let silence be the general rule, or let only what is necessary be said, and in few words." The idea is to avoid chattering. Mental balance and focus is critical in survival situations.

"If you get a lucky break really use it. You have to fight like a bastard." Says one survivor. Other use other mantras repeated, to help survival mentality.

Last thing: be cool.

George Parkanyi writes:

In late October 1999 I went into a cold river and pulled someone out who had jumped off a bridge. Luckily her winter clothing had kept her afloat, and as it turns out thankfully the rescue was not all that difficult. . When I saw her shadow floating in the dark under the bridge, I remember thinking she could sink at any time, and for all I knew she was already dead. She'd been in the water at least 5-7 minutes. (I had run from the nearby video store to see what was going on when someone rushed in to call 911.) I quickly threw off my coat, sweater, and shoes so I'd have something dry to come back to, said a split-second prayer, and waded in. Then time slowed down — and I felt more like a detached observer. It was like something or someone else had taken over and was driving, and I was just watching it happen. I don't remember feeling the cold.

When I reached her, surprisingly she was still afloat, face-up and conscious. I was up to my chin in water but didn't have to swim. I introduced myself with "Hi I'm George. I'll be your rescuer for this evening. What's your name?" "Nobody", she murmured — par for the course I suppose as she was trying to kill herself. So I grabbed her coat and literally just towed her in. I heaved her onto shore and threw my coat over her, but about half a minute later the firefighters and paramedics arrived and took over.

Before then, I never knew what I'd do in that situation, or what it would be like. As Jim says, the mind really does go into a totally different state. And I think it starts at the point where you've fully committed yourself. But before I went in I did make some quick calculations; perhaps 30 seconds worth — help would be on its way, I was a strong swimmer, pretty cold water, shoes off, need something dry later, how much time to get there, how much time would she have, how much time would I have. So the rational mind is still key.

The one funny thing about that night was the look the video store clerk's face when I sloshed back into the store all wet and finished renting my video.

Russ Sears writes:

Just today, I was thinking about what makes US strong is that we all face the "prisoners' dilemma" together, but most of the people I know tend to think of it instead as the "rescuers' dilemma".

Best case, small gain, most likely case cold, pain from an ungrateful soul, but the worst case…

Do you risk it?

When the neighbor's barn burns or is hit by a tornado, we all pitch in to help. Because we know it could have been us. She may not have wanted help, but if she was your daughter, you would have been delighted that someone like you was there. People here in fly over country are talking survival of buying guns and heading for the hills of Canada or Alaska, if things get ugly and bad. But it is just talk, always will be, we have a duty.

George Parkanyi replies:

Helping others is critical, because as you point out "There but for the grace of G_d go I." I'm sure everyone has been in a position of vulnerability at some point in their lives when a helping hand made a huge difference. It has for me, many times over, and my regret is that sometimes I forget that. And everyone has also been in the position of being that helping hand. I think on balance people will rise to the occasion and do more good than harm to each other as times get tougher here in the near term.

Marion Dreyfus comments:

It doesn't sound as if anyone made a big fuss about your bravery and cool under the crisis conditions. I will make such a fuss: Since I am fairly terrified of water, having drowned when I was 11 and been brought back to life by a doze-y lifeguard who saw a woman take me to the deep end of the pool when I could not swim, I am impressed at your calculations that did not impede your swift and funny intentions. Did you really say "I'll be your rescuer for the evening"? That is hilarious. Belatedly: You are a hero! You deserve some sort of acknowledgment that those people back then forgot to give you. Bravo!

Victor Niederhoffer adds:

My father did the same thing. But it wasn't so heroic because he was a policeman and had to do it. I have the letter from the woman he saved, and she was very grateful he saved her life as she came back and enjoyed life. I know a few people who tried to kill themselvees and they have had very happy lives afterwards including a frequent contributor to this site, who is one of the happiest guys I've ever met, even though his life style might not appeal to those who dont like 150 degree weather. The video store operator —- to make the story complete: "When I sloshed bak into the store, the clerk looked at me in amazement. He said "my goodness, you're a hero. That will be 2.50 by the way ." I said " 2.50!!!! After all that!" He said, "Oh, right, I forgot to add the VAT. Sorry."



Closing prices:

April 21, 1982 (inception) 670.45
Oct. 19, 1987 712.1
today             686.1

A remarkably quiet market.

George Parkanyi writes:

I'm just workin' the drift. man, workin' the drift…



CurveHow can we avoid curve fitting when designing a trading strategy? Are there any solid parameters one can use as guide? It seems very easy to adjust the trading signals to the data. This leads to a perfect backtested system - and a tomorrow's crash. What is the line that tells apart perfect trading strategy optimization from curve fitting? The worry is to arrive to a model that explains everything and predicts nothing. (And a further question: What is the NATURE of the predictive value of a system? What - philosophically speaking - confer to a model it's ability to predict future market behavior?)

James Sogi writes:

KISS. Keep parameters simple and robust.

Newton Linchen replies:

You have to agree that it's easier said than done. There is always the desire to "improve" results, to avoid drawdown, to boost profitability…

Is there a "wise speculator's" to-do list on, for example, how many parameters does a system requires/accepts (can handle)?

Nigel Davies offers:

Here's an offbeat view:

Curve fitting isn't the only problem, there's also the issue of whether one takes into account contrary evidence. And there will usually be some kind of contrary evidence, unless and until a feeding frenzy occurs (i.e a segment of market participants start to lose their heads).

So for me the whole thing boils down to inner mental balance and harmony - when someone is under stress or has certain personality issues, they're going to find a way to fit some curves somehow. On the other those who are relaxed (even when the external situation is very difficult) and have stable characters will tend towards objectivity even in the most trying circumstances.

I think this way of seeing things provides a couple of important insights: a) True non randomness will tend to occur when most market participants are highly emotional. b) A good way to avoid curve fitting is to work on someone's ability to withstand stress - if they want to improve they should try green vegetables, good water and maybe some form of yoga, meditation or martial art (tai chi and yiquan are certainly good).

Newton Linchen replies:

The word that I found most important in your e-mail was "objectivity".

I kind of agree with the rest, but, I'm referring most to the curve fitting while developing trading ideas, not when trading them. That's why a scale to measure curve fitting (if it was possible at all) is in order: from what point curve fitting enters the modeling data process?

And, what would be the chess player point of view in this issue?

Nigel Davies replies:

Well what we chess players do is essentially try to destroy our own ideas because if we don't then our opponents will. In the midst of this process 'hope' is the enemy, and unless you're on top of your game he can appear in all sorts of situations. And this despite our best intentions.

Markets don't function in the same way as chess opponents; they act more as a mirror for our own flaws (mainly hope) rather than a malevolent force that's there to do you in. So the requirement to falsify doesn't seem quite so urgent, especially when one is winning game with a particular 'system'.

Out of sample testing can help simulate the process of falsification but not with the same level of paranoia, and also what's built into it is an assumption that the effect is stable.

This brings me to the other difference between chess and markets; the former offers a stable platform on which to experiment and test ones ideas, the latter only has moments of stability. How long will they last? Who knows. But I suspect that subliminal knowledge about the out of sample data may play a part in system construction, not to mention the fact that other people may be doing the same kind of thing and thus competing for the entrees.

An interesting experiment might be to see how the real time application of a system compares to the out of sample test. I hypothesize that it will be worse, much worse.

Kim Zussman adds:

Markets demonstrate repeating patterns over irregularly spaced intervals. It's one thing to find those patterns in the current regime, but how to determine when your precious pattern has failed vs. simply statistical noise?

The answers given here before include money-management and control analysis.

But if you manage your money so carefully as to not go bust when the patterns do, on the whole can you make money (beyond, say, B/H, net of vig, opportunity cost, day job)?

If control analysis and similar quantitative methods work, why aren't engineers rich? (OK some are, but more lawyers are and they don't understand this stuff)

The point will be made that systematic approaches fail, because all patterns get uncovered and you need to be alert to this, and adapt faster and bolder than other agents competing for mating rights. Which should result in certain runners at the top of the distribution (of smarts, guts, determination, etc) far out-distancing the pack.

And it seems there are such, in the infinitesimally small proportion predicted by the curve.

That is curve fitting.

Legacy Daily observes:

"I hypothesize that it will be worse, much worse." If it was so easy, I doubt this discussion would be taking place.

I think human judgment (+ the emotional balance Nigel mentions) are the elements that make multiple regression statistical analysis work. I am skeptical that past price history of a security can predict its future price action but not as skeptical that past relationships between multiple correlated markets (variables) can hold true in the future. The number of independent variables that you use to explain your dependent variable, which variables to choose, how to lag them, and interpretation of the result (why are the numbers saying what they are saying and the historical version of the same) among other decisions are based on so many human decisions that I doubt any system can accurately perpetually predict anything. Even if it could, the force (impact) of the system itself would skew the results rendering the original analysis, premises, and decisions invalid. I have heard of "learning" systems but I haven't had an opportunity to experiment with a model that is able to choose independent variables as the cycles change.

The system has two advantages over us the humans. It takes emotion out of the picture and it can perform many computations quickly. If one gives it any more credit than that, one learns some painful lessons sooner or later. The solution many people implement is "money management" techniques to cut losses short and let the winners take care of themselves (which again are based on judgment). I am sure there are studies out there that try to determine the impact of quantitative models on the markets. Perhaps fading those models by a contra model may yield more positive (dare I say predictable) results…

One last comment, check out how a system generates random numbers (if haven't already looked into this). While the number appears random to us, it is anything but random, unless the generator is based on external random phenomena.

Bill Rafter adds:

Research to identify a universal truth to be used going either forward or backward (out of sample or in-sample) is not curvefitting. An example of that might be the implications of higher levels of implied volatility to future asset price levels.

Research of past data to identify a specific value to be used going forward (out of sample) is not curvefitting, but used backward (in-sample) is curvefitting. If you think of the latter as look-ahead bias it becomes a little more clear. Optimization would clearly count as curvefitting.

Sometimes (usually because of insufficient history) you have no ability to divide your data into two tranches – one for identifying values and the second for testing. In such a case you had best limit your research to identifying universal truths rather than specific values.

Scott Brooks comments:

If the past is not a good measure of today and we only use the present data, then isn't that really just short term trend following? As has been said on this list many times, trend following works great until it doesn't. Therefore, using today's data doesn't really work either.

Phil McDonnell comments:

Curve fitting is one of those things market researchers try NOT to do. But as Mr. Linchen suggests, it is difficult to know when we are approaching the slippery slope of curve fitting. What is curve fitting and what is wrong with it?

A simple example of curve fitting may help. Suppose we had two variables that could not possibly have any predictive value. Call them x1 and x2. They are random numbers. Then let's use them to 'predict' two days worth of market changes m. We have the following table:

m x1 x2
+4 2 1
+20 8 6

Can our random numbers predict the market with a model like this? In fact they can. We know this because we can set up 2 simultaneous equations in two unknowns and solve it. The basic equation is:

m = a * x1 + b * x2

The solution is a = 1 and b = 2. You can check this by back substituting. Multiply x1 by 1 and add two times x2 and each time it appears to give you a correct answer for m. The reason is that it is almost always possible (*) to solve two equations in two unknowns.

So this gives us one rule to consider when we are fitting. The rule is: Never fit n data points with n parameters.

The reason is because you will generally get a 'too good to be true' fit as Larry Williams suggests. This rule generalizes. For example best practices include getting much more data than the number of parameters you are trying to fit. There is a statistical concept called degrees of freedom involved here.

Degrees of freedom is how much wiggle room there is in your model. Each variable you add is a chance for your model to wiggle to better fit the data. The rule of thumb is that you take the number of data points you have and subtract the number of variables. Another way to say this is the number of data points should be MUCH more than the number of fitted parameters.

It is also good to mention that the number of parameters can be tricky to understand. Looking at intraday patterns a parameter could be something like today's high was lower than yesterday's high. Even though it is a true false criteria it is still an independent variable. Choice of the length of a moving average is a parameter. Whether one is above or below is another parameter. Some people use thresholds in moving average systems. Each is a parameter. Adding a second moving average may add four more parameters and the comparison between the two
averages yet another. In a system involving a 200 day and 50 day
average that showed 10 buy sell signals it might have as many as 10 parameters and thus be nearly useless.

Steve Ellison mentioned the two sample data technique. Basically you can fit your model on one data set and then use the same parameters to test out of sample. What you cannot do is refit the model or system parameters to the new data.

Another caveat here is the data mining slippery slope. This means you need to keep track of how many other variables you tried and rejected. This is also called the multiple comparison problem. It can be as insidious as trying to know how many variables someone else tried before coming up with their idea. For example how many parameters did Welles Wilder try before coming up with his 14 day RSI index? There is no way 14 was his first and only guess.

Another bad practice is when you have a system that has picked say 20 profitable trades and you look for rules to weed out those pesky few bad trades to get the perfect system. If you find yourself adding a rule or variable to rule out one or two trades you are well into data mining territory.

Bruno's suggestion to use the BIC or AIC is a good one. If one is doing a multiple regression one should look at the individual t stats for the coefficients AND look at the F test for the overall quality of the fit. Any variables with t-stats that are not above 2 should be tossed. Also an variables which are highly correlated with each other, the weaker one should be tossed.

George Parkanyi reminds us:

Yeah but you guys are forgetting that without curve-fitting we never would have invented the bra.

Say, has anybody got any experience with vertical drop fitting? I just back-tested some oil data and …

Larry Williams writes:

If it looks like it works real well it is curve fitting.

Newton Linchen reiterates:

 my point is: what is the degree of system optimization that turns into curve fitting? In other words, how one is able to recognize curve fitting while modeling data? Perhaps returns too good to believe?

What I mean is to get a general rule that would tell: "Hey, man, from THIS point on you are curve fitting, so step back!"

Steve Ellison proffers:

I learned from Dr. McDonnell to divide the data into two halves and do the curve fitting on only the first half of the data, then test a strategy that looks good on the second half of the data.

Yishen Kuik writes:

The usual out of sample testing says, take price series data, break it into 2, optimize on the 1st piece, test on the 2nd piece, see if you still get a good result.

If you get a bad result you know you've curve fitted. If you get a good result, you know you have something that works.

But what if you get a mildly good result? Then what do you "know" ?

Jim Sogi adds:

This reminds me of the three blind men each touching one part of the elephant and describing what the elephant was like. Quants are often like the blind men, each touching say the 90's bull run tranche, others sampling recent data, others sample the whole. Each has their own description of the market, which like the blind men, are all wrong.

The most important data tranche is the most recent as that is what the current cycle is. You want your trades to work there. Don't try make the reality fit the model.

Also, why not break it into 3 pieces and have 2 out of sample pieces to test it on.

We can go further. If each discreet trade is of limited length, then why not slice up the price series into 100 pieces, reassemble all the odd numbered time slices chronologically into sample A, the even ones into sample B.

Then optimize on sample A and test on sample B. This can address to some degree concerns about regime shifts that might differently characterize your two samples in a simple break of the data.




 It's unusual for a President to give a buy tip on stocks, but he did. The Japanese government has threatened to buy stocks as well, a thumb in the dyke so to speak. Do you think the mythical "plunge protection" team might be getting ready? I wonder if this is the usual jawboning or something else.

On another subject, I watched The Seven Samurai by Akira Kurosawa for the umpteenth time. The phrase that really jumped out at me was, "If you only defend you will lose." The other interesting aspect was the counting of the deaths of the bandits, one by one. Kind of like these continuing down days. They must be getting desperate.

George Parkanyi replies:

Oh yeah? What's he buying? (Thinking out loud: How many stocks out there have the name Lincoln or Roosevelt in them? Franklin? BEN! … nahh, it can't be that easy …)

This is not unprecedented. Not two years after taking over taking over Hong Kong, the Chinese government bought Hong Kong blue chips (and probably took a few shorts out back to shoot for good measure) to shore up the market during the Asian crisis. It worked; the market rebounded shortly thereafter and they gradually sold off the positions. (They kept the up-tick rule for a while, but only for sentimental reasons.)

I wish I could print money to buy stocks. But people on the whole seem to be purists, and react negatively when I try, for example, to add zeroes to a $10 bill at the check-out counter.



 Should one trust the judgment of the 'experienced'? Experience counts for a lot as long as positions behave normally but in a non-standard game it can lead to stereotyped responses. This probably has market applications in times when everyone is looking for a rock to cling onto.

Here's a question: does a stats based approach to markets equate to an experienced one? If so, how can one avoid being stereotypical?

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

Scott Barrie comments:

Not quite the answer you are looking for but experience vs. youth reminds me of two things… besides approaching middle age I am not young, but still not old enough to be experienced. Back in early 90s when I worked on the CBOE, I heard stories about the founding days. The CBOE was a dumping ground for the "Men Who Don't Fit In" (aka the rabble) or the young, seeking opportunity, or both. Those quick to adapt to the environment, were doing arbitrage trades (boxes) left and right and making a pretty penny –with very minimal risk to boot. It was those who adapted to the difference in trading options vs futures(equities) quickly who scored big and quick. As I heard the stories told, they were STUCK there, away from polite society — like many would consider the CBOT polite society. My point is the young, the pioneers, made good money, and pretty easy money as I heard it told (of course, things are always better in the past, so the story is probably just that).

The second market based example comes from the SEOS crowd. The small players ruled for a few years, making fortunes on a shoe string — as legend would have it. The pickings were easy, as the rules changed and those who spotted the change and were able to implement its nuances made lots of money, at least for a while. Many were young, or off the beaten path (rabble) hence they became known as "bandits" for stealing the tick or two that was the "god given right" of the specialists and market-makers (exchange members). In both cases, I have only been able to meet people who heard the stories of these developments years ahead of me. Those who survived and prospered, gained experience and have lost their youth. Those who didn't only managed to lose their youth. 

George Parkanyi replies:

It depends. You also have to assess the motives. General, broad experience can come in handy when things change greatly or rapidly. There are more potential avenues and adaptations open to someone who has seen how things turn out in many different situations. However, say someone is experienced, but they are willing to live within their existing paradigm come what may (e.g. someone owns a house in a hurricane zone, knows the risks, but is willing to accept those risks - even of death - because they CHOOSE not to change their lifestyle). You may have a very experienced captain that suddenly finds himself in overwhelming circumstances, but ultimately chooses to go down with the ship - that may not be your choice. Depending on your own motives, you may want to follow the example of someone who may not be that experienced, but is determined as hell to survive.

In the current situation as a trader, your first question should be — are the financial markets themselves going to survive? If you think not, then maybe selling everything now and buying some guns and a 5-year supply of Spam is the way to go. If you CARE not (like me), then keep trading and if it goes it goes. Your screen trading experience won't count for much in a Mad Max world, and then your choice is to accept its over and just take what comes.

After you've decided that you'll keep trading, then markets typically do one of three things, go up, meander sideways, or go down. If you're really smart and have lots of experience at reading the signs, you may be able to deduce which environment you are in and likely to stay in for a while. Trade accordingly. If you have no idea, then you may want to build an approach for each scenario, risk manage each, and hope the correct one delivers you more profits than the loss management of the other ones costs. I still think experience will be decidedly helpful to the person who was creative and flexible on the first place, regardless of age. Successful traders tend to be students of human nature — and I would think have a better understanding of how people are likely to react in different situations and environments, and use that to advantage.

As to the stats question, it would depend on what you are measuring. You would still have to assess relevance to current circumstances on a case-by-case basis for each metric you are using. And to avoid being stereotypical, you might want to turn basic assumptions and sacred cows upside down and see what falls out, and just keep asking lots and lots of questions and thinking them through. Also broaden the scope of scenarios you could imagine — it would be kind of like thinking many moves ahead in chess.

It would actually be very interesting to have a brainstorming session on the case for each type of potential market — up, down, sideways or even total collapse.

Nigel Davies adds:

I have a concept I use in my chess teaching which is something I've called 'gardening moves'. This is when you try to find a move which is useful in 'all possible worlds'. These tend to come when one has falsified most of the one dimensional possibilities.

Is the decision to trade a good one in all possible worlds? Probably not. Are there investments that would be good in all possible worlds? Probably not. But there are certainly those which can be OK in most possible worlds.

Go down with the ship? Not flamin' likely! I take the view that any creature worth it's salt has a duty to adapt and survive as well as it can and ensure that its progeny do the same. In my book there's no glory in defeat.

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



 1. Tax savings to the shareholder.  The shareholder receiving those dividends must pay taxes on them at a fairly high rate, and in that tax year.  If alternatively the corp uses that cash to repurchase its own shares on the open market or otherwise, the overhanging supply of shares decreases resulting in a higher price for all shares.  Thus the shareholder experiences a capital gain, which historically has been taxed at a lower rate.  Thus his after-tax return increases.  And he can choose the tax year.  Taxes deferred are taxes denied.

2. The shareholder receives the dividend at a time not determined by himself, and the odds are that it is not the most desirable time for him to receive that payment.  If the shareholder wants some cash, he can sell some shares when it is convenient and/or necessary for him to do so.  If you want some annoying experience with dividends, buy some HOLDERS (an early/anachronistic version of ETFs).  You will get dividend announcements several times a week and your accountant will be delighted with all of the work you have given him.

3. (Opinion) Corps that have cash available to pay dividends are not efficient investors of the capital entrusted to them.  By giving the shareholder a dividend they are saying effectively, "we do not have any good investment ideas; take the money because you probably can do better."  This is not to suggest that all corps should be acquirers of other companies, but they could put some money in R&D to either enlarge share or reduce expenses in the future.  And R&D expenses are tax deductible.

4. (Opinion) The payment of dividends is a public relations game to get investors to hold the stock for long periods.  The process lulls investors into not reevaluating their investment options as regularly or often as they should, which is not in the shareholder's best interest.  (N.B. That opinion is different from what the "buy and ignore" crowd will tell you.)

Thank YOU for your service to our country.

Stefan Jovanovich comments:

I think the point about the taxation of dividends belongs to an earlier time.  The taxable portfolios of individual investors (as opposed to IRAs, SIMPLE IRAs, 401(k)s, etc.) are not a significant part of the overall market.  Most of the shares owned are in the hands of tax-exempt institutions.  Most of the taxable investors are corporations; because of the dividends received exclusion their effective tax-rate on payouts from other corporations is - at most - 15%.  I would hardly want to quarrel with Bill's maths, but it could be argued that the advantage of having a cash payout diminished a 15% by tax could be a better return than allowing corporate management to hold on to the cash and then use it to speculate in their own company's securities.  There are very few Henry Singletons.

George Parkanyi adds:

The dividends-are-bad argument misses the point that dividends are not always static, and when companies keep increasing them regularly, after a while you can be earning a very high yield on your original investment in addition to the capital appreciation.  Companies can also squander money, and perhaps paying a dividend is a better choice than overpaying for some acquisition that blows up.  Dividends can also be good indicators of value where your primary objective is capital appreciation.  Look around you now.

I also would be careful using generalizations like "hope for the buy and hold crowd", implying they are a bunch of bovine followers.  A lot of people have gotten rich by holding on to companies that have grown and dramatically appreciated in value.  In addition to the appreciation, there are tax-deferral and transaction cost avoidance benefits.  In fact, it takes a LOT of discipline to be that patient, especially if you follow the markets regularly.

As for dividend-paying stocks, they're just another useful tool - not for everyone, but for many - in the arsenal of investment vehicles available to traders and investors.  Personally I think that quality companies paying dividends are going to rocket off the bottom first when things turn around because of the yield support and recognition of value, and many of us will be lamenting "How did I miss _________ at 6%?"

Phil McDonnell replies:

Dividends can be an important part of returns.  Most studies of long term stock market returns show that re-investment of dividends accounts for about half of the long term return.  So in the long term they are very important.

In the short term they may be less important.  If a stock pays a dividend of $.50 then it will probably drop and average of $.50 on the day it goes ex-dividend.  So there would seem to be no apparent gain.  But if the dividends are reinvested in the stock the investor is buying the stock a little bit cheaper after the ex-dividend event.

Added to this are the benefits of dollar cost averaging. Specifically when the stock is generally at a low price more shares are purchased with the dividend.  When the stock is high fewer shares are purchased with that same dividend.  Over time this leads to an average price per share that is below the average price of the stock during the same period.

In looking at yields and total returns it is important to look at how the reporting institution does its calculation.  You would think that this is not important and that people like S&P report things on a consistent basis.  A good case in point is that the S&P index is a cap weighted index.  Big cap stocks like IBM, GE and XOM get far more weight than their smaller brethren.  But when S&P reports the earnings for the index, bizarrely, they do not use cap weighting.  The earnings are equal weighted.  Thus an earnings to index level comparison for the S&P is completely meaningless.  An example is that S&P calculates the equal weighted reported earnings as negative for the first time in history.  But if they were cap weighted the earnings would be positive.  If the operating earnings were reported on a cap weighted basis they would be 80% higher than the equal weighted earnings that S&P actually reports.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008



 This question is akin to an inverse of the rabbit from the empty hat trick. The rabbit has to be there in the hat before it has been taken out. The inverse of this trick would be that the affairs of men relating to wealth and money during a downturn and crash are prone to imagining a rabbit vanishing into a hat that was never put into the hat.

Money in its broadest realm is a state of the mind. Cash and currency are but one tangible subset of money, a much smaller one. There are many other tangible subsets. Then there are the intangible ones. The wealth effect espoused by financial behaviorists is but nothing else. Today's context is nothing different really conceptually from the Tulip mania or any other that has happened in between since.

Value is what money is supposed to store. Cash is one form of money. Central Banks are creating money in modern times as their dutiful function. Financial markets are producing money and consuming away their own and others' money creations periodically as a by-product of their other core functions. Whatever can be a store of value and a medium of exchange is money. That's how there was a time not too long ago when the Tulip bulb was the most important store of and producer of more money. As confidence and thus belief in the existing amount of collective wealth and value goes up so does the amount of money perceived goes up. When the amount of money perceived around exceeds far beyond the utility or the utilizable value, mankind is presented with the bills enabling reality check.

Where would the money go that never existed? That rabbit was never put in to the hat. No point in searching it there at least. But then in such cases, there were several rabbits that never existed.

Now markets, crowds, societies and the entire mankind are known to have swung from one extreme to the other one. So, as this all gets prepared to be relegated back behind to leaves of history, yet again the real rabbits will be put into the hat and won't be visible before being pulled out. In markets, non-existent rabbits are being put into hats and existent rabbits don't get seen inside the hat. Men of the markets are indulging in relishing and enjoying the magic of both kinds they are themselves creating again and again.

George Parkanyi asks:

But where has the actual cash that's been created (not the intangibles) gone? Every balance sheet begins and ends with the current assets line-item Cash. I understand that the Treasury can create money out of thin air - but whatever dollars it has created to date exist somewhere as cash - net of those dollars that have been taken out of circulation. It cannot not exist. A big chunk of it may not be CIRCULATING, or at least not in our economy, but it's SOMEWHERE. My question is where? and what would cause the money not circulating to begin circulating again?

Now some balance sheets are of course over-stated because they value assets at a market value that is not realizable. And real cash was lent against those unsustainable values. This just means that a significant amount of cash was deployed unproductively buying a house for $1,000,000 that could be replaced for $400,000, or a $1,000,000 mortgage backed issue that may only receive back $300,000 of principal. But even where cash went to purchase intangibles, the seller of the intangible still received the cash, and either "saved" it or went and bought something else.

If we assume that the cash the Treasury has created over time still mostly exists, then I believe the question becomes to what extent have balance sheets been bloated with unrealizable intangible values? And to what level do these intangibles need to readjust down for businesses to again begin investing and for people to still show up for work and maintain and grow an economy?

There are some potential implications. For example, if you have $30 trillion of cash around the world (I have no idea what the real number should be), then adding another 2, 5, or 10 trillion may not necessarily be all that inflationary. Also, if intangible "assets" on books are 3 or 4 times the amount of cash available, and they suddenly go out of favor (e.g. real estate prices drop, no-one wants junk bonds, no-one wants to pay more than book value for stocks), then demand for cash and "safe" cash equivalents will soar (and cause one godawful depression- especially if the cash is just hoarded). There may even be bank runs despite federal deposit insurance. And what if the real cash is mostly overseas, and we're holding the bag with mostly intangibles? Ouch.

I would expect that the tipping point to inflation will come when we begin to see shortages (or perceived shortages) in real assets (e.g. from droughts causing food shortages or commodity shortages due to global supply disruptions) to meet current needs, but especially if there is a fear-driven demand to acquire and hoard real assets (loss of confidence in the currency), possibly leading to hyper-inflation. That doesn't seem to be the case right now, especially in North America and Europe.

My gut reaction on this is to lean toward the deflation scenario, because even though the Treasury may throw a few $trillion out there, much of it may be absorbed by born-again savers and foreigners, and still mostly stay out of circulation while asset prices fall. However, that deferred latent purchasing power, when unleashed, could be enormous when asset prices finally turn.

Easan Katir comments:

George, here is the train of thought I think you're asking about/ applying your line of questioning to what everyone says is the root problem: housing.

Trillions were in pensions and sovereign funds. Pension plans, sovereign funds, no doubt Orange County ( they get in on all the deals ) bought CDOs from investment banks. So their cash went to investment banks. To create the CDOs, the banks had to buy mortgages from lenders. So the cash went to mortgage lenders. To originate the loan, mortgage lenders gave cash to home sellers. At this point in the logic train we have two layers of paper, not cash: CDOs and mortgages, which have had to be reduced in value because the home buyers overpaid.

Buyers and lenders gave their cash to the homebuilders, who were of course, sellers. So the homebuilders should have mountains of money. Since they don't appear to, one assumes they must have taken their money and bought more land, built more houses, which they couldn't sell, and have had to write down. Some cash went to the land sellers, the subcontractors and the materials suppliers. Private homebuilders bought more investment real estate, and gave their cash to those sellers.

Those who now have the trillions don't seem to be standing up and waving "it's here. I've got it", do they….

So a "nutshell" answer to your question, "where is the cash?" might be, it's in the bank accounts of anyone who was a seller of houses, land or stocks a few years ago. Herb and Marion Sandler, for example, who sold in 2006.

Stefan Jovanovich comments:

Most of "the money" is gone. Some very little of it is sitting in safes and vaults in the form of greenbacks and bullion, but most of it is simply up in smoke. Very few of the people invited to the A-List party have the wisdom to want to leave early or the guts to be seen leaving early. The homebuilders here in California put most of the money they made into options for and outright purchases of new lots, heavy equipment and (in the case of the public companies) stock buy-backs. They also paid a lot of money in income taxes. The value of the lots they bought or optioned here in California is close to zero, and I assume it is the same in Florida and the other places that saw a boom. The heavy equipment is worth between 10 and 25 cents on each dollar they paid in 2005, 2006 and 2007. (It is not just the slow-down in orders from China that is killing Caterpillar right now; the competition from used equipment is murderous.) The idea that somehow only we poor Americans were the suckers is funny. If anything, we have gotten off comparatively easy. The property markets in Europe and the Middle East and Asia have, as the Beach Boys might have put it, all become California dirt; and their central bankers bought far more of our crap paper than Helicopter Ben bought of theirs. What is also funny is the notion that the money center banks need to start lending again to get the economy moving again. They ARE lending - to the Treasury. Why, in a world of ZIRP, should they do anything else?

Bud Conrad writes:

Bud ConradThere are so many good questions and answers it is hard to focus on simple explanations. But first a few clarifications on George Parkanyi's initial point of view: Money is not a real thing of substantial value, and it is not created by the Treasury, but by the Federal Reserve. The Dollars in your pocket are Federal Reserve Notes. This is a minor point because your question makes perfect sense if you wrap the word "government" around both the Treasury and the Federal Reserve, and replace your use of the world Treasury by the word government.

Then your question still stands: Where did the money go? First, the real assets of homes and land and factories still exist, and they are still owned by someone. What disappeared was the value expressed in dollars. This is a form of money implosion as experienced by holders of deeds of trust that don't cover the defaults. It means less money in total. That is why we have deflation.

But as you say the government (Fed) can print money pretty much at will to keep things going. The system of fractional reserve banking is set up so that most of the "money" comes from the banking system as it makes loans. For example, mortgages are used to buy homes, not the money from a down payment. These mortgages were based on the banks making money by creating loans. About 6 times as much "money" was made by the banking system as by the Fed. In boom times and according to theory, banks always want to make more loans as that is the way they make money. They are constrained by having enough reserves to meet the Fed's requirement of supposedly 10% of deposits put on deposit at the Fed. When the Fed adds new reserves by buying Treasuries from banks, the theory expects the banks to make new loans an "multiply" the money throughout the economy making new loans. In this situation today, the Fed has bought Toxic waste giving the banks new money that could be lent. But the banks aren't lending because they have bad debts, and need to have capital adequate to meet regulatory review and because they can't find lenders they can trust who want money. So the banks have piled up "Excess Reserves" at the Fed and the money multiplier is leaving the Fed "Pushing on a string" getting no expansion of the money, even after their bailouts that they thought would be stimulating.

P.S. I like the rabbit that isn't there being put in the hat as explanation as it makes as much sense as all the details here. It is only an illusion that money is worth anything, that is left over from convention before 1971 when foreign central banks could convert dollars at $32 per oz for gold. De Gaul reached for the gold and Nixon slammed the window on his fingers after we sold off half our store. Since then it is mere historical convention, image and illusion that keeps the dollar afloat.

Nigel Davies offers:

Here's another take on it. What if most energy in any system is lost simply through friction, this frictional tendency actually increasing during an asset bubble. When the bubble deflates again, most of what you have left is the huge waste caused by people chasing something that never really existed in the first place. They were pursuing an optical illusion caused by increased liquidity and dissipating real wealth via their frenetic activity.

Jim Sogi writes:

Money, cash, and credit, is merely a counting method for confidence, or now, the lack thereof. It is created as an ether, and disappears as the fog. It is a strong only as our full faith. With mass communication, global memes seem to spread faster, turn on a dime, so to speak. I wonder if there is a correlation between speed of decline and recovery time?

Vincent Andres responds to Nigel Davies' questions about China:

Once upon a time they did build a big wall, I would posit it's now imprinted in their DNA. The surface inside the wall + the number of people there seems already a nice piece to manage. And btw, In 2008, everybody also knows how too big empires end.

So, I'm really not worrying too much about China. China managing China is already a really great challenge. Kudos if they succeed.

Just my two cents feeling, I would like to hear the flaws/missing points above.

George Parkanyi adds:

The mitigation of risk and the collective formation of capital in the capitalist system incents exploration, invention, innovation, and experimentation. Look around you at the marvellous things it has built, and the amazing discoveries it has facilitated. Next time you take a flight think about all that went into you being able to do that. Or even just driving a car. There's nothing really wrong with the current monetary system other than we've allowed it to run amok. Credit is fine as long as there is a reasonable expectation of most of it being repaid. (But even if it isn't the stuff gets built anyway; someone eventually just takes a haircut.) With some better checks and balances, there is no reason we can't dust ourselves off from this face-plant and continue to progress - hopefully a little less rough-shod over the environment and each other. The key is to keep enough people incented to keep innovating and working productively to sustain the complex societies and systems we have built.



 “A Scout is kind and cheerful, helpful and trustworthy, considerate and clean, and wise in the use of all resources.”

This is Scouts Canada’s Scout Law, and the last phrase “wise in the use of all resources” strikes to the heart of improvisation when used in the context of creative problem-solving. As a Scout leader who does a lot of camping in different locations and different situations, I’m surprised at how poor improvisers children are, and I think it may have to do with the type of thinking that goes along with structured curricula at school. Younger kids at play with toys can be great improvisers, but does the school system bash it out of them?

I’ve found over the years that improvisation provides some of the most satisfying moments for me — particularly in outdoors situations. Just recently at a winter camp, I trekked into the woods on snowshoes to be the “lost” party in a search and rescue exercise. They were expecting me to start out along a path we had snowshoed the night before — but I changed the rules a little. Instead I walked up the road in boots about half a kilometre and then entered the forest directly there on snowshoes in deep snow. A found a rock outcropping overseeing the immediate area, but fairly far from the original path the Scouts would surely follow, and cleared enough snow to make a fire. All I brought with me was a box of matches, a plastic garbage bag, some nylon rope, and a walkie talkie on which to communicate with the other Scout leader Steve. While they roared off in the wrong direction, I scavenged deadwood from the immediate area, and using some resin filled evergreen branches, was able to get a fire going. My plan was to make it easier for them by seeing the smoke (which they never did). With the materials I improvised a very comfortable chaise lounge. One snowshoe I placed flat on the snow at the edge of the fire-pit (the depth of the pit gave me adequate leg-room), and flush against two saplings about 1½ feet apart, and the second I lashed to the saplings as a back-rest. Then, with the plastic bag as a seat-cover to keep me dry, I sat and enjoyed the morning sunshine, warm and toasty by the fire.

They had no clue where I was, so I called on the walkie talkie and determined where they were. I knew they needed to back-track so I told them to do so, and then in about ten minutes to call me again. When they did, I told the five of them to holler as loud as they could. I heard them very faintly , but enough to get a bearing on them relative to the sun. I relayed the information that they needed to travel in the direction of the sun directly at their backs. They couldn’t do that exactly and followed the trail back. We used this audible technique a number more times, and finally I gave them a due East bearing from the trail. For a while they couldn’t hear me (one voice), but once they did they zeroed in quickly. As the snow was really deep, I was surprised however to see they didn’t bring their snowshoes. “We didn’t think we’d need them”. I laughed. My rescuers were bedraggled and tired, boots full of snow, while I was “suffering” from my “injuries” by the fire in creature comfort.

My proudest moment though this year was the fall camp where it poured non-stop. So badly that some troops left. A had stayed at the base station doing warrant work (teaching kids how to use knives — no, not throwing them), and realized that the hiking party would be getting back cold, wet, and miserable. So I suggested to the other leaders we should start a fire if for no other reason than morale. We had a tarp up for one of the stations, but needed to get it higher to put a fire under, so we tipped a picnic table against a large tree and used it as a ladder to gain height. After tying off the heightened tarp, we then took the picnic table and set it against the fire pit we had built as a drying station. Additionally I crossed a bunch of ropes about five feet over the fire, and presto-– we now also had a make-shift laundry. Sure enough the kids returned and gladly huddled around that fire. And we dried enough clothes so they could go to bed dry (important for keeping warm) and stay overnight.

I love improvising, and I hope some of it rubs off on the kids. In trading, the great improvisers use liquidity and correlation well. If a set of conditions would move say five or six markets in a particular way, then good traders will take positions in multiple to markets to mask their overall movement, create liquidity for themselves, diversify to some extent, lock in profits, and/or to trade themselves out of a bind. I’m sure many traders here have improvised their way to profits or out of a jam — and that there are some great stories.



 During my chess career I learned a lot about the dark side of psychology. One thing that I didn't put into 'Chess for Scoundrels' was how to talk a tournament leader into self destruction.

It goes like this. Let's say that a particular player is leading a tournament and is really 'in the zone'. The way to ruin him is to congratulate him on his magnificent play and then innocently ask what exactly is he doing right? This works in 2 ways, the first part (the flattery) being to cultivate vanity (more preening, less vigilance) and the second (requesting the explanation) fosters the kind of self-consciousness which takes them well and truly out of the zone.

Now I don't use this myself, but I've seen it done many times by, let's say, 'well meaning' fans. They flatter and beg advice, thus unknowingly sowing the seeds of self-destruction in their hero. And of course they promptly move onto a new hero when that one happens to fall.

This is why it's better to only flatter your enemies. And run like the wind when you're the lucky recipient.

Pitt T. Maner III adds:

Gamesmenship is practiced in many sports. And Stephen Potter was one of the masters in a good-hearted way:

All this failure is important, for it never would have occurred to a successful man to devise the four strange books that were the making of Potter's reputation as a comic artist. The idea for these books first arose while Potter was playing tennis with the philosopher C.E.M. Joad as his partner, against two younger and better players. After hitting a ball that was obviously well out of court, Joad called, "Kindly say clearly, please, whether the ball was in or out." By suggesting a slight lapse in etiquette on the part of the younger players, good sportsmen both, it threw them off stride, a stride they never regained, and Potter and Joad went on to win the match. "For me," writes Potter, "it was the birth of gamesmanship." "Gamesmanship" is devoted to "the art of winning games without actually cheating." Actually is the key word here. In tennis, golf, chess, poker, cricket, bridge, hunting and other games, Potter suggests delicate ways of breaking the flow of concentration in your opponent so that he stumbles and falls off his game. A gamesman does what he can to make sure that the best man does not win.


George Parkanyi comments:

This would suggest a corollary that insults and criticism would only just strengthen the already confident, i.e. the rise to the challenge gets the creative/competitive juices flowing.

It reminds of a recent football game — I think it was the Super Bowl. For some unknown reason, this huge Pittsburgh player went after this much smaller Cardinal player tossing him around like a rag after the whistle had blown. I remember commenting at the time — "What did he say to that guy?" It certainly was something.

Paolo Pezzutti writes in:

It happened to me after a long streak of winning games during a tennis match. For some reason I was in the game, focused and ready to exploit any weakness of my opponent. But when I would start to rationalize what was happening and why it was happening and building scenarios for the final victory I was finished, and eventually I would lose at least the set. Maybe it's because you take bigger risks: you think you can do even better and change something in your tactics. This makes you out of sync with your physical and mental condition which builds an advantage to your adversary. Similarly in the markets, after a long winning streak, when I try to analyze the what and whys, I end up changing the way I have been trading up to that moment and things get worse.

Nigel Davies adds:

Empty sycophants can be bad news for any teacher, especially teachers who are active participants in their activity and need to maintain great focus and self discipline. I've found in my own mentoring work that the best students can be very difficult, but they can actually help you raise your own game.



I'm sounding alarm. Amidst signs that:
1. Trading and Investment capital is continuing to contract.
2. Political and regulatory interferences are becoming more chaotic
3. Economic downturn's impact is widening
…it is harder than ever before to pin down intermediate-term opportunities. Those who've been trading in-and-out and even reversing every few days (albeit, with year-opener bias in mind), have done well. But in the course of February, year-opener directions should fade. Sector by sector:
1. SP: Commercials have been on the right side of every twist-and-turn. Raising Net Longs late Q4, shorting early Jan, buying again mid-Jan and selling again last week. Test of Nov lows is certain - and only then the panic will reach the pitch tone. However, it's important to not lose sight of the absolute diminishing values: what will look like the ultimate break-down - in fact, will have little room to forge ahead, relative to enormous Bear coups of 2008. When smaller players finally go overly Short on new lows, en mass - they'll find little reward.
2. Treasuries: 30y futures have retraced exactly half of their straight-line Q4 sprint 111->142, thus relieving unconscionable Xmas overbought. O.I. pattern is bullish at current juncture, dropping on down-days and rising on up-days.
3. Currencies: C.O.T. display intriguing divergence vis-a-vis equity-Bear posture. Yen commitments are Bearish, while SF Bullish. I'm getting ready for substantial reversals in both dropping European currencies and rising Yen. My scenario is that such reversals will be playing out against the background of equities' panic, and will catch Specs flat-footed.
4. GC commitments got predictably stone-walled in course of super-rally. Commercials offered scale-up across the precious metals complex. While long-term outlook for Gold is unavoidably Bullish (given few viable investment alternatives), I'd much rather be a buyer on any sharp profit-taking spells, than on any "strong trend". Copper O.I. pattern remains Bullish - but it will be up-hill battle against the back-drop of equity panic.
5. Energy contracts remain in disarray, with little of new indicators in the past week. Of note CL 6-week consolidation pattern that follows vertical 147->33 move, record HO O.I. levels, RB price out-performance (not supported by O.I. pattern) and NG price under-performance, nearing very important $4.05 low of 2006. My conclusion is that the complex will struggle with equities - and that important buying opportunity will form in the process.

George Parkanyi comments:

I admit that I apply COT like a simpleton, but time and time again I've noticed that aligning with the commercials in physical commodities (in the financial indices or currencies I don't even know who a commercial is, or if they're particularly bright enough to make a difference) generally gets you going in the right direction. THAT I learned to pay attention to from Larry's excellent books on the subject. (Unfortunately, Larry, I didn't follow your money management advice and eventually skewered my commodities account).

A guy called Barry Lees runs a site called cotfutures and basically all he does is reorganize COT data into a useful format -particularly a rolling 18 month 0-100 ranking representing the range between the maximum commercial net-short position (0) and the maximum net-long position (100). I've found the 0-10's to be pretty good markers for a downward reversal and the 90-100's for an upward reversal. Speculators would be at the opposite side of the spectrum. There are other factors of course, but these are pretty good ballpark indicators.

Right now, Copper and Rough Rice are at 100-0 extremes, corn 98-4, oats 93-1, cotton 93-20, lumber 92-14. The latter makes sense - it reflects the housing market and consumer staples (leprosy). Gold and oil are mid-range and inconclusive by this interpretation. The closest thing to a short are hogs at 24-63, which is not really considered to be an extreme. (Commercials seem to have not much of a market to sell into and must be cutting back production or holding back inventory because prices suck. Anyway, that's the way I might interpret it.) Would I rush out and by copper and rice right away? Not necessarily. But to buy copper stocks right now to invest for a couple of years might not turn out too badly.

Larry Williams adds:

Not that I know it all, but a little more than most I kid myself, so I will comment what Lees is doing is 10 years behind the times and fails to take into consideration price levels–a critical point.

COT is actually entering bullish area for hogs—2 weeks ago entered bullish are for lumber but not a great buy point due to price levels. Commercials buy all the way down as they take delivery and use the stuff—they are not spec buyers—and that must be factored in….same in copper sure there's been commercial buying, but low price levels induced it.

James Goldcamp writes:

Conceptually I've always had a hard time taking COT serious in markets where the futures markets are not a significant portion of the overall business such as SP(stocks). Isn't the SP overshadowed by the cash market for stocks (where many of the big players such as mutual funds don't use futures at all or minimally)? The same would seem to be true for the currencies. Perhaps you might argue (with respect to markets where the futures are not significant portion of the overall $ traded) the structure of who is positioned in what manner is indicative of sentiment ; however, I cant believe it's driving anything.

Larry Williams replies:

currencies have a very strong commercial influence; international corps protecting sales in various currencies.



A while back I pondered how some of the Beatles songs might have worked out differently had the lads been bitten by the trading bug. Would they have written:

All You Need is Cash

Don't Mark Me Down

When I Saw Her Shorting There

Day Trader

Hey Crude

Bet it, Lee

Dear Prudent (Man)

Penny Stock

Sgt Peppers Lonely Shorts Club Band

She's Leaving Home (Depot)

You've Got to Hide Your Dogs Away

I Am the Wall Street

Norwegian Wood (a good day on the Scandinavian bond desk)

Hello, Good Buy!

Maxwell's Silver Outlook

Backing the USSR

With a Little Help From My Friends (more recently the Galleon company song)

The Long Unwinding Debt

Get Black (popular with compliance departments)

Here Comes the Stun

RICO Raccoon

Can't Buy Me Bonds

Help! (works either way)

Broker You're a Rich Man

I've a Got a Feeling / Hurl (medley)

If It Fell

Sum Together (also known as The Settlement Song)

Act Naturally (also known as The Audit Song)

Things We Shed Today

Everybody's Got Something to Trade Except for Me and My Monkey

Helter (Tax) Shelter

When It's at Sixty-Four

We Can Work It Out (margin call set to music)

You Never Give Me Your Money (second, more urgent margin call set to music)

and finally …

Fool on the Till



 Many people misunderstand capital. Even if all our dollars are rendered worthless, that does not change the fact that land, buildings, roads, the tools of our trades and above all, human ingenuity is still all there. (True capital) Dollars have no tangible value. (Zimbabwe dollars have even less). The Emperor never HAD any clothes — we just all mutually agree to see clothes where there actually are none. Money is just a scoring system to determine how much of my efforts and the fruits of my efforts I will trade for your efforts and the fruits of your efforts. People who think they have value in cash, CDs or bonds, or to a large extent stocks, and park all their lifetime accumulated efforts there would be big losers if that particular scoring system fails. (Unfortunately, as traders in electronic blips, it would also probably suck to be us in this scenario.) People who retain control of physical assets through simple possession or specialized knowledge would end up the winners. (Look at who’s rich today in the pieces of the old Soviet Union and its satellites. Typically, yesterday’s communists are today’s big capitalists.)

If our currencies became worthless we would simply have to invent other media of exchange and new ways for re-mobilizing all the physical and intellectual capital that would still be there and at our disposal.

The concept of the potlatch is actually quite interesting. Purposeful wealth destruction had the social preventative/regenerative effect similar to say, fires deliberately set to prevent larger fires and/or regenerate land. The end of money, or the current form of it, is not necessarily the end of us.



 Ships generally tend to be mission-oriented (e.g. finding and engaging an enemy, delivering a cargo etc.) as opposed to process oriented. If you want men to follow you, there needs to be a strong sense of purpose attached to the activity. People need to identify with and be part of something, and to feel that there is meaning in what they are doing. They will take on even menial tasks much more willingly if they know it is for something special.

The most fun and satisfying job I ever had was on an actual space mission. Our team was stationed for 3 months in Perth, Australia at the Aussat tracking station, and our job was to acquire the signal from the satellite Anik C1 after launch after it crossed into the Eastern Hemisphere on its shuttle orbit. We had a tight team, each member with distinct responsibilities– mine the operation of the computers and the software. Failure was not an option. At risk was a $300 million dollar satellite and multiple millions of transponder revenues to the company. We worked hard, testing and practicing, but we also partied and played hard. And we of course succeeded. It was a great experience. Create a purpose — and they will follow.

On a side note, that job spawned an awful lot of stories. They would be true, and would have titles such as:

“The Cherry Blossoms of the Hakone Hills (Japan)

”“The Vending Machine … or … Drawing A Crowd at Mt. Fuji”

“The Star Ferry, Kowloon, and Victoria Peak”

“Lobster at 30,000 ft on Singapore Airlines”

“Being Sprayed at 3AM by Men in Space Suits.”

“Being Propositioned at the Koolabah … or … Thank God She Fell Down Before She Got to the Table … and … Why My Colleagues Thought That Was Beyond Funny”

“Cigars at Night on Sorrento Beach, and the Great Green Meteorite”

“Leo T’s Retirement Plan”

“The Hughes Guy Did the Car-Mounted Camera for Steve McQueen’s Famous San Francisco Car Chase! Go Figure”

“Man on Beach Discovers Yin-Yang Sign is Actually the Moon Observed From the Southern Hemisphere”

“Sleeping in the Car Outside Bendigo”

“Abandoned Railcars on the Trestle at Bonegila (NSW) … or My First Australian Home Was a Refugee Camp”

“Visiting My Childhood Neighborhood in Eden Hills, SA … or … Why Does Everything Look So Small?”

“Driving on the Wrong Side of the Road - and All That Entails”

“It’s 43 Degrees C Outside - I Know, Let’s Install the Feedhorn in the Bird-Bath*”
* slang for antenna in stow position

“My Day at the Nude Beach”

“The Unofficial Coded Messages Slipped Into The Daily Mission Control Report … or … Had They Known”

“A.G.’s Unofficial Topless Beach ‘Photo Shoots’”

“Casually Chatting With Micheal B. As He Walks Out of Fremantle Bar Carrying a Newly-Found Girl Slung Over His Shoulder.”

“Rob P. Found Asleep Pants-Down in Toilet Stall After Brief Search by Fellow Drunks.”

“Crashing the Oilmen’s Association Cocktail Party, and Stealing Off With Their Women”

“Welcoming the QE2?

“Welcoming the Concord”

“My 3 Days on the Indian Pacific*”
* Sydney to Perth transcontinental train

“Shooting Pool With Gold Miners in Kalgoorlie”

“Buying a Water Polo Team Raffle Ticket in Kalgoorlie … or … My Shot at Winning a Side of Beef”

“Also During Kalgoorlie Lay-Over - Strange Kiwi Travel Companion Finds Reasonably Priced Horizontal Refreshment in Tin-Hut Alley”

“There’s No Such Thing as Too Much Pizza, Cricket, and Monty Python; oh yes, and Souvlaki”

“The Girl in the White Bikini”

“Officially Verified, Playing Cricket in a Parking Lot is a Bad Idea”

“The Kodak Girl … or … The Most Amazing Red Sweater in the World”

“Finding Circuit Board Cleaning Spray with 15 Minutes to go Before an Australian Long Week-End”

“Bringing to Life the Expression ‘Not Being Able to Get Laid In a Whorehouse’ … or … the One-Armed Madam”

“The Swan River Wine Tour … or … No Man Left Standing … or … Group Vomiting on the Swan River”

“Catamaraning on the Swan River”

“Swimming After Catamaran on the Swan River”

“Foster’s, Toohey’s, Swan Lager … We Drank It All. No Really, We Drank it ALL”

I think I’d better stop … 



 Sometimes direct is best.

Today, because of the current transit strike in Ottawa, and because it was not like 40 degrees below zero outside, I walked to work, and for once remembered to bring my iPod. Trudging across the Minto bridges that span the Rideau river just above Rideau Falls, I was suddenly enveloped in soft early-morning sunlight streaming through the trees and stretching their shadows across the frozen snow-covered river. A pretty half-moon was bolted onto the clear blue sky at about 1 o’clock (degrees), and Boney M’s catchy “By the Rivers of Babylon” was boogying through my head. It looked as if everything was settling into one of those rapturous slow-motion magical moments, but then “The Tennessee Birdwalk” (a novelty song) came on. Well that’s like listening to Vivaldi followed by the chicken dance — and that was that.

But it was a nice morning, and I was making good progress. It got me thinking about my dreadful attempted commute of just the day before. The plan had been to “drop off” the boys at their schools downtown (since there were no buses because of the strike), and then drive in to work, leave early, and do the rounds in reverse. Well it had been snowing pretty heavily, and as standard operating procedure, two snow-flakes and everyone in Ottawa forgets how to drive — but with the transit strike it was much worse.

I went for my favorite short-cut, but when I got to my re-entry point, traffic was seriously backed up and going nowhere, so I went the other way and tried another short-cut, and another, and everywhere, in the direction I wanted to go, there was nothing but a sea of red tail-lights stretching out ahead. Then the kids started. “Why are we going to Toronto?” “Shut-up, Tom.” “I don’t recognize this part of the city.” “Shut-up, Nick.”

I finally gave up, worked my way into the crush of cars clogging the artery that I had ended up at, and just followed the car in front of me — for an hour. I dropped off the kids — way late, and then got to my work a full two hours after I had started out. No parking, anywhere. 3 lots later I capitulated in disgust and drove home (took 5 minutes), and just worked from there.

I can walk to work (as I did today) in 40 minutes (a guaranteed, known return). Instead, I tried to take one short-cut, then another, and another, just digging myself in deeper — getting more and more late. Had I taken the route Cindy does when she drives the kids, it would have been slow, but much more direct and I probably would have gotten to work in half the time — and found a parking spot. As I walked on this morning, I thought about how my little commuting disaster sounded a lot like some trading I’ve done in the past.

Thought I’d share.



ShoeDecember 14, 2008 - (Buleumberg News). This evening at a press conference in Iraq, an unidentified assailant threw two shoes at George Bush in rapid-fire succession, which the president nimbly avoided.

Given the lackadaisical Secret Service response - no agents dived to take a shoe for the president, nor returned fire with their own shoes - the breakdown in security was considered complete, and it is expected heads will roll.

It’s not yet clear what shoes were used in the attack, but according to Jane’s, Florsheims (which several experts have suggested they might be) are more of a long-range shoe, whereas the Gucci is favoured by NATO countries for short-range tactical operations (and mess parties). Nike’s may look scary, but they are mostly just rubber and canvas, and generally better suited for crowd control.

It’s not clear how the assailant acquired the shoes, or who financed them, but there’s been no shortage of shoes on the black market since the collapse of the old Soviet Union.

The anti-shoe lobby, born of the sordid Imelda Marcos years, is of course outraged, sparking worldwide demonstrations outside Italian embassies for better shoe-control.

The president had not yet revealed what he plans to do after he steps down in January, but the White House did acknowledge that dodgeball offers have started pouring in from across the country.

Dec/15/2008 03:52 GMT FR/23B

Nigel Davies remarks:

I was quite impressed with the Prez’s deft shoe avoidance and wonder how many other politicians would have shown similar dexterity. For example out of the last three Democratic Prez nominees I believe that only Obama would have shown a similar level of skill.

Dan Grossman agrees:

T JeffersonI agree with Nigel, Bush was very deft in dodging the shoes, with minimal movement, not flinching or making a big deal of it.

Raises the question, what President was the best athlete? Probably Bush 41, at least at time in office, because good athlete and relatively young. A runner and cyclist, undoubtedly an infinitely better golfer than Clinton (even though latter made such a big deal of it) and Eisenhower. But consider:

Bush 39 was a star baseball player at Yale, while Bush 41 only a cheerleader. Bush 39 a wartime fighter pilot, survivor of crash, parachuted on 70th birthday.

Kennedy a good athlete and golfer, although severe back problems.

Ford a star football player, so could well have been best of all, athletic reputation unfairly ruined by Chevy Chase.

Washington was best horseman in Virginia.

Jefferson rode horse for days to inauguration in Philadelphia or some such.

Don't know enough about 19th century presidents.



vicAn interesting question is to what extent news is news. Oct 16 at 3:00 pm, news of a rescue plan for the insurers came out with the market down 1%. It immediately rallied 4%. The question is would it have done it without the "news"? And to what extent was the news in the market? Looking at Israel one notes it was down only 2%, catching up with a 12% decline in the US. The extent of the decline at 11:00 was similar to yesterday, and last week, and the path similar to last Thursday. Would it have repeated without the news, and was the news elicited, as I have often said, without quantifying for Thursday, to be the last gasp? It would be interesting to generalize this question. For example, gold rallied a few percent the day before a Libyan jet was downed in 1983, and it turned out that the downing of the plane was already planned as a shot across the bow to our friend Muammar.

George Parkanyi adds:

This whole crisis has very much been managed with strategically released "news." Every time the market has started to turn ugly, the Fed, Treasury, central banks, larger institutions take some action and make some kind of announcement designed to reassure the markets and the public.

Today for example, Warren Buffett announces he's buying (probably already has bought [chuckle!]) equities. The announcement had great timing, as everyone hangs on every word of his [except on this web site], this is a Friday, also a volatile options expiry day, and there's been a little bit of recent upward momentum. I'm sure (well my guess anyway is that) the Feds asked Buffett that if and when he did start buying, to let them know so they could time the announcement to maximum effect.

Steve Leslie writes:

Interesting philosophical question "When is news news". Answer: All news is news. I suppose your question truly is when is some news more important than other news. Obvious answer: news that is unexpected is important news and news that the consensus is keying on or deems relevant at that particular moment in time.

For example if one were to study the movie Trading Places with Eddie Murphy and Dan Ackroyd we see that by having information that was not available to the general public ahead of time, it gave them a great advantage to trade ahead of the news and make a great deal of money in Orange Juice futures.

We also see in the movie Wall Street which is based on the life of Ivan Boesky and his corrupt methods, Gordon Gekko makes huge fortunes trading ahead of public informations but is driven under by manipulation of information by Charlie Sheen into the marketplace. Boesky was written of more thoroughly in Den of Thieves by Stewart

Years back there was a scandal at the Wall Street Journal where one of their writers for the Heard on the Street column was secretly sharing his column with a few people before it was published. This was back when a mention of a stock in the "column" was worth a few points. This landed him a jail term as I recall.

Dr. Doom Henry Kaufman of Salomon Bros fame, used to have profound impact on the markets esp the bond market with his prediction on interest rates. This was when interest rates were very sensitive.

Farther back, Joe Granville market maven could move markets with a special call on stocks.

Dan Lundberg could move the oil markets with his release of data on the oil industry back during the oil crisis of the 79's and 80's. We see this to an extent today with Pickins when he decides to publicly discuss oil.

Efficient Market theorists will explain that the market adjusts to all available news in the world eventually. I suppose the psychology and sensitivity (volatility) will determine to some extent how profound that impact will be immediately and blended out over time. Thus from this perspective all news should have only an ephemeral quality to it.

A pure technical analyst like Stan Weinstein author of Secrets of Profits in Bull and Bear Markets will state that the charts tell all. It is just a matter of being able to read them correctly. Bob Prechter became famous by his trading in the 80's using Elliot Wave Theory then fell out of favor by "losing his touch" and making a series of bearish calls during the greatest run in the equity markets in history.

Back in 1942 with the World War still very much in doubt the US stock market performed very well. Was this due to the massive ramping up of the US military machine or was the market anticipating a victory by the allies a full 2 years before victory in May of 1945.

Perhaps the real answer lies in blending of thought. Similar to Einsteins Theory of Relativity and Quantum mechanics. Neither fully explains the universe but a unified theory gives a much better heuristic.

I hope these comments are helpful.



?Mark Cuban was on one of the business channels last night promoting the idea that all the toxic mortgage backed securities be rolled up into a giant publicly traded ETF. I'd have to guess that with so much forced selling, the most distressed mortgage backed securities must be good buys, yet there doesn't seem to be any vehicle for regular folks to participate. Is there something out there that I'm missing?

Rocky Humbert offers:

I like these two closed-end funds: HSM (Hyperion Strategic Mortgage) and HTR (Hyperion Total Return). They are both at steep discounts to their NAV, they are managed by Lew Ranieri (the father of mortgage backed securities… Liar's Poker, etc.), and they have quality assets which have been dragged down by the sector collapse. If you are looking for true toxic waste, then consider RMA, RHY, RSF and RMH. These closed-end funds were previously managed by Morgan Keegan, and Lew Ranieri agreed to manage them after the meltdown (and lawsuits).

George Parkanyi adds:

UYG on the Amex — the ProShares 2x Financials ETF. It is loaded with US financial companies, which in turn are arrayed with every imaginable kind of toxic debt to suit your fancy. It’s not a toxic debt pure-play but if you can move past the token deposit-taking and convential-lending distractions, these guys have simply astonishing toxic debt franchises.



V NI never can read an O'Brian without learning something timeless or bursting out with laughter. While listening to Far Side of the World, I came across the hands getting very disturbed about the extirpations from the boobies which wore away the metal of the guns "and while the Dr. wasn't looking, they gave the boobies a good beating whenever they could."

Next comes two tortoises going down a thoroughly beaten track. Yes, a "beaten track." That's how trains got started. Originally the horses used beaten tracks, converted into rails and then with steam locomotives pulling.

Does the market go on a beaten track? More than a Lobogola migration back and forth on the elephant tracks. This must be tested, but do keep the tests to yourself.

James Sogi relates:

J SogiUSC trounced Ohio State this weekend 35-3. Coach Pete Carroll said of the win, "Over the years when we prepare this well, we're hard to beat. It doesn't matter who we play, We didn't do anything out of the ordinary." This surely applies to traders who prepare well, who have a number of appropriate strategies for the various market conditions — they are going to be hard to beat. The USC team has a great organization, and attracts top talent. Their coaches and facilities are tops. They have a supportive audience.

Even now, with markets in turmoil it gives the short term guys opportunity, and even the long term guys well-priced buy in points. Even if it bounces down a hundred, it will bounce back up with a vengance. In any case, a good trader should be hard to beat, especially on his home turf, even against other top ranked teams in any market.

Tao of PokerIn Tao of Poker, by Larry Phillips, one of the top all time favorite trading books, up there with Bacon and with Niederhoffer & Kenner, there is a treasure of deep wisdom. At the core is the idea of playing right at all times. Even when things are down, continure to play the proper game. Don't blow out and turn a 20k loss into a 100k loss. He says don't get greedy on the wins, take what the game gives. He says when the cards are right, and the players are weak, press it. There are times when the market is turning or turned and you've got to pull a Nelson and go right at them. Hanging back leaves one behind, or, worse, vulnerable later to counterattack. He talks about the black holes of breath taking depth, with is scary to keep in mind. He says play for money, not for the thrill or the feelings which are associated with certain positions. As with all deep wisdom, it much easier said than done.

George Parkanyi muses:

There have been panics before in the US markets that looked as dire, or more dire, to the participants at the time than this. One difference now though is the interconnectedness of the global economy. To me things look a little like a nonlinear system that has been in a period of stability for a long time, starting to becoming chaotic. The feedback loops, both negative and positive, seem to be overcorrecting more and more wildly (recent commodity moves both up and down). If the global linkages start breaking, through the sheer force of these movements (e.g. credit market participants no longer want to trade because they don't know how to value assets), then you could potentially see a period of total financial collapse in terms of today's major world currencies. (The physical and human assets will still all be there and eventually re-monetized.)

Remember that famous video clip of the Tacoma Narrows Bridge collapse?

I'm not saying it will happen, but the normal money flows do seem to be decoupling in some markets, and where does that lead us?



BatMy friend and stock market mentor Omar Sheriffe Vernon el Halawani loved cricket in addition to the stock market. We watched many a Wall Street Week together. I saw him through his last two years of cancer, and although he was disappointed that the treatments didn’t take hold, he never once complained about his lot, or his suffering. Yet this was a man who would rail against taxes all day and haggle over the price of a cup of coffee.

One of his dying wishes was to have his ashes spread on a cricket pitch in each of Canada, England, and Jamaica — the three places where he spent most of his life. His cousin and I did Canada, and I won’t say when or where because this is quite illegal, and the location is particularly high-profile — we put him in the wicket holes.

Sheriffe was a high school teacher for his whole career, but became a millionaire by buying a little real estate — but mostly from shrewdly trading stocks. He took his lumps early like the rest of us, but was a very quick study. He had a deep understanding of eonomics, and from that and sheer native intelligence, became a great stock picker. “George, the Canadian banks are a license to print money.” So he bought Bank of Montreal and held it for 20 years — split after split after split. His annual dividend income was well north of 20% on his original investment.

In his later years he also used to tell me “George, why bother to sell? Remember Peacock!” Peacock was a character in Edwin Lefebvre’s biography of Jesse Livermore’s “Reminiscences of a Stock Operator,” and when brokers would harangue him to take profits, he would apologetically whine “but it is a bull market and if I sold I would lose my position — then where would I be?”

Williams Tower / HoustonSo Sheriffe bought Corning at $2 in 2002, and Williams Companies for not much more, and watched them rise tenfold. He bought Transcanada Pipelines at $10 to watch it triple and re-instate its dividend, and so on. This man knew how to sit.

Tonight I scored my third goal and set up my second in four playoff soccer games. We won the final. I’ve been playing soccer in this league for over five years and have never once scored a goal. But because I played indoor last season, and also on Sundays throughout the year, I finally developed enough stamina and a little skill to run up and and down the field consistently and with confidence, and the past four games were my personal little breakout.

Immersion. Loving what you do. Doing it over and over again. This breeds success.



V NThere are universal principles that apply to success in all endeavors. I took 10 for cricket by Micoach adapted from The Path to Athletic Power by Boyd Eply who apparently is a famous power coach.

1. Ground based activities. You play most games on the ground so your exercises should be on the ground. Yes, and the way to test a system is to apply it in the real world, not on paper. You must go back at least x years and see what it would have been like at that time.

2. Multiple joint activities. You use all the joints, in coordination. Squats do also, but a leg extension just requires the legs to move. You need to see how your tests and market activities work in the real world when you have multiple positions not just one at a time.

3. Three dimensional movements. Weights train you on three planes but the wire machines train on only two, "with the weights and pulleys taking the strain." In the world of markets, you are embedded in life. The family comes in. Food must be eaten. And sometimes you must leave the screen and take breaks. The announcements don't come when you expect them. Take this into account.

4. Train explosively. Speed comes from how quickly your muscles work. Work with sprints "and Pliometrics" not slow strength or sprints. Do vary your market positions according to the odds and expectations.

5. Progressive overload. Keep increasing the reps.

6. Periodisation. Take account of different time periods and days.

7. Split routine. Do weights on some days and flex on others giving your body a chance to recover. How about commodities at the end of the week and stocks in the beginning and grains over the weekend.

8. Hard easy system. Take it hard some times and easy other times or you'll burn out. Try skipping trading some days and spending time at the gardens.

9. Train specifically. Make it as close to real things as possible. No long runs unless you're a distance runner. Please don't paper trade only and do take account of margins and slippage and your broker front running you.

10. Interval training. Long periods of rest and then an explosion "just like you get when batting, bowling or fielding." The whole game hinges on what you do during seconds. Be prepared and never let down your guard. 

I'd be interested in how readers think the ideas of cricket and power training of Eply and Hinchliffe are related to or different from universal principles applicable to markets.

Martin Lindkvist replies:

Martin LTo gain power, muscle fibers need to be damaged which then leads to the cells repairing themselves, overcompensating, creating new growth and more power. Likewise, you cannot have profits without allowing for drawdowns.

Using many different exercises allows for the muscles to be trained from many angles creating more strength also in the power movements without overtraining in those few specific movements. Using many different/diversified signals/systems allows for more profit compared to overleveraging just a few main signals.

When you train with heavy weights, do use a spotter that can help you get the most of the exercise as well as making sure that you don't hurt yourself, or use a power rack. In markets when leveraged, consider utilising a risk manager for the same function, catastrophic stop loss, etc.

When you have had a while off, start out easy with lighter weights, or fewer contracts.



L WYou can allude to the mistress or gods of the markets, but the best analogy I have found comes from American Indians who honor the coyote; some tribes saw the coyote as a god, most all label a coyote as "the trickster".

"The Trickster alternately scandalizes, disgusts, amuses, disrupts, chastises, and humiliates (or is humiliated by) the animal-like proto-people of pre-history, yet he is also a creative force transforming their world, sometimes in bizarre and outrageous ways, with his instinctive energies and cunning. Eternally scavenging for food, he represents the most basic instincts, but in other narratives, he is also the father of the Indian people and a potent conductor of spiritual forces in the form of sacred dreams." Native American Trickster Tales.

The trickster is responsible for mosquitoes; that was the first legend my grandfather told me about the trickster, a short summation is the coyote killed the monster and cut him into a million bits so he would be dead and never bother anyone again. The bits became mosquitoes, evil cannot be stopped and there are unforeseen consequences to all good acts.

Dr. Williams is the author of The Right Stock at The Right Time, Wiley, 2003

George Parkanyi replies:

I don't know. I don't see the market as a trickster. I see it as a dumb, lumbering creature of habit, unpredictable only in its timing and its reasons. It likes to go back and forth, often gets confused, is easily distracted by shiny glass, and can be as easily startled by its own shadow. Occasionally it smokes something it shouldn't and tears off inexplicably (Internet bubble) or doesn't watch where it's going and face-plants into a big hole (1987). No matter where it goes, it eventually likes to come back to the familiar.

Who knows why or when it does what it does? But it keeps doing the same things, and going to the same places, over and over again. (And each of its offspring, except for a rare few, behave the same way). So instead of expending all this time and energy on the next move of what is essentially a moron, why not just pick a spot, or spots, and relax and wait till he comes by?



CartA friend of mine bought 10 hot dog carts for an initial investment of around $65,000. He employs a crew of young girls that wear clothes more suitable for the beach. He parks the carts in the right of way on the highways, and his stands always have a steady stream of business, regardless of the weather. He's reluctant to mention just how well his venture is doing, but I suspect that he's making a nice income from the carts. When he first started the business, there was quite a bit of negative publicity in the local press due to the offense that certain segments of the population have regarding beautiful women in bikinis selling hot dogs. He regarded the newspaper publicity as good advertising. Since no laws have been broken and he has complied with all the numerous regulations, they can't kick his carts off the corners. The free market will always fill a need or vacuum, and there seems to be a need for bikini clad girls manning hot dog carts in Southwest Florida. As a side note, our local police seem to be very good customers, and eat a disproportionate number of hot dogs for lunch. Now, only if a good BBQ place would follow suit.

Allan Millhone wrote:

I see on the news that a bikini barista in Belfair, Washington has been closed because of the scantily clad women serving coffee. Down the road in another town one drive-through remains open and partrons like the concept of the women wearing 'pasties' as they serve up coffee. Creative marketing or simply exploitation?

Jim Rogers takes it one step further:

I'm sure it offends the sensibilities of some, but various businesses have tried this kind if tactic in the past (e.g. there was a topless hair salon when I lived in Las Vegas called "A Little Off The Top"; no, I never tried it, since my dome has been topless for quite some time). Most of these businesses get put down under the auspices of health code ordinances. However, that usually takes long enough for investors to get decent returns.

George Parkanyi extends:

You know, that's not a bad idea for Paulson to move some of that mortgage dreck. Twenty cents on the dollar and the surface area. It works. We'll call it Securitized Hooters — SHooters for short — featuring at each kiosk "blonde traders" and a hot photo-shoot cut-out of a lingerie model we'll call, say "Fanny May" (giving it a more wholesome farmer's daughter twist). Jeff, I think you've solved the credit crisis.



A VeltmanA fascinating game is on today in Crude futures, with algorithmic black boxes sniffing out sell-stops below 121.61, which will mark a new low for summer 2008! Such a game would have not just short-term implications. Yes, it would be enticing to keep shorting until the stops are triggered, thus allowing a later profitable cover. But also, a long-term "chart damage" would be created once the first lower low is marked on this year's chart. The implication of that would play out some time in August when programs would then gear up to be "sellers on a rally," only because of this little "trend change" indication.

George Parkanyi suggests:

I don't know, Anatoly, that's reading in a lot. Even Freud once replied testily that "a cigar is sometimes just a cigar". But I'd love for your scenario to play out, so I can take another profit from my oil short position.

Anatoly Veltman explains:

CFTC's Commitment Of Traders (C.O.T.) report as of 7/22 settlement, published near Friday's close, confirmed our suspicions. For the first time this year, both Large and Small Specs rolled over from Net Long to Net Short in crude! The speculative push is on: to try and trigger sell-stops near $121.61 June low. One should be aware of fragility of such a plan: 1. Crude has fallen two weeks straight on reduced Open Interest (from 1.35m to 1.22m), i.e. over 100,000 Longs already got out and do not have a resting stop-loss order below. 2. Price has entered the area of natural support: 38.2% retracement of 2008 advance and 100-day moving average.

Thus, whether Specs succeed and trigger remaining sell-stops or not - the ensuing rush to resume buying activity should not keep us waiting for too long.

Rocky Humbert analyzes:

In my many years of commodity speculation, the most important lesson which I have learned is humility. The second most important lesson is to look beyond the obvious. And the third most important lesson is that price action leads the fundamental news. In this case, I suggest Anatoly look to all of Nat Gas, Coal, RBOB and Heating Oil crack spreads, and the shape of the yield curve, for far more interesting market information than whether a particular price point triggers some short term or long term stops.

  1. Nat Gas has given back its entire rally since January without so much as a minor bounce. This would equate to Crude moving to 90$/bbl without any meaningful bounce. Coal has also taken out the price equivalent of Anatoly's stop level on the downside.
  2. The gasoline (RBOB) crack spread has been negative or near zero for some weeks now. This is unprecendented for the summer driving season and shows the extent of true end user demand destruction. Refineries will obviously reduce their runs rather than process crude at a negative crack spread. Crude is a completely useless commodity. It's the products that really matter!
  3. The heating oil crack spread, in contrast, remains extraordinarily wide. Some attribute this to Chinese hoarding post snowstorm/earthquake and pre-Olympics. So the gasoline and heating oil crack spreads are giving us contradictory signals. While I'm open-minded on the outcome (although short right now), if I see the heating oil crack start declining, I'll know for sure that it's game, set and match for this phase of the crude bull market, and I'll aggressively press my shorts.
  4. The Crude yield curve recently moved to contango from backwardation. Producers are now motivated to build even more inventories, and this is a self-reinforcing feedback loop. When the crude curve goes into contango, it is predictive of declining prices in the spot contract for the following three to six months.
  5. The price volatility of crude is around 40% now. So, as a pure probability statement, one can easily envision a 40% decline from the "high" and we'd still be in a "secular" bull market! More importantly, given 40% volatility, one would expect daily swings of around $7 per barrel — just as random noise.
  6. I am unaware of any rigorously backtested studies which show that the COT open interest is predictive in crude. They are only a coincident indicator of trend. Perhaps Anatoly has different studies available that he can share?
  7. Lastly, and most importantly, many commodities do trend for good economic reasons. I suspect even Vic and Laurel will concede this point. One can ridicule the trendfollowers but I reckon the good ones have been long crude from $90 and started exiting when we broke through $135.

Right now the entire energy complex appears to be breaking down after a remarkable multi-month and multi year-bull market. If you are buying the dip for a quickie bounce — good luck! But if you hold your positions for weeks or months, as I do — it's frivolous to declare your entire market view based on whether one particular price prints. Markets are far wiser than that.

Anatoly Veltman replies:

Rocky, your observations are very useful. I'm glad to further discussion on short-to-intermediate term Oil - moreover, your view is coincident to Ahmedinajad's "unjustly over-priced!":

  1. What if NatGas next "bounced" big?
  2. Demand destruction and "importance" of only products — agreed.
  3. So short crude based on RBOB; not yet short a second unit based on HO?
  4. The "contango bear indicator" has been obvious throughout NYMEX history; has it been tested over the recent years, since Crude futures (and ETF based on them) became an asset class?
  5. My Elliott Wave log-scale chart allows correction to $50, before Wave 5 ensues.
  6. I am against C.O.T./O.I. techniques' mechanical application. Only a trader with sophisticated understanding of how it confirms/overrules a trading idea should use that coincidental data.
  7. $135 broke one up-trendline — agreed. What put you into a long over $90 through $147.27 — everyone could learn from a detailed explanation!

Rocky Humbert adds:

Anatoly, point by point: 

  1. And what if it didn’t? They call Natgas the “widow maker” for a reason!
  2. Glad we agree.
  3. Philosophically yes. But real life is rarely so easy.
  4. There’s only been one episode where CL swung from backwardation to contango since ETF’s came on the scene. That was Dec 2004 to Dec 2005. And although the nominal price went nowhere, longs lost money net of the roll cost. So, not enough data. But, putting on my bond hat for a second, positive carry really does matter.
  5. Cool. Then let’s stop chatting, you need to call your broker and go limit short.
  6. OK. I think the upstairs/offshore mkts plus the ETF’s have made these stats less useful. Also note that some people think that aggressively buying a heavily shorted STOCK is a way to squeeze shorts and make money. Other people believe that the shorts are smarter than the longs in individual stocks. In all events, I avoid using tools which are open to interpretation. I’m just not smart enough to figure them out.
  7. There are still Donchian systems out there. BUT …. even a blind squirrel sometimes finds a nut too. As a college math book might say, “the proof is left to the reader.” Hence you can decide whether it’s a blind squirrel or a useful system. Vic, Laurel and many readers of DailySpec are philosophically opposed to static systems … and I’d rather remain coy rather than risk being pilloried or laughed at. Let’s leave it at that please.



Wright BrosDecember 17th, 1903 was when the Wright brothers had their first successful flight at Kitty Hawk, NC. I know this because of the fascinating 30-minute lecture and following 30-minute film at the Wright brothers Memorial Park, three miles from where we are vacationing in Kitty Hawk.

Without really looking into it, I had always assumed that the invention of powered flight was kind of a hit-and-miss thing, much like Edison ploddingly trying a thousand things inventing his light bulb, but not so. The Wrights were really bright guys who, though their main business was running a bicycle shop in Dayton, Ohio, truly proved to be both scientists and engineers. These guys were amazing. They carefully planned and calculated all of their moves, starting with segmenting the four main problems of controlled flight - pitch, roll, yaw, and thrust - solving each separately then putting it all together in the Wright Flyer of 1903.

Not only did they research and work out the theory, but they did exhaustive modeling and testing; starting with kites, scaling up to gliders and then finally the powered machine. They developed their own test and measuring tools, including a wind tunnel to test wing designs, and worked out how to measuring lift and drag using a tension scale, compass, and basic trigonometry (to optimize the wing shape).

All the elements first came together in their 1902 glider, which they tested successfully. The only thing left was to add power for thrust.

Again, they had to invent the necessary elements. When no car company would build them the type of engine they needed, they improvised their own simple but ingenious four-piston engine cast in aluminum. They then also had the insight to design their propeller to act like a wing, and optimized the shape so accurately that they were within a few % of what you would optimize with modern technology. Orville, hacked, carved, shaped and polished the propellers himself. The one engine powered two propellers, which were driven by essentially bicycle chains mounted through bicycle frame tubing.

They accomplished the whole thing in a well thought out systematic and truly scientific way, having to invent most of what they needed as they solved one problem after another. I found it to be so much the more impressive because of that - their methodology.

The lesson for traders or investors designing a system is to observe from different perspectives to gain insight, segment problems into more manageable components, transfer ideas from other disciplines or seemingly unrelated areas, try to establish some theoretical basis for why what you are attempting should work, build models, test, and optimize. Also, you need to be persistent, adaptable, and resourceful.



They used to tell me I was building a dream - and so I followed the mob,

When there was earth to grade, or nails to drive, I'd borrow for the job.

They used to tell me I was building a dream, with peace and glory we led,

Why should I now be standing in line, foreclosure just ahead?

Once I built a credit-line, made it run, buying time.

Once I built a credit-line; now it's done. Brother, can we spare sub-prime?

Once I built a McMansion, up to the sun, stucco, sticks..sublime;

Once I built a tower, now it's done. Brother, can we spare sub-prime?

Once in khaki shorts, gee we looked swell,

Full of that Yankee Doodly Dum,

7.5 million ARM's,

Who'd a thought it dumb!

Say, don't you remember, they called me Mort; Mort I paid - all the time.

Why don't you remember, I'm your pal? Buddy, can we spare sub-prime?

"Brother, Can You Spare a Dime", lyrics by Yip Harburg, music by Jay Gorney (1931)

George Parkanyi adds:

I have another entry!

Sung to the tune of the Beatles’ Yellow Submarine …

In the town, where I was born,
Lived a man, who failed to see
The basic flaw, of going long
Asset-backed securities.

And so he bought, a mighty tranche
Of CDOs he thought secure
From triple A, it slowly dawns
That what he bought, but cow manure

all together now …

We all hold a ton of hollow sub-prime liens,
Hollow sub-prime liens
Hollow sub-prime liens

We all hold a ton of hollow sub-prime liens,
Hollow sub-prime liens
Hollow sub-prime liens

Now we watch, quite nervously
A fast imploding S&P
And we wonder, do we still have
A functioning economy

We all hold a ton of hollow sub-prime liens,
Hollow sub-prime liens
Hollow sub-prime liens

We all hold a ton of hollow sub-prime liens,
Hollow sub-prime liens
Hollow sub-prime liens

(repeat and fade)



PhilMost of us are aware of the benefits of portfolio diversification. The simple fact is that it pays to have diversified positions in different industries, countries and even diverse markets. The key to it all is to look at the correlation between the various components of the portfolio.

However there is another kind of risk that many investors are exposed to. It can be fairly assumed that the vast majority of investors are exposed to this single risk in all of their positions. Simply put it is the risk of default if your broker goes under.

There are two ways to defend against this risk. One is to assess the broker's financial position personally. In particular look at how leveraged the broker is. As a rough check one can simply look at the stock chart of the broker if they are publicly traded. If the stock has been tanking faster than the industry it is a clear red flag.

Secondly the investor can identify multiple brokers who appear sound. But even then it makes sense to diversify using multiple accounts with two or more brokers. Remember if a broker shuts down losing half your money is a whole lot better than losing it all. You can still come back.

None of this discussion is meant to assert that the SIPC, FDIC and the many other protective agencies cannot perform on their guarantees for investor safety. Probably they can. But in the eventuality that a decent sized firm goes down, the process to sort the mess will undoubtedly takes months or years. After all it is the government at work. At best you might get all your money back but a very long time from now. Certainly you will miss any buying opportunity which develops from this crisis.

George Parkanyi remarks:

That’s why I pay a little extra commission to deal with a Canadian big five bank’s discount brokerage and not, say, E-Trade (at least not in this environment).

Another point to add is that certain types of accounts are segregated. Registered accounts for example are held in trust, so if your broker goes under, the assets in those accounts are yours. They can’t be touched. It’s margin, short, and option accounts where you have the risk — because the assets are commingled with the firm’s. I believed cash accounts are also segregated.

But if your boutique broker does go bust, it may take a while to sort out the mess and be able to access your segregated accounts, so it’s still a good idea to either steer clear or diversify brokers, as Dr. McDonnell recommends.

J.T. Holley writes:

With FDIC the thing no one realizes is that you are only getting your principle back!  They don't care that you bought a 5 yr CD in 2005 that was yielding 5.5%!  Now get to the back of the line and wait for your $100k!

I had a wonderful lady who happened to be my client back in '01-'03 who passed at the age of 98.  She was risky as heck w/ her "discretionary" money, but her fixed income side of the portfolio was rock-solid.  I once was assisting her with her 1099s for the tax season and noticed that she had 15 $100k CDs at 15 different banks in the area.  I asked her why.  She said that was the limit at each and she didn't want to go through "it again". I asked her to explain and she said she had her money taken in the Great Depression before FDIC at the age of 22. According to her, the only way to properly have your money diversified is as Dr. McDonnell explained! 



KeysJust caught a clip on the nightly news out Oakland, CA way that many people renting homes are finding that the property owners have not paid their mortgages and now they are told they have to move. One example is that the bank offers the renter $2,500 to move out at once and turn in his keys. Other banks send out letters telling the renter that the bank now owns the home and rent is now $10,000 per month! I question the legality of that action, but most renters cannot afford good legal counsel, get scared and move. The banks for the most part will not deal with the renter in any way.

Russ Herrold explains:

An old and well known landlord's trick: In a kinder and gentler day, one could usually strike a deal with a delinquent tenant that if he was out by sundown on a Saturday, you would not adversely report him to the local rental credit reporting agency, and there were a couple cases of beer with his name on them down at the 'beer dock.' Stupid banks in Calif had to drive the prices up for everyone else..

George Parkanyi muses:

This seems counter-productive. If I just inherited a property that had a cash-flow, I'd be grateful for the cash-flow. If I repossessed from the residents, maybe I'd look for a renter to create cash-flow while I figured out what to do with the property. Are there not property management companies that do this sort of thing for a living? Might someone not want to start a rental business by taking distressed properties off panicky banks' hands and finding suitable tenants — and then sell the properties off later at a handsome profit when the real-estate market finally turns?

Alan Millhone replies:

George comments about taking over distressed property and find a renter to stay here till the housing storm subsides. To do this one must have liquidity and then gird one's loins for the downturn in the housing sector. For how long? That is the magic question.

I noted last night along our main drag a new tenant moving into a former Allstate Insurance office that closed due to lack of business. The new occupant has hastily painted notices on the windows that a tattoo parlour is soon to be there! On our Kroger's lot is a new strip mall of five connected buildings. Three have been vacant since they were built over a year ago and the two that are there are 'cash till payday' lenders.

There are many empty rental units around Belpre and one fellow I know dropped his rent in order to fill one unit. He built them new a couple of years ago and the mortgage is killing him as he had one unit vacant for over seven months.

Another fellow I know torn down an older house on one of his properties and built a two story , two bath, two bedroom, double garage, duplex and grossly overbuilt the entire project, sparing no expense. He needs $800 plus utilities per side for rent. Now his construction loan had turned into a monthly payment with nothing coming in and he is hurting. When he was building I asked him what he thought he would have in the new duplex? He replied $100,000. I then replied for what part of the complex? He later told me he had overbuilt and had over $150,000 in the units.

My point? Rental property is good in good times and okay in bad times if you have little going out in a monthly payment, taxes, insurance to the bank. Now is a tremendous time to pick up cheap property, IF you can tough it out till the economy improves.



I look at the commitments of traders data to get a quick reading of how extremely commercials and speculators are at polar opposites. The COT-Futures site ranks the relationship from 0 to 100 in relative terms — 0 is most net short in the past 18 months or so; 100 is the most net long. There is a $5 a month fee for this service. When commercials are 0-10, it's time to think about selling, because they sure are. When it's 90-100, be a buyer. Commitments data won't give you specific entry signals for short-term trades, but they put you in the right ball-park for the next significant move. It works well for the physical commodities. I haven't found them to be very meaningful for financials and currencies, because who the heck are commercials anyway in the stock market (and are they particularly bright?), and the real players in the currency markets use futures only for pocket-change.For weeks, gold, oil, sugar, and grains had all been on "tilt" at 0 (commercial selling and massive speculative buying), and the last couple of days is the result. Natural gas was sitting at a 100 reading (practically the only commodity that was) just before it made its recent big move up.

At the moment, I'm fully invested in 26 fixed names in four groups: 6, 6, 6, and 8. All I am doing right now is that whenever any two within a group diverge relative to each other by 30% from a prior fixed point in time (the previous trade date), I sell 30% of the stronger one and recycle that cash into the weaker one. When there is such a trade I reset the reference point for all the stocks in the group to that day's closing/trade price, and then just wait for the next 30% divergence from that date. There is a significant long-term compounding effect in doing this, by the way. One of the stocks is a 2x leveraged short gold stocks ETF from about when gold was $800. Despite the run-up in the metal, the ETF position has delivered three buy signals near its lows, two sell signals on up moves after buys, and is now net-profitable despite being heavily under water for a while.

Why was I confident averaging down, as it were, against gold? The commitments numbers. I knew that sooner or later gold was going to take a big hit, even if it remains in a long-term bull market. If it drops enough to get the commercials buying again (and/or specs panicking out) then I'll simply switch to the matching long ETF and play that side until the commercials go heavily short again with respect to speculators. Doesn't have to be perfectly timed. In fact you may be wrong for a while, which can help you accumulate a bigger position with a lower cost basis. Since the gold ETF, I've added three other 2x ETFs in natural gas (long), crude oil (short), and grains (long). I'm cheating in the grains — according to commitments data I should be short, but they've come off a lot and that particular position at the moment is quite small. I'm happy to add to it if grains keep coming down. The volatility of these things is great for generating the trading spreads I look for. That's why I've integrated them into my stock portfolio. Watch the commitments as a trend-change guidepost.



During the run-up to a crash, population diversity falls. Agents begin to use very similar trading strategies as their common good performance begins to self-reinforce. This makes the population very brittle, in that a small reduction in the demand for shares could have a strong destabilizing impact on the market. The economic mechanism here is clear. Traders have a hard time finding anyone to sell to in a falling market since everyone else is following very similar strategies. In the Walrasian setup used here, this forces the price to drop by a large magnitude to clear the market. The population homogeneity translates into a reduction in market liquidity.

Blake LeBaron, "Financial Market Efficiency in a Coevolutionary Environment," Proceedings of the Workshop on Simulation of Social Agents: Architectures and Institutions, Argonne National Laboratory and University of Chicago, October 2000, Argonne 2001, 50.

Riz Din remarks:

Reminds me of the extreme robustness of the naturally diverse rainforest, and of how relatively small changes can destroy single crop plantations.

George Parkanyi writes:

I'm not so sure that's as true anymore. There are many new instruments such as commodity and short ETFs that create more possibilities for risk mitigation and alternative strategies. Perfect opposite correlation is an asset-allocator's dream. I would think most trading volume comes from mutual and pension funds. If they change their charters, or simply interpret short ETFs to be another asset class, then the herd mentality may dissipate somewhat as there is now less reason to sell in a panic. Hedge funds and individual investors already have the bi-directional option available to them. For example, I recently used short ETFs to blunt the decline of the past couple of weeks. I felt less pressure to sell my stocks that did go down — in fact I bought more — because I had money working in the other direction. I'm theorizing that markets will tend to become more choppy and less smoothly trending, even in a broad decline, for this reason.



In light of current market behaviour, what are some ideas on risk control? Someone is going to say Optimal F, or related, but here I was more thinking about what you do when flying by the seat of pants as always.

You can reduce risk by:

1. Staying out of market more (always?)
2. Setting stops (which get triggered right before huge rallies and increase probability of losses)
3. Trading small (too small to ever recoup losses)
4. Staying in only for prescribed short intervals (ensuring the miss of the rally a day later)

Ken Smith replies:

DangerI once concluded I should take the first option suggested by Dr. Zussman: stay out.

My idea was if I cannot predict then do not trade. But I often fool myself, thinking myself a magician, prognosticator of great moment. Under the sway of this illusion/delusion, I do not stay out and frequently prove myself wrong.

But the problem is I am frequently right. The balance between right and wrong has played out on the positive side for some time now.

You should know I do not have money to trade. I am advising without compensation, under a tacit marital contract. So when I am wrong I suffer emotionally more than if this coin of the market were out of my own pocket.

I suppose those knowledgeable about psychology, behaviorism, that sort of thing, will recognize this pattern as typical of some concept developed by the profession.

For me it means I have to risk going into the fog under steam and do so without radar, only a whistle blow to sound out what's ahead. Primitive tool. 

George Parkanyi writes:

Ken FisherAccording to Ken Fisher, the first 2/3 of bear markets are relatively mild. Typically the last 1/3 (about 6-8 months generally) is the brutal bit. If you think this is a bear market, we have approximately 12-18 months to go, with the worst yet to come. But is it a bear market? The nature of Dr. Zussman's question suggests uncertainty. If his anxiety has increased, then a good rule-of-thumb is reduce exposure (position sizes) until something more compelling, or some clarity, presents itself. He can always scale back up if the market suddenly starts going his way. No matter what the conditions, certain fundamentals and the tape should offer a few tradeable ideas in either direction. I think the risk-mitigation strategy should be whatever his methodology generally calls for. If his risk management approach is contingent on the type of market that he is in, by definition he's going to have to market-time successfully all the time or run the risk of a large hit. Best to have one consistent risk management approach for all seasons.



LemurBurton Fabricand wrote two interesting books: The Science of Winning and Non-Brownian Movement in the Stock Market. One of the major principles of the books, highly recommended as a supplement to Bacon, is that when a horse goes off at odds that are unusually unappealing, it's good to bet on it. He applies the method to a small sample of horse races, and finds that for specific applications of the principle, a slightly winning system can be developed.

I was reminded of this principle by the very unusual action of the stock market the last two overnights. Thursday evening and Friday morning, New York time, the market moved up about 1% overnight after yet another 40 day low on Monday. The optimism was broken by the Merrill announcement and the disappointing Fed testimony, as well as the credit downgrades. One of the worst declines in history occurred, 47 points from the open to close, exceeded only by the 66 point decline on 4/17/2000.

You would think that after such a decline, especially after an up opening, with fear in the air as never before, there would be a terrible fear about opening the market up again overnight. But no, it's up 2/3% overnight and Japan during the last two days, when the US market has been down 4%, is up some 1% from 13505 at Wednesday's close to 13650 as I write at 11:00 pm EST.

The insight of Fabricand is relevant, that this seeming underlay, this amazing courage in the light of the pessimism is not quite as amateurish , "boy, don't try too hard in the stretch unless you really are going to take it because I want the odds to be up next time" as it might seem.


I have been studying the intake of clay by lemurs and parrots so as to neutralize the alkaloids and other poisons in seeds that they eat and disperse. What are the comparable foods that the market must eat to neutralize bad events? What does the speculator have to do to neutralize the many uses of specialized information and unlimited capital that the trading houses can apply when they are not acting over and above the various Chinese Walls that they can climb whenever there is a merger or downgrade?

I found 38,000 articles on "underestimation of change" on Google and have not read them all yet. Victor Zarnowitz found that underestimation of change was a persistent aspect of his data on GNP forecasts although the rarity of predictions of declines made his data consistent with algebraic underestimates as well. I thought a realistic way to test this was to look at all the moves from close to 2:00 am EST to see if the big ones are underestimates. I found there were 18 big ups of more than 10 points as of 2:00 am, and 18 big declines of more than 10 points. Of these 36 big moves, 18 had reversed by 10:00 am and 18 had continued. Thus, there was no evidence in a real data set without revisions or biases or contrivances, that there was an underestimate of change. 

Martin Lindkvist adds:

Fabricand also wrote the books "Horse Sense" and "Beating the Street".
In both he explains the principle behind his systems: The principle of
maximum confusion. Writes Fabricand in "Horse Sense":

"The betting public is most likely to err in determining the winning
probability of the favorite in those races where the past performance
record of the favorite is very similar to that of one or more horses
in the race."

in "Beating the Street" he continues on the topic:

"For the races, the intuitive idea behind the principle is that
although the favorite appears very much like the other horses in
ability, there must be some reason or reasons not immediately obvious
for the betting public to make that horse favored. Yet, because the
two horses seem alike on the surface, the public may be confused
enough to bet too heavily on the other horse, making the favorite

In "Beating the Street" Fabricand also lays out a stock trading system
based on the principle. 

Yishen Kuik reports:

A new word for today, Geophagy.  Wikipedia says:

Geophagy is the human practice of eating earthy or soil-like substances such as clay, and chalk, in order to obtain essential nutrients such as sulfur and phosphorus from the soil. It is closely related to pica, a classified eating disorder in the DSM-IV characterized by abnormal cravings for nonfood items.

Geophagy is most often seen in rural or preindustrial societies among pregnant women and children. However, it is practiced by members of all races, social classes, ages, and sexes. In other parts of the world the practice is less stigmatized, and geophagy is not studied as a pathology but rather as an "adaptive behavior" that supplements the diet with essential nutrients or treats a disorder such as diarrhea.

In some parts of the world, geophagia is a culturally sanctioned practice. In many parts of the developing world, earth intended for consumption is available for purchase.

Bill Craft relates:

In the rural Southeastern US there exist deposits of Kaolin along the Oconee Group (formerly called the Tuscaloosa Formation). The locals and miners call it 'chalk' because of the white look and ability to stick when wet and permeate when dry any supposedly closed space.

Some of the residents have consumed the 'chalk' for centuries as it was a cure-all. Even the Creek Indians used it with Yaupon Holly (Ilex Vomitoria) for ritual 'cleansing.'

Mix some Washington State Apples with it and you get:


Ahh! Ritual Cleansing! Just what the mistress ordered!

Phil McDonnell explains:

Ketchup/MustardMost toxins are alkaloids, which in turn are bases. These toxins can usually be neutralized by ingesting acids. This is a practice which is not unique to backward civilizations. Check common condiment ingredient lists for vinegar. It is in ketchup, mustard and many other items. Chemically it is an acid. Oil and vinegar salad dressing is another example. When an acid and a base combine they neutralize each other and form a salt. Many salts are water soluble and can be readily flushed from the body.Even in modern society we have many minerals that are important to nutrition and are routinely used as remedies. Antacids such as Tums and Rolaids are simply calcium carbonate — chalk. Products such as Milk of Magnesia and Pepto Bismol are long-time mineral based remedies as well. Most so-called vitamin pills also contain a long list of minerals that are essential to our daily well being.

In the markets the toxins are the bad stocks at any given time. Recently the toxic stocks have been the big banks, most are down something like 50% over the last year. They continue to feel the worst effects of the current financial meltdown. Money usually goes somewhere. So when the banks are sold the good stocks are the beneficiaries. Google is a prime example. The high growth of earnings continue on track. So for a while GOOG continued to surge ahead. But toward the end of a panic the market acts more like the police when they raid a house of ill repute. They take the good girls with the bad. So even the formerly strong GOOG has seen a come down from well above 700 to a touch below 600. But there is nothing wrong with Google as a company. It is only that the big G has to act as an acid to neutralize the toxic base which is the subprime dependent stocks. So that salty taste in your mouth may not be just blood. It may be the act of a market neutralizing its toxins in order to return to good health.

George Parkanyi writes: 

To answer Victor's question about ingesting antidotes to poisonous markets, I eat 2x leveraged short ETFs, and I'll tell you why.

I live in Canada. Our family assets are tied up in tax-deferred registered retirement savings plans and registered education plans denominated in Canadian dollars. Although we can buy U.S. equities (and have to convert currency back and forth every trade), we can't buy options (we can write covered calls), we can't use margin, and we can't use futures. So there was a time when you had two choices in these conditions, sell or hold.

One morning last year I'm making my kids' school lunches, watching the Business News Network, when a commercial comes on proudly trumpeting three new pairs of long/short 2x leveraged ETFs. I remember thinking "Finally, something useful!". Later that day I researched those same Canadian ones, and found the U.S. ones. There was a wide range of available pairings, not only by indices, but by industry sectors as well. Some even paid dividends.

I use a specific strategy that requires full investment. By embedding (OK, eating) just a few of these ETFs on Jan 2, I was able to maintain my holdings, and keep my drawdown to only 3% as of today's close (despite all those NASDAQ stocks — ahem). It didn't take many; at most, 1/6 of the portfolio was in short ETFs, and I even scaled these back as the down-leg progressed.

Bottom line — your garage mechanic or plumber now has the ability to turn his retirement savings into a hedge fund.

If you can now so easily buy what is essentially market-catastrophe or profit-protection insurance, could this be changing the fearscape when markets fall? It makes being a contrarian more complicated. Reminds me of the Monty Python sketch where the people's bandit Dennis Moore is so successful stealing from the rich and giving to the poor that the poor become rich and lazy, leaving him confused and conflicted. Eventually he ends up holding up stage coaches and just re-distributing the wealth amongst the passengers.

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