Sep

15

 Marty Hogan's Power Raquetball was a 1978 paperback large book I got for 25 cents at a library book sale. It shows Hogan hitting a racqetball under a speed gun at 142 mph, and even shows Keeley with a shaved head playing in a match trying to psych out his opponent. It shows Keeley losing to Hilecher, on the floor as his taunting fails.

There are lots of conditioning exercises and routines in it. Here is a wrist strengthening exercise: with palm down, arm extended, get a double sheet of newpaper, hold it by the corner and start to crumple it with one hand only. Try and crumple the newspaper sheet into a ball the size of a raquetball. This exercise uses all the fingers and is better than simply squeezing a ball. Do it twice a day.

May

13

 I found this article quite fascinating: "Want to Get Out Alive? Follow the Ants: ants show that emergency exits work better when they're obstructed"

Shiwakoti and his team are experimenting with placing barriers in front of the Melbourne football stadium exits that lead to the train station. The preliminary results look promising. "Just by having small architectural changes in the layout, or the train stations, or stadiums, you can have thmassive improvement in terms of evacuation rate," Shiwakoti says. Perhaps we shouldn't be surprised at the unexpected lessons we're learning. Ants have been learning how to deal with congestion for millions of years. They might just show us the way out.

Carder Dimitroff writes:

This is incredible. There have to be important market lessons here.

Ken Drees writes: 

I keep thinking that an element may be missing in this concept. Ants basically lay flat, like cylinders on legs, and they can climb up and over, lift more than their weight, etc. The blocking strategy may lead to more orderly traffic for their bodies where as the human biped body is almost opposite. I can see the panic happening around the new block in my mind just the same with two packed flows all crowding and then choking at the exit. Plus what usually happens is someone falls down and then there is trampling and bunching, not to mention there are large slow body types. I am not sold on the idea, although it is very interesting.

Apr

25

 If one were to order a custom cane to use during market panics, that cane would have a handle/top fashioned like a honey badger's head–with teeth bared. The bottom, the point of the cane, its claw like foot for digging up bargains, and the shaft of the cane from the bottom up like a baby leopard's spots mixed with the black and silver wood of the Badger's fur like colorations. Since the bottom of the market is at its weakest, like a defenseless cub, yet its colored to scare one off, like a Honey badger does at first glance, you must be willing to go into the coop and take what you can, because that is what a spec is designed to do. You must remind yourself to be fearless and aggressive so a look to the cane's snarl in your fist should remind you to attack–without delay.

Mar

20

 I follow the sports news and commentary and find it much more erudite
and analytic than the financial commentary. Try reading the NY Times
analyses of games The Knicks play, and you'll learn more about the
market and human nature than you will from Bloomberg. 

Ken Drees writes: 

I once worked on technology to automate sports reporting using "canned" or routine language. It came to nothing at the time but it amazed me how simple it would be to automate sentence and paragraph structure of a simple sport score/ game report. You would have selected templates and fill in bursts of stats to make it seem true. Anyone who listens to an athlete's interview these days hears the same old same old.

"We battled, and that's what we are about–never give up, keep focused on the game at hand." "No, I am not looking ahead towards the next series, I am focused on the day to day–what it takes to win today is what I am about".

Seriously all these athletes talk program. All the same crap every time—I can hear it before they say it!

Anton Johnson writes: 

This is the best ever basketball interview.

Ralph Vince writes: 

It is a most peculiar sport, and the great Meadowlark Lemon worth study; that someone can be so good, so adroit at what they do, which is not comedic, that they can transform it into comedy, not take oneself so seriously, and perform to perfection. Mastery occurs when someone can do something to such perfection that they can laugh about it and about themselves as their virtuosity expresses itself, carried on a wave of euphoria of their own creation.

Contrary to what I would have expected, basketball seems to have players who are more articulate and analytical. Among the worst are those who are involved in the individual sports like golf, tennis, as well as most NFL locker rooms. For whatever reason, NBA players seem to do far better in front of the microphone.

Stefan Jovanovich writes: 

Players are not any better than actors at coming up with original lines on their own; it is the coaches (who like the writers are usually not on camera) who have the interesting stuff to say.

Feb

23

 What can we learn from spiders. In addition to the Japanese and the Incas, Walt Whitman and Beethoven, and machines, Frank Lloyd Wright said the main influence on his work was the spider. He liked the lightness and strength of their webs. Can we learn anything about markets from the spider?

Ken Drees writes: 

King Louis XI was known as the spider king so named because he always wove the most intricate and well conceived plots against his enemies. Markets seem to see further into the move sequences. Maybe there is something to be learned by investigating him.

Gibbons Burke writes: 

 I trying to relate the spider to the markets the first thing that occurs to me is the quote from Reminiscences of a Stock Operator:

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."

Spiders set up their optimized webs, and then just sit tight, patiently positioned for the meal to show up.

The webs are well-structured, robust, and, like trend trading systems the number of winners (flyies eaten) is vastly outnumbered by the number of losers (fly byes).

The best webs are difficult to see.

A spider does better by making a large web, but too large and ti won't be able to hold the tray. Liken the size of the web to the use of leverage… extend your line too much and when you get a big move (a rather large beetle) it destroys the web rather than getting caught.

In unfavorable conditions, the spider eats up its web and redigests the resource to put it up when conditions are better suited to catching flies.

Chris Tucker writes: 

Spiders use sophisticated tools to capture prey, most frequently a web with sticky silk to trap insects. Spider webs are a marvel of engineering and spider silk is incredibly elastic and stronger (by weight) than steel. Spiders are incredibly industrious, many orb weavers consume their webs every evening and build a new one each night.

Spiders are patient. Orb weavers set their traps and wait, letting their tools do the work. Spiders are observant, they wait patiently for signals from their webs (usually vibrations) before pouncing. Several types of spiders use camouflage to fool prey. Ant mimicking spiders wave their front legs in the air to disguise the fact that they have eight legs and no antennae.

Spiders use deceptive behavior to fool/lure prey.

I have copied and pasted some interesting info below from the excellent wiki article on spiders):


When at rest, the ant-mimicking crab spider Amyciaea does not closely resemble Oecophylla [it's prey], but while hunting it imitates the behavior of a dying ant to attract worker ants.

Also from the wiki on spiders:

 About half the potential prey that hit orb webs escape. A web has to perform three functions: intercepting the prey (intersection), absorbing its momentum without breaking (stopping), and trapping the prey by entangling it or sticking to it (retention). No single design is best for all prey. For example: wider spacing of lines will increase the web's area and hence its ability to intercept prey, but reduce its stopping power and retention; closer spacing, larger sticky droplets and thicker lines would improve retention, but would make it easier for potential prey to see and avoid the web, at least during the day. However there are no consistent differences between orb webs built for use during the day and those built for use at night. In fact there is no simple relationship between orb web design features and the prey they capture, as each orb-weaving species takes a wide range of prey.

Spiders leverage their best talents and keep an escape route handy:

The hubs of orb webs, where the spiders lurk, are usually above the center, as the spiders can move downwards faster than upwards. If there is an obvious direction in which the spider can retreat to avoid its own predators, the hub is usually offset towards that direction.

Bolas spiders are like fishermen and use deceptive lures to attract prey:

Bolas Spiders are unusual orb-weaver spiders that do not spin the typical web. Instead, they hunt by using a sticky 'capture blob' of silk on the end of a line, known as a 'bolas'. By swinging the bolas at flying male moths or moth flies nearby, the spider may snag its prey rather like a fisherman snagging a fish on a hook. Because of this, they are also called angling or fishing spider (although the remotely related genus Dolomedes is also called fishing spider). The prey is lured to the spider by the production of up to three pheromone analogues.

Pitt T. Maner III writes: 

I found this article on the developing market for spider silk interesting:

"Despite being a protein, spider silk is by weight five times stronger than steel and three times tougher than Kevlar, a p-aramid fiber from DuPont. Strength is defined as the weight a material can bear, and toughness is the amount of kinetic energy it can absorb without breaking. The silk's primary structure is its amino acid sequence, mainly consisting of repeated glycine and alanine blocks.

Potential applications include cables and bulletproof vests. Spider silk's antimicrobial properties make it suitable for wound patches. Because the silk is not rejected by the human body, it can be used to manufacture artificial tendons or to coat implants. And its thermal conductivity is similar to that of copper but its mass density is one-seventh of copper's, making it a potential heat management material."

Feb

3

December Low Indicator:

When the Dow closes below its December closing low in the first quarter, it is frequently an excellent warning sign. The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970s. Hooper dismissed the importance of January and January's first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday-shortened week. Instead, said Hooper, "Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out!"

Jan

29

 Let the Fed note the havoc in the market and do something very temperate today. And as they gather for their resplendent lunch, perhaps with the fake doc attending, let them make some noises to their cronies, perhaps in the men's room or the corridors marbled that the Fed must put things on an even keel, so as to give the market the weather gage.

Ken Drees writes:

Let them never be irryellevant.

Dec

23

 The sun's magnetic poles are about to flip. I wonder if this cycle has been studied in regards to markets? It's an 11 year cycle.

Art Cooper writes: 

Here is William Stanley Jevons's work on the subject from 1878.

Dec

10

 The following old African story makes me think about how we view our trades and our data. We instantly love our conclusions and unfortunately love our trades to death.

How the monkeys saved the fish.

The rainy season that year had been the strongest ever and the river had broken its banks. There were floods everywhere and the animals were all running up into the hills. The floods came so fast that many drowned except the lucky monkeys who used their proverbial agility to climb up into the treetops. They looked down on the surface of the water where the fish were swimming and gracefully jumping out of the water as if they were the only ones enjoying the devastating flood.

One of the monkeys saw the fish and shouted to his companion: "Look down, my friend, look at those poor creatures. They are going to drown. Do you see how they struggle in the water?" "Yes," said the other monkey. "What a pity! Probably they were late in escaping to the hills because they seem to have no legs. How can we save them?" "I think we must do something. Let's go close to the edge of the flood where the water is not deep enough to cover us, and we can help them to get out."

So the monkeys did just that. They started catching the fish, but not without difficulty. One by one, they brought them out of the water and put them carefully on the dry land. After a short time there was a pile of fish lying on the grass motionless. One of the monkeys said, "Do you see? They were tired, but now they are just sleeping and resting. Had it not been for us, my friend, all these poor people without legs would have drowned."

The other monkey said: "They were trying to escape from us because they could not understand our good intentions. But when they wake up they will be very grateful because we have brought them salvation."

(Traditional Tanzanian Folktale)

Happy Birthday, Victor–70 is a nice number!

Aug

30

 [The company said] the target for its general insurance business was
“challenging” following disaster-related losses.

"Zurich Defends Accounts as Ackermann Exits After CFO’s Suicide"

Using some pop psychology, I would anticipate that what exactly is referred to as "challenging" has some bearing on the magnitude of future declines. In this case some financial target being "challenging" simply means that there is no way in hell they will meet it. If however the business environment is described that way it's likely to mean two things: all hell is breaking loose and the management not only lost control but doesn't want to take responsibility for what's going on.

Victor Niederhoffer writes:

A study of use of "challenging" and NYSE might show some evidence of future inordinate declines a la Sornette but taking account of both side of the distribution, not just one tail, i.e. a real study.

Here is a 2007 study of that hypothesis which is somewhat "challenging" on a number of fronts. 

Ken Drees writes: 

I find this Stunning.

The poetry of the the modifier word "healthy" pointing to cash flows as in blood flow that sustains "a strong and resilient balance sheet", the body of the corporation, juxtapositioned against the wan image of a very "dead" monitor, (CFO), of the bloodflow of the corporation's health under a "sheet" at the morgue.

Mar

27

 Review of Trading Bases, a story of Wall Street, Gambling, and Baseball by Joe Peta

A timely book here just ahead of opening day, http://tradingbases.squarespace.com/. Peta relates a lifelong love of baseball and statistics, his experiences as an equity desk trader for Lehman Bros. (15 years) and his subsequent battle back from a horrifying injury sustained by being run over in the streets of NY by an ambulance –as if his Lehman experience wasn't enough to endure. He suffered a "Theisman grotesque" leg break that left him depressed and basically rehabbing alone in his NY apartment with wife and family living on the west coast.

His passion for trading snuffed by not being able to work, hopped up on pain meds, and trapped in the apartment leads to him to watching more sports than ever before. A baseball lover at heart and a statistical junkie, Peta finds a reason to wake up in the mornings. He decides to try his hand at making a statistical model that would identify edges for baseball team wins and losses that would provide him with a betting edge over the Vegas Line.

Peta eventually creates a hedge fund that bets baseball games that returns 41% in 2011 with similar daily volatility as the S&P 500. The book outlines Joe's views on gambling. Baseball is his preferred niche since the juice/spread is the smallest in comparison to other sports, the ability to use statistics to get an edge is available, and the natural alignment between the better and the team– rooting for your team to win versus the convolution of winning and beating a point spread.

Joe explains his model with care, logic, and facts–backing up his assertions with anecdotes, experiences and back testing in terms of the body of baseball evidence from the historical stat stockpile. He builds on the pioneer work of Sabermetrics, Bill James, and Nate Silver. In general his system uses time tested relationships of team win/loss records, runs allowed/runs scored, starting pitching assumptions, WAR/PECOTA analysis, and more. He relates his journey on a monthly basis showing his results, the breakdowns of what went right and what went wrong, his acceptance of a "lumpy" higher return than a smooth more accepted rate of return by clinging to the belief that reversion to the mean will occur–eventually. He uses a concept called "cluster luck" to identify "lucky or unlucky" pockets in team's prior records that should be ignored and removed from overall estimates. This is a key to his being able to form an opinion against the betting line of under or over valuation. His model then picks matchups that should be bet on and he uses a very systematic approach to determining the amount of the fund to bet on any one game–essentially using fund manager skill sets.

One notable opinion of his describes his fondness for "skill sets displayed" versus the recording of errors (mistakes committed and sometimes unfairly attributed). He uses SIERA (skill-interactive ERA) for pitcher evaluation and special modeling for playoffs and interleague games. He also walks the reader through his decision making process for when to tweak the model or when to stand pat—. Over tweaking will result in removing the natural capture of mean reversion. Joe has a friendly writing style and comes across as genuine, interesting and likeable.

I think any spec would like this quick reading book–you will learn something here about baseball stats and baseball betting theory; you may well enjoy the woven storyline of his trading career experiences as these snippets and stories move betwixt his model outlining. It is written for an above average mind, but its not too heavy to put someone off who doesn't deal with wall street or modeling on a daily basis. I read ever page, every micro-print footnote, and every end note.

Ken Drees adds: 

I could not find a section or passage by memory or a reference from the index to overall management influence on single game outcomes or win expectations. One chapter deals with playing from behind and how "small ball" played to cut a two run lead to a one run game is a bad practice–playing not to lose instead of playing to win–giving away your upside to get a better feeling that you are "doing something"–almost like a job justification strategy–manufacturing a run, playing to tie instead of win. Peta backs this up with data –pages 204-206. Obviously management is taken into account when overall seasonal expectations are determined. But the managers don't play on the field so they are not highly considered in Peta's analysis. I would think possibly it may come up as a side data point in the playoffs –having more of a weighting than regular season. It may be that widely popular managers may in fact swell a line up for a team and thus give you a better opportunity to make money against–like the NY Yankees as Peta points out are a marquee club who usually get premium priced in certain situations regardless of true odds.

Interestingly –he bets both national and American league games–turns down activity during interleague play since data is less deep for those occasions and also scales back during the playoffs.

In the chapter, "Focusing on the Wrong Data", Peta parts company with "a total lack of regard for management/soft skills mentality" that some of the sabermetric followers employ. He cites a player's manager, Ron Washington of the Rangers who is loved by his players and who makes a critical decision in game 3 of the world series tied one game a piece. He Gives veteran Torrealba –a 2011 95 game starter at catcher, a "deserved" start over the much better performing player at that time during the season, Mike Napoli. He juggled the line-up and in Peta's opinion weakened his team in two ways in order to give one player a "deserved" start over giving the other 24 players there best chance for a world series game 3 victory and series lead.

So maybe Peta does give some weightings in his model –maybe when playoffs and world series are in the prime-time spotlight managers can be exploited by bettors for their traits–both good and bad.

Victor Niederhoffer writes: 

I agree with the excellence of Trading Bases. The author is very brilliant, and very likable. And his discussion of what went wrong at Lehman is the best as well as his college essay on the central funding department, which almost got him fired, and his well deserved hatred of the boxing head at that firm, who gave him a one sentence interview before hiring him.

He assumes you know a reasonable amount about baseball trivia and it's helpful if you read the annual issues of the baseball prospects and are familiar with the pythagorean theorem of Bill James. The author was a star trader of tech stocks at several firms before being hit by a ambulance and turning to his first love after being fired by the Japanese and carried out in his wheel chair. A great book. I second what Mr. Drees said about it. 

Mar

12

One of the most valuable things I learned from the Chair is how not to do a study.

Let us summarize how to do a study. First define a pattern or event of some type. Then calculate the expected return subsequent to that event when the event happened. Then compare that return to the returns for all other non-event time periods. Do a t-test to establish significance at the 95% level.

That said the real problem is how can we insure ourselves against the possibility of biasing our study or otherwise completely messing up. the first thing that comes to mind is to never include data in your decision process that was not known at the time. For example Enron went bankrupt and then several years later after an audit the financial results were released showing that the original releases had been fraudulent. You cannot use the adjusted data based on the argument that it is the best data. Only the original data was known at the time so you must use that.

The same thing goes for price data. You have to use the prices that were known at the close if you are doing a buy at the close study. You cannot use retrospectively adjusted prices when the data is adjusted later than the supposed decision was made.

Always use tradeables. For example the S&P 500 index does not trade as an index. The S&P futures do and SPY does as well so one would use either of them as data for your study. The reason is that individual stocks can have stale quotes. Some of the smaller stocks in an index do not trade nearly as often as the larger caps. Thus the index can be behind the true position of the market. The tradeables trade and thus are subject to arbitrage that tends to keep them in line with the real market level.

This is a short list of things not to do. However it is representative of the fact that it is harder to learn what not to do than what to do. Other contributions would be welcome.

Victor Niederhoffer adds:

Always simulate what the chances were that your observed results were due to pure luck and take into account the path that your results would take and what that would have required of money management.

Consider the impact of retrospection on your results. The human mind is capable of ascertaining many regularities that occurred in the past, and is good at uncovering them in a study after the events occurred, but not very good at uncovering predictions based on new data that they are not already privy too. Never use range forecasts as they don't tell you whether you would have made or lost. Be aware of the difference between description and prediction, and statistical significance versus predictive distributions.

Never be overconfident. Do take account of the drift in your data, and the shape of the distributions you are drawing from. Mr. T, is not very good if only 2 or 3 observations removed from your sample would change the results.

To what extent are the regularities you believe you have uncovered been extant in the literature or the knowledge of shrewd fast moving traders. That changes things. What is the extent of regression bias in your results? 

Alston Mabry comments:

Something else, basically another riff on the Chair's comments: I find that statistics like means and correlations are, of course, useful, but they almost always hide important, idiosyncratic structure in the underlying data. In a sense, summary statistics are "intended" to do that, but I find it useful to unpack them and examine the structure in the data series, how the summary stats change over time, etc.

Anton Johnson writes: 

A couple of important things to consider.

Large changes in outcome resulting from small adjustments of a parameter is a sign of over-fitting and usually bodes badly for real-time results. Sometimes eliminating or finding a suitable replacement for the sensitive parameter will result in a more robust and usable model.

As a general rule, the number of parameters used in a study should be FAR fewer than the number of resulting trade signals.

Ken Drees adds:

Coach Bob Knight's new book The Power of Negative Thinking mentions "NO" being safer than yes. You can always more easily change a "no" into a "yes" versus the opposite–deciding to change your mind from positive to negative.

The gist of the book is to tamp down the uber positive thinking crowd–no, you can't do anything you want, no, you can't magically power your way to a fine end. PONT, Power of Negative Thinking is how Knight coached. He explains it that you must limit faults, limit mistakes–if we don't do these things then we have a chance to win. He keys on dealing with negatives to achieve a positive. He must have come across a lot of less disciplined approaches to coaching in order to come up with an against the grain type philosophy (PONT).

A lot of his points are probably already in the quiver of the sharpened spec. His hyper worried routines, careful study of the opponent, downplaying of good fortune and constant moving of yesterday's win into the rearview mirror broadens out into that persona you conjure when you think of him–that brooding face, those searching eyes–never smiling. The idea of "can't do it" was probably the most different from what we hear today–most are afraid to say "can't–that it means "I won't". Knight loves the honesty of a player saying I can't understand that assignment, or I can't push myself any farther. I would not recommend the book to cross over into speculation, but it's a quick read and there are more than some items to enjoy.

During it, I thought about player health in relation to speculating. I am my own coach. It's a luxury to have someone call your number and sit you down for a breather, to know you may need rest over more drill. How do I know that I am playing/ trading fatigued—only after a poor result? Knight seems to have the keen memory still in gear. There are some interesting stories about his games and Big 10 accomplishments.

Coach Knight will definitely tell you "No".  

Leo Jia writes: 

Very interesting, Ken. Thank you for sharing.

There seems to be some rationale in being positive. As I understand it, when one says "yes, I can do it" and envisions the actual doing, he actually plants a seed in his subconscious brain. The subconscious brain can be more powerful in many ways than the conscious. So planting a seed there is to use the additional powers of the brain, which are not accessible by the conscious mind normally, and thus increase one's chance of achieving a goal.

Jan

7

 When will the drought vibe hit the grains if things continue weatherwise? Drought is a slow creep type of price impetus that suddenly pounces.

Ever since Jeff Watson asked about wheat and what to do with it a few months ago I have been poking around the river scraping bottom articles. With everything else up yesterday, I have to turn a head towards the left behinds and consider them as worthy orphans.

"Mississippi River Nears Historic Lows, Shipping at Risk"

Scott Brooks writes: 

One thing to watch for in a drought is the amount of snow that falls. Snow is very important in agricultural land. A good snow cover will slowly melt and drip into the soil, thus giving the soil water but in a way that allows it to soak deep into the ground without too much run off or evaporation (i.e. the snow cover keeps the water from evaporating thus allowing it to soak deeply into the soil.

Soaking the soil deeply followed by consistent and gentle spring rains helps end a drought.

The problem that these drought stricken area's have is that they are not only dry on the surface and in the rivers, but also deep within in the soil. And since water goes down (or evaporates up), we have to fill up the watershed from the bottom up, thus the need for snow. Otherwise, even gentle consistent spring rain won't help as much as you'd think…..as most of the water is going to go deep into the soil and not be of use to the plants.

Think about it this way. You have a cup that is 12 inches deep, but you only have a straw that is 8 inches long. You gotta fill the cup up 4 inches just to get a taste of the water. And to drink from it on a long term and consistently (i.e. throughout the whole growing season) you need the base amount of water to be closer to 5 inches and then have consistent rains to keep the water at a level where the roots can reach it.

a commenter replies: 

10 inches of snow is equal to 1" of rain. This article speaks to what you say: "Drought in 2013? Major Pains Ahead".

 

Nov

27

 I recently read a great book: The Last Viking: The Life of Roald Amundsen.

Roald Amundsen grew up wanting to be an explorer. He always knew what he wanted to do with his life. He was the only man (at the time) to have stood at both poles of the earth during his career. As a youth, he slept with the window open in winter to condition himself. He told his Mother he liked fresh air when she thought it strange. He had a supreme physical body due to hiking and skiing and physical endurance training. When he saw a doctor as a young man. the doctor whooped and called in fellows to see such an example of muscularity.

He studied explorers and their texts his entire life and every dime went into expeditions. Early on he recognized that explorers always got entangled with the ship's captain–by that he meant there were two heads that often clashed, the explorer would have to defer to the captain–the expedition would be cut short, bold decisions would be muted, etc. He took the necessary time and hours working on ships sailing and studying and became a certified Captain in order to eliminate the friction factor–he also became more the expert in sailing than his contemporaries. In the same vein he decided to not take a medical doctor/scientific sailor candidate on one of his voyages even though from a previous experience a doctor came in critically important during a rough time in the arctic. The reason to omit the doctor is that men on an extended trip of isolation confuse a doctor as a leader–the doctor becomes a force that may override an explorer's leadership.

Amundsen always was a student of technology. He was an observer of indigenous peoples of the arctic and he used their techniques for survival and success where his rivals seemed more wooden and resistant to change. Using Inuit clothing, hut technology, ice house forms and dogs as transport over ice where others did not were key to his success. He had to leave a lot of the business part of his career to family and close friends–which eventually soured in the end. He was always at odds with money –never having enough, always fundraising and one step ahead of creditors. His famed persona (like a rock star of today) was always in the papers–his exploits somehow always paid off his debts but then the cycle would repeat itself. He had to go on the multi continent lecture and talk circuit (early 1900s) to make money–a grueling life worse than being at -minus 50F in an ice crevasse.

Bown, the author, did his homework. The bibliography is basically every book out there, plus he did a lot of his own work in extensive newspaper story research (NYT–predominantly). There is a lot of controversy about this man and his methods–a lot of bias that Bown seems to navigate around. 

If you haven't read about polar exploration it's a good book to read since it relates the entire history of man's search for the final fabled lost lands or undiscovered sea lanes that would make trade travel quicker and cheaper. The book came out to mark the 100 year anniversary of the south pole discovery by Amundsen in 1911. You also will get a good sense of the flavor of the times–airplane technology, dirigibles, engine design changes. Amundsen also designed his own polar ship with hull designed for ice, special auxilliary motor equipped for special maneuvers.

There is plenty for the spec to think about here in relation to goal setting, using tools that others ignore, attention to details, what areas of endeavor should and should not be "farmed out". Also, there's a lot of stuff on how to plan for all potential problems, how to size up talents, and how to pick a team.

Sometimes the tedium of trading can be thought of as waiting day after day in an ice house for the weather to turn favorable. Amundsen was a big proponent of routines, small incentive contests and the shunning of idleness during his arctic times with his men–much here to think of and use for your own purposes. In this day of constant communication the book acts like an escape of sorts to a time when years would go by between shoving off on an expedition and returning–where and when and in what condition was always a surprise.

Nov

1

 I see an estimate of 50 billion to repair the NY subway system. "Many of the suppliers of equipment have been out of business for 50 years". All equipment damaged by salt water basically must be replaced. The loss of wealth from the flooding and the 3 million homes without power must represent enormous opportunity cost to the economy. At least 50 billion above and beyond the subway. The total goods that an economy produces represents the amount available to be divided up and would seem to be a good measure to total utility. These total goods are 100 billion less than they would have been. They say that one of the causes of the 1907 October crash was the San Francisco earthquake of April 1906. Big destructions in other floods and tsunamis would seem to have lagged negative impacts also. Total reductions in wealth like this have to be big negatives for the long term despite the tendency of calamitous events to have a negative impact the first day and bounce back by end of week.

Ken Drees writes: 

I like the reference to San Fran in scope and lag. Let's say it costs 200 billion to repair–it will be the only QE that cannot be afforded. A sad reality. 

Oct

2

 We've talked about vig on trades, but consider the vig on life events such as moving, divorce, death. Moving seems like an expensive proposition, 10% commission on house, moving, disruption, time off. Divorce probably has a 60% vig with splitting estate in half, commissions, forced sales, attorney fees, emotional loss. Death has a 110% vig, you lose everything and the transfer to the next generation has its expenses as well plus the emotional toll. Though not exceptionally successful in a career or anything else, I've been lucky not to have had to move or get divorced, get sick or die, yet. I've seen so many over the years go down in business, love, life, health: many more than have made it big. Perhaps buy and hold has some merit.

Ken Drees adds: 

There's a big vig cost on changing colleges or majors now vs. the past when the price of college was lower.

Aug

14

What of the threat stringing out past the point of threat into a sleep? Market fatigue waiting for the euro mess to resolve, Iran to be bombed, Syria to fall, nat gas to get a pulse, gold to restart, Japan to rise again, GE to come, etc.

Steve Ellison writes: 

Natural gas, 6/15/2012: 2.467 (July contract)

2.196 (adjusted for rolls to August and September)

Natural gas now: 2.752 (September contract)

That's a 23% increase.

Jul

31

 I believe one of the elements we overlooked in our conversations about Apple was (is?) the Mac's superior graphics applications. Whether this superiority was by accident or design, it played a major role in the Mac's initial financial success.

Apple was (numerically) a small player (and seller) in a big and growing field. But outfits with big bucks and a need for superior graphics (i.e., newspapers, ad agencies, job shops, and design studios) had no difficulty in choosing the Apple products despite their much higher prices and refusal to license out knock-offs.

If I remember correctly, Macs had about 5-8% of the consumer market, but were dominant not only for those businesses listed above, but for any organization that wanted to produce a professional looking, graphic-intensive mailer or newsletter. As a result, many graphics-oriented software developers submitted their best work to Apple — and the disparity grew.

Despite owning over 80 Macs in our department alone (the editorial staff had more), we could never negotiate a volume discount; Mac was the market. Only a little before my retirement did the PCs begin to show some advances in design capabilities. My few remaining contacts tell me Macs are still used. If Jobs factored this into his development plans then he was very insightful.

Ken Drees writes:

Jobs made huge inroads with schools/universities as a distributions channel for macs–thereby seizing a very healthy nitch that became loyal. Journalism schools were MAC city in the 80s /90s.

Daniel Flam writes: 

Apple does have some nifty innovations, but along with a very totalitarian mentality. Democracies can turn into anarchy –monarchies can become totalitarian, and Apple is a dictatorship. Some people yearn for a messiah– Apple gave those people what they want. 

May

7

 Maybe a financial version of this lifted the Nikkei to 10k? Is a stock or an index heavier/harder to move higher at retrospect lows, mid points or tops? What is heaviness in terms of financial prices at lows, inertia? Is weight in financial terms of stock movement a correct way to view? Are stock prices weightless at all times and only affected by tethers on or tethers off? What made the Nikkei rise gently to 10200 and now fall gracefully back towards its 9000 - 8000 beginning level. Lava lamps come to mind.

"Wearable Muscle Suit Makes Heavy Lifting a Cinch":

It takes a second to register, but the 40 kg of rice I just picked up like a human forklift truck suddenly seem as light as a feather. Thanks to the "muscle suit" Umehara slipped onto my back prior to the exercise, I feel completely empowered. Fixed at the hips and shoulders by a padded waistband and straps, and extending part-way down the side of my legs, the exoskeleton has an A-shaped aluminium frame and sleeves that rotate freely at elbow and shoulder joints.

It weighs 9.2 kg, but the burst of air that Umehara injected into four artificial muscles attached on the back of the frame make both jacket and rice feel virtually weightless.

The muscle suit is one of a series of cybernetic exoskeletons developed by Hiroshi Kobayashi's team at the Tokyo University of Science in Japan. Scheduled for commercial release early next year, the wearable robot takes two forms: one augmenting the arms and back that is aimed at areas of commerce where heavy lifting is required. The other, a lighter, 5 kg version, will target the nursing industry to assist in lifting people in and out of bed, for example.

May

7

 My teens say facebook is yesterday–hope the IPO isn't a "fail" as they call things that suck, or do not work. 

Facebook IPO Status Update:

The stock now could go public at a lower price. Moreover, new uncertainty about the Menlo Park, Cal., company's growth prospects may temper some of the feeding frenzy that was expected to take place on the stock's first day of trading — currently scheduled for May 18.

Craig Mee responds:

Agreed. Looking at explosive movers and shakers like Google, Facebook is a different animal. Google gets the job done, but Facebook is more part of a trend or coolness factor that can be side stepped as quick as the share/message/like buttons allow. What's more, the site, especially the log in page, looks kind of old school. You can buy things, but you can't buy coolness, once you've lost it.

Russell Sears writes:

My daughter says it is because Facebook has been taken over by all the whiners, posting all the time and losers playing games. It seems the only acceptable use is keeping Grandma up to date. Hence if you admit you use it, you are the sucker at the table.

Gary Rogan writes:

In addition to the inherent instability of any high tech company, this one adds the delightful dependence of its success on the what most of its customers think of most/some of its other customers, usually a characteristic associated with trendy fashion retailers and night clubs. Compared to this one, Groupon that made another all-time low today at significantly less than half of its initial trading range is the rock of Gibraltar.

Apr

17

 I just saw the Royals (getting swept by the Indians) put in their outfielder to pitch the ninth to save what is left of a depleted pen.

The pitching was akin to batting practice, the tribe went quickly, and the pitcher got a Royals' standing ovation, the only pitcher all weekend to get one.

Market equivalent?

It seems like the batters may have been a bit taken out of their element by the novelty, maybe the overconfident factor at work.

Maybe the Royals' skipper scored a tiny tiny mental victory here to lift the team for the next series.

Feb

28

 In the movie Nixon/Frost–I was channel surfing and stopped when the character of Swifty Lazar was on the screen. He was brokering a deal and trying to get the most he could for the Nixon interview from Frost. What a line.

Lazar: "You must call the man on a weekend or very late, in the middle of the night, that way you can find out where you stand. If he takes your call at a very late hour, or at an inconvenience then you know he is interested, you then know that you got him."

You see Frost push his sleeping honey aside and take the call despite her protestations.

Market implications here–somewhere.

From the New Yorker

Lazar picked up the menu, took off his glasses, removed a gold-rimmed monocle from his breast pocket, put it in place, and studied the menu, holding it an inch or two away from his nose. "I want breakfast," he said. "Scrambled eggs with smoked salmon." He turned to me and said, "I got a late start this morning." I wondered whether this was his way of apologizing for being late, but nothing in his manner suggested that it was. "I mixed up my pills," he explained. "I took my wake-up pill last night and my sleeping pill when I got up this morning." He turned toward the captain, who was hovering beside me. "He'll have a '21' Burger, medium," he said, dismissing him with a wave while I was still looking at my menu. Lazar, as I was to learn, hates people who can't make up their minds about what they want to eat (or anything else), and is very likely to order for them if they aren't quick enough to suit him.

Feb

24

 Here's an interesting Schilling article that Real Estate has 20% down to go due to unlisted foreclosures, separation from investing/ownership, and 40% underwater with another 20% drop in price.

However, the real estate cycle is notoriously fast when it takes off, so trying to time it is hard to do.

Victor Niederhoffer comments: 

If, if, if. I've seen this reasoning on bonds from a million sources over the last 5 years. If bond yields go up, or go back, it would cause this destruction or that catastrophe. But people in the bond field know as much about the course of the yield curve as anything in the world, indeed they're much more versed than the stock market people. And it just takes a few Grosses or Soroses or DeRosas or dozens of others to set prices exactly where they should be taking account of all future contingencies. In short, the yield curves today provide an extremely accurate forecast of future fixed income yields. The experts, the DeRosas take account of the likely change from easing to tightening and when, and what a impact that will have on everything in their current forecasts. To predicate a trade on the idea that bond yields at 3% or 2% are ridiculously low is to go against the greatest experts in a field the world has ever known, et al.

George Zachar writes:

Unfortunately, the bond mavens today are forced to gauge not the real economic context of the forward curve, but the internal dialogues of Bernanke and Dudley. With the Fed manhandling the yield curve from tip to tip (and TIPS too), the price signaling attribute of the treasury market has vanished.

We are likely years away from private capital allocators fully resuming their role as impartial price setters for money. And there's a real risk the cronies will never be pried loose.

Ken Drees writes:

 I heard one of my mood of real estate indicators loud and clear the other day, ironically on the am radio. The banter back and forth was why renting is better than owning, even though the price may be higher to rent.

radio person a: Why should I tie myself down with a house, if I lose my job I can't move?

person b: Right, its easier to just rent and move.

The job environment needs to bottom and improve before housing can turn–Rocky's 2014 guess is as good as any for a bottom based on soaked up supply.

Fred Crossman writes: 

We are in an unprecedented period where the world central banks, instead of suggesting work and saving as a remedy to excessive debt, offer the effortless remedy of federal programs, massive printing, and more debt. Is it ironic, as we reach new market highs, that the biggest per cent mover today (not SHLD, which is up on worse than expected earnings but a shot at more creative financing) is a diet drug that eschews exercise and dieting but instead offers a pill for the same result?

Feb

14

 Are we at the point where the street needs volumes back to averages? What will the catalyst be; Israeli saber rattling, Iranian suicide boats, Spanish bank downgrades? Only the shadow knows…

Fred Crossman writes:

Hey Vince, I don't think war events are bearish. How about bad eurozone IP and German ZEW conditions numbers on Tuesday or bad eurozone and German GDP numbers on Wednesday to get the de-coupling crowd thinking again? (disclaimer: I have never been right).

Ken Drees writes:

Yes indeed! Bring a new headline to the fore, raise a signal, blow a horn–anything but the same old boredom.

There was a time when I would sit down and hash out 10, 20 or more "things or scenarios" that could happen to pitch markets off center. Even after thinking quite outside the box, in the box, and on the box–military, financial, political, mother nature, etc. I could never seem to guess right–the markets always had a new one, or a "dumb" one that I thought not an issue. Outside of mental exercise, boning up on geopolitics and such, the benefits of handicapping the unknown catalyst that will jolt the markets seems less important to me. The thing to realize is that something will happen, sit back and enjoy the surprise.

The market lulls us now into its lovely and comfortable bosom of low vol–sleep little specs, sleeeep–it's time to sit up straight, let the cool snowflakes rouse the poppy fragrance from one's nostrils and keep awake.

As now table banter has turned towards a new and safer market, easy returns, low priced protection, 8 weeks of this blissful gentle lifting and stretching will most likely be shattered by something "out of the blue". Apple at 500, facebook getting in while the getting is good–two talking poppies.

"Confidence is suspicion asleep".

Feb

7

 Whenever I try to finesse a trade, add layers, integrate, etc, I wind up losing, slipping, getting caught up in the extras and missing the big picture, the point of the trade in the first place. I bring this up in relation to the final TD by the Giants last night in which the running back squatted on the one yard line actually thinking about what to do.

He was in a momentary trance, do I score, should I sit here and get downed on the one and we can burn the clock? SCORE! How can they presume to know the success of future plays? They were behind, they do not have the luxury of finesse. They might have been down at the one, fumble or miss the field goal–and the announcers were oh so smug about the entire clock comeback strategy.

And what of the patriots supposedly letting the giants score? Banking it on the comeback drive, that entire endgame seemed flawed. Was the psychology such that the Pats figured they would be behind at the end, did they play into their own vision of the game's outcome?

Jan

22

 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).

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Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.

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Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.
 

Jan

14

The attached charts the ratio SPY/TLT 2002-present [The S&P ETF vs the US Treasury ETF]. The current ratio of about 1.06 is near the bottom of the post 08-09 crisis range, but still far from the bottom reached in March 2009.

Victor Niederhoffer writes: 

This illustrates the wisdom of the proverb "there is always a web between markets but the web is always changing". Conversely nothing exemplifies this proverb better than the shifting relation between fixed income and stocks.

Alston Mabry adds:

Just as an exploratory reminder to myself, attached is a chart showing the variations in 60-day correlations between two 1000-day series (of % changes) generated randomly but with an overall correlation of -0.3.  In other words the true correlation is -0.3 but we pretend we don't know that and measure the 60-day sampled correlation.

Ken Drees adds: 

Zussman's chart makes one think about potential energy–the buildup of potential change as one sector grows larger than the other.

Alston Mabry adds: 

And again, just to see what it looks like, here's the rolling 20-period correlation for the weekly % changes of Dr Z's SPY and TLT.

Finally, one last chart, combining the previous two ideas: the rolling 20-week correlation of SPY and TLT, graphed with the rolling 20-period correlation of two random series with the same overall correlation as SPY-TLT (-0.41).

Dec

22

 Bill Gross recently penned an essay in the FT entitled "The Ugly Side of Ultra-Cheap Money". He makes some provocative (and questionable) generalizations regarding the effects of zero interest rates on the real economy, but:

1. He importantly ignores the important differences between zero nominal interest rates and zero real interest rates. (Due to deflation, Japan has run a tight monetary policy for years, and the Yen's multi-decade appreciation to 78/$ provides a reasonable proxy of the relative inflation rates between the USA and Japan.)

2. He fails to openly acknowledge that ultra-cheap money is terrible for his business. He laments people keeping dollars under their mattress (because it pays the same as money market funds). Yet, he doesn't mention that the current interest rates out to the 5 year result in his management fees being rather larger than the investor's yield to maturity.

I submit that there IS a pretty side of ultra-cheap money:

Mr. Market (and foreign owners of US debt) are giving a gift to the US Treasury that is truly remarkable. A Bill (the paper, not the Gross) yields 0% (negative ~3% trailing real yield) and the 5-year yields .9% (negative 1% real). Most of the US debt maturities are 5 years and under. And the Fed owns about 10% of the total debt…soaking up the outter maturities. This means, with $15T in debt, the REAL static debt burden is decreasing by about 600+ Billion per year. (Of course, when Mr. Market grows angry with the US Treasury, this pretty picture could viciously swing the other way as various pundits, including Taleb, Grant, Mauldin, etc are warning.)

Here's a chart that shows the US Debt Maturity.

Yes, Viriginia, there IS a Santa Claus. If you pull off the long white beard, you'll see Santa is actually the people who are buying US Government paper and holding cash. And we should all thank them as they come down the chimney.

Ken Drees writes:

Forget Santa, what about VIXen? He is laid out, 5 months cold. Is it another Christmas in July for the VIX?

Dec

15

 Here's a link to my article about Bo Keeley "The Legend of Bo Keeley grows". They or I got the photo credits goofed up. Sorry. Story comes out in NYC, SF, LA, Seattle, Austin, TX, DC, Chicago, Shanghai, London. Welcome home.

Ken Drees sends us a poem to honor Bo's welfare: 

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Bo Left Us Dead

(Written after reflection on good news of Bo Keely's safety)

Finished Bo's book, just put it down,
Next thing I hear
Sad tragic news,
Keely's not to be found.
No, not in anytown,
Got himself killed this time 'roun.

Them Mex think he's undercover narc,
Down there, too tall and off white
He sticks out,
One too many rides in the dark.
DocBo, The speculator surmises,
Has run plum out of lucky devices.

No facebook, email or phone, G*d please help Bo,
Sadly, its over for him;
No more of his stories, and that grin.
Please bring him back whole.
But if he's truly dead Lord,
Least his soul's in your yard.

Praying is over, Bo left us dead,
No more tales, rails or boxes
To inspire, tranfix,
To dazzle our heads.
Keely has jumped one reefer too far,
Somber, even the bulls at roundhouse bar.

And then like rain that drought licks for,
Bo's Alive for sure. For sure!
Been in the desert, all this time,
Playing with spiders, rocks, and slime.
Those mental puts on Bo expired,
Luckily not the man, that a freight train sired.

So comes the end of this tiny tale
Let the celebration begin,
Dead, now alive, its all win-win.
February's, cruel winter's gale,
Will no doubt herald,
A cupid hearted Hobo, quite undead sans peril.

Dec

15

 Have you seen this article about the top 5 regrets of the dying? It is a must read. 

Gary Rogan writes: 

I really liked all of them, except based on everything that I know I disagree with the statement that "happiness is a choice". Irrational fears are not a choice, depression is not a choice, and neither is happiness.

Gibbons Burke writes: 

Well, happiness is dependent on one's attitude, and in many cases, you can choose, control or direct your attitude.

My theory is unhappiness and depression happen when reality does not live up to one's expectations of what life is "supposed" to be like. I think the key to happiness is letting go of those expectations. That action at least is within an individuals purview and control. There is an old Zen maxim: If you are not happy in the here and now, you never will be.

Russ Sears adds:

I think most irrational fears and depression stem from the unintended consequences of one's choices or often, the lack of decisions, such as little or no exercise. However, I believe many of these choices are made when we are children, and we do not fully understand the consequences. Many of these bad choices may be taught often though example by adults or sometimes it is just one's unproductive coping methods that are simply not countered with productive coping methods by the adults in their lives. I think some people are more prone to fall into these ruts, but most of these ruts are dug none the less.

Jim Sogi writes: 

The regrets are perhaps easily said on the deathbed but implementing these choices in life is very difficult. Many can not afford the luxury of such choices. When there is no financial security hard work is a necessity. Such regrets are not much different than daydreams such as, oh I wish I could live in Hawaii and surf everyday. The fact of the matter is that the grass always seems greener on the other side. Speak to the lifestyle guys in their old age. Will they say I wish I worked harder and had a career and made more meaning of life than being a ski bum or surf bum? 

Gary Rogan responds: 

What you say is true about the effects of exercise. But that's just one of many factors that are biochemical in nature. Pre-natal environment, genetics, and related chemical balances and imbalances are highly important in the subjective perception of the level of happiness. There are proteins in your brain that effect how the levels of happiness-inducing hormones and neurotransmitters are regulated and there is nothing you can do about it without a major medical intervention. Certainly some choices that people make affect their eventual subjective perceptions through the resultant stresses and satisfying achievements in their lives, so the choice part of it can clearly be argued. My main point was that by the time the person is an adult, their disposition is as good as inherited. They can vary the levels of subjective perception of happiness around that level through their actions, but they are still stuck with the range, mostly through no fault or choice of their own.

Since a few literally quotations on the subject have been posted, let me end with the quote from William Blake that was used before the chapter on the biological basis of personality I recently read:

Every Night & every Morn

Some to Misery are Born.

Every Morn & every Night

Some are Born to sweet Delight.

Ken Drees writes in: 

I believe that you must put effort towards a goal and that exercise in itself begets a reward that bends toward happiness. It's the journey, not the end result. You must cultivate to grow. A perfectly plowed field left untended grows weeds–the pull is down if nothing is done.

Russ Sears adds:

 It has been my experience with helping others put exercise into their lives that few teens and young adults have reached such a narrow range that they cannot achieve happiness in their lives. This would include people that have been abused and people that have a natural dispensation to anxiety. Their "range" increases often well beyond what we are currently capable of achieving with "major medical intervention". As we age however our capacity to exercise decreases. While the effects of exercise can still be remarkable; they too are limited by the accelerated decay due to unhappiness within an older body's capacity. Allowing time for our bodies is an art. Art that can bring the delights of youth back to the old and a understanding of the content happiness of a disciplined life to the young.

Peter Saint-Andre replies: 

Horsefeathers.

Yes, hard work is often a necessity. But hard work does not prevent one from pursuing other priorities in parallel (writing, music, athletics, investing, whatever you're interested in). Very few people in America have absolutely no leisure time — in fact they have a lot more leisure time than our forebears, but they waste it on television and Facebook and other worthless activities.

Between working 100 hours a week (which few do) and being a ski bum (which few also do) there lies the vast majority of people. Too many of them have ample opportunity to bring forth some of the songs inside them, but instead they fritter their time away and thus end up leading lives of quiet desperation.

It does not need to be so.

Dan Grossman adds: 

Jim Sogi has a good point. The deathbed regret that one didn't spend more time with one's family is frequently an unrealistic cliche, similar to fired high level executives expressing the same sentimental goal.

The fact is that being good at family life is a talent not everyone has. And family life can be difficult, messy and not easy to make progress with. Which is perhaps one of the reasons more women these days prefer to have jobs rather than deal all day with family.

Being honest or at least more realistic on their deathbeds, some people should perhaps be saying "I wish I had spent more time building my company."

Rocky Humbert comments:

 I feel compelled to note that this discussion about deathbed regrets has been largely ego-centric (from the viewpoint of the bed's occupant) — rather than the perspective of those surrounding the deathbed. I've walked through many a cemetery, (including the storied Kensico Cemetery) and note the preponderance of epitaphs that read: "Loving Husband,"; "Devoted Father," ; "Devoted Mother," and the absence of any tombstones that read: "King of Banking" or "Money Talks: But Not From the Grave."

Notably, Ayn Rand's tombstone in Kensico is devoid of any comments — bearing just her year of birth and death. (She is, however, buried next to her husband.) 

In discussing this with my daughter (who recently acquired her driver's license/learning permit), I shared with her the ONLY memory of my high school driver's ed class. (The lesson was taught in the style of an epitaph.):

"Here lies the body of Otis Day.

He died defending his right of way.

He was right; dead right; as he drove along.

But now he's just as dead, as if he'd been wrong." 

Kim Zussman writes:

Is an approach of future regret-minimization equivalent to risk-aversion?

Workaholic dads have something to show for their life efforts that Mr. Moms don't, and vice-versa.

If so, perhaps the only free epithet is to diversify devotions — at the expense of reduced expectation of making a big mark on the world or your family.

Dec

5

 There is no power like oratory. Caesar controlled men by exciting their fears, Cicero by . . . swaying their passions. The influence of the one perished; that of the other continues to this day.

-Henry Clay

The market calls out to us bearishly with forceful reasonings, which come arm and arm with losses or expected losses. The bull is the passion of gain and the hoisted mugs of winning together and a crowded din of likemindedness.

Nov

29

The chair may have covered this as ballyhoo in his book as part of pattern recognition Edwards and McGeeism, but the energized SPY of late now sports a gap that is getting filled now at 116ish and has a gap below 117and change to just under 119.

Gaps as signposts and voids to be filled eventually never really aided my trading, though I noted their existence. Has anyone plyed these differently or in any useful way?

Nov

27

 I believe we've had enough of the grist for the chair and that we return from commodities. We have learned from the exchange. The market is down 7 days in a row. Where's it going? I note only 3 other occasions in the last 15 years. There is not necessarily light at the end of the tunnel 10 days later based on the past.

Ken Drees writes: 

With the euro news winds moving US equities and the "bad" German bund auction capper for the moment, the inner core begins to feel the fallout and therefore the closer we are to a plan B coming up out of the blue. Every euro bond auction is now going to be bad until something is done. I would say we are close to the rumor stage of rescue and that equities are tilted for a rally. I think the 7% retail spending increase may be enough to get things started if some positive rumors surface for rescue in euroland.

Paolo Pezzutti writes: 

Who should be the rescuer? Unless in Europe somebody questions the excessive welfare state built over the years, nothing can change. People still give for granted "rights" and privileges that cannot be afforded any more. Somebody has to question the size of governments and the perimeter of their interests and actions. Nobody is doing it so far. They are still looking for lenders and trying to find money rising taxes. How can we be optimistic? 

Nov

22

 I see a water boil type market where slowly the heating ramps up until it bursts into boil. Multiple country bond market auctions failing or stumbling, euro equities struggling, S&P hanging like a turkey from a hunter's hand, mf global is a needle in the confidence arena, the heating up of a bad kettle keeps going.

So I'm not seeing things from a contrary view, but I'm seeing things as slowly unraveling…or maybe there is a grand rescue that will be hatched on turkey day?

Somehow I feel that table talk will be interesting on Thursday.

Victor Niederhoffer comments:

The idea of buying the announcement and selling the rumor for profit has been exemplified recently. 

Nov

17

 Sears started as a catalog/mail order company and will eventually turn back to its old roots–shed the real estate, close all the stores and sell from the internet only.

Just a thought.

Rocky Humbert comments: 

Interesting timing for Ken's post!

Exact 7 years ago today, (11/17/04), Eddie Lampert announced the acquisition of Sears by Kmart. Lampert took control of Kmart during its bankruptcy.

Eddie (a fellow Yalie and GS risk-arbitrage alum) is a very smart guy. His resume includes the improbable feat of having talked his way out of a kidnapping, and some fabulous investments, including Autozone.

Alas, Sears was Eddie's biggest transaction.

And how have Sears shareholders fared? Not so good. The Sears story morphed from a real-estate play (which quadrupled the stock) to cost-cutting to "we're not going to sacrifice profits for revenues"  to who cares about sames-stores-sales to the present morass.

Since the merger, the S&P 500 has returned +23.1%. Walmart has returned 24.1%. Sears has returned negative 24%.

Which raises the tasteless counterfactual question: How would have Sears performed if the kidnappers had not been persuaded?

The lesson: always have an exit strategy other than the graveyard.

Stefan Jovanovich comments:

This is Sears' own potted history of its going into store building:

The first Sears retail store opened in Chicago on February 2, 1925 in the Merchandise building. This store included an optical shop and a soda fountain. During the summer of 1928 three more Chicago department stores opened, one on the north side at Lawrence and Winchester, a second on the south side at 79th and Kenwood, and the third at 62nd and Western. In 1929 Sears took over the department store business of Becker-Ryan Company. In 1933 Sears tore down the old Becker-Ryan Company store in Englewood, and built the first windowless department store, inspired by the 1932 Chicago worlds fair. In March of 1932, Sears opened its first downtown department store in Chicago on State Street. Sears located the store in an eight-story building, built in 1893 by Levi Z. Leiter, which for years housed the Stegel-Cooper department store. The original Chicago occupant on this piece of land was William Bross who in 1871 mounted his house on wheels and rolled it down State Street to the corner of Van Buren Street. He kept his house on wheels for several years because of the marshy conditions of the land. The Leiter Building, designed by famous skyscraper architect William LeBaron Jenny, included walls of New England granite.

The store sat on the corner of Van Buren, State and Congress streets and cost over a million dollars to refurbish. A 72-foot long electric Sears sign greeted shoppers at the front entrance. A stunning black and white terrazzo covered the main floor. The State street store was the first Sears store in a downtown shopping district, the sixth store in Chicago, and the 381st store the company built. Opening day for the State Street store took place deep in the Great Depression. Local newspapers reported that 15,000 shoppers visited the new store and several thousand people flooded the store's employment office. Sears did everything it could to help put people to work, employing 750 Chicago workers for four months during the renovation and staffing the new store with over 1,000 people.

Illinois Governor Louis Emmerson in a message to Sears Chairman Lessing Rosenwald stated, "I cannot help but feel that this opening will mean a great deal for your organization as well as for your city." Rosenwald proudly proclaimed that, "We regard the opening of our new store on the world's greatest thoroughfare as one of the high spots of our company's history." Within the store the sale of tombstones, farm tractors, and ready-made milking stalls caught customer's attention. The sporting goods department featured a model-hunting lodge. Other attractions included a candy shop, soda fountain, lunch counters, a shoe repair shop, a pet shop, dentists, chiropodists, a first aid station with a trained nurse, a children's playground, and a department for demonstrating kitchen utensils.

The company's chronology of its adventures in retailing in North Carolina is revealing. It did not build stores outside of the major cities– Charlotte, Durham, Goldsboro, Raleigh, etc, — until the 1980s! Meanwhile, some bright people in the truly small town of Wilkesboro had started their own enterprise, now known as Lowes.

Market Caps today (according to Google Finance):

SHLD - 6.83B LOW - 29.98B

Oct

31

 Read this: the idiocy of Larry Summers.

The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.

Oct

31

 "Suddenly Soros"

[to the tune of Suddenly Seymour]

Lift up your bond
You know that I cara
Here, mark my message
Wipe that market away
Show me your book
Dirty black longing
I know things were bad
But now we are straight

Suddenly Soros
I'm standing astride you
You don't need no longshot
Don't have to report
Suddenly Soros
Is here to provide you
True liquid funding
Soros' is your friend

(AUDREY)
Nobody ever
Treated EU kindly
FEDdy left early
BUBA is sore
I'd meet any flexer and
I'd follow him blindly
He'd write his swaps
And I'd say "More"

Suddenly Soros
Is standin' behind me
He took down the orders
He won't transcend
Suddenly Soros
Is here with a warning
Spoos under performing
Soros' my friend

(SOROS )
Tell me this predation lasts till forever
Tell me your good times are clean washed away

(AUDREY))
Please understand that its still
damn enlightnin'
For losers like I've been
It's so great to say

Suddenly Soros

(SOROS )
Suddenly Soros
He trustified me
He securitized you
(AUDREY )
Suddenly Soros showed me the plan
(SOROS)
Suddenly Soros sold into your plan

(BOTH)
Earn now and be poor
That bad trade's inside me (you)
With spoos underperforming

Oct

28

 How is a 50% Mark Down on the Par/Redemption Value of a Bond NOT a Default?

[Ed.: for background information see for example Greece Default CDS Failure to Trigger ].

 Stefan Jovanovich continues: 

 "You don’t need everyone buying CDS to expect it to pay out, you just need a buyer of last resort who’ll make it pay out. You don’t need tons of short sellers to root out fraud, but you do need to allow short selling so that one or two clever and capitalized short sellers can bet against the frauds. You don’t need all the buyers to think the price is right, just the marginal buyer. Greek CDS “works” only in the limit case, only for a non-bank investor who’s willing to be a jerk and run a certain amount of politico-PR risk. But that doesn’t mean it mostly doesn’t work. It means it entirely works."

From a post by Matt Levine.

At the risk of being the jerk who still doesn't get it, the tape is not the world. The short sellers win because there is, in fact, a fraud - Baldwin-United, Enron, etc. really do not have the money or assets that can produce future profits even though their books say they do. Even without short-selling the fraud would ultimately produce the lovely worthless securities losses that can be deducted against ordinary income. The tape would catch up with the world.

With CDS for sovereign debts it seems that "the world" is what the financial authorities define it to be, not the reality of Greece's solvency. I can understand that people will continue to trade CDS because there is, in fact, a market for them; what I do not understand is why anyone believes "the market" in this case has any reality other than a virtual one.

Gary Rogan comments:

Stefan, there is a real reality that

(a) by itself Greece can't pay off it's debt

(b) there are all kinds of people that want to do something to improve it's ability to pay it off.

In this sense Greece is not Enron and the reality is not virtual. There is this strange technical point of what happens to the CDS's if "everybody" voluntarily accepts a 50% haircut, but even the resolution of this point is real, not virtual, so if you buy both the debt and the CDS's something real will happen if you hold the debt to maturity.

Stefan Jovanovich responds: 

There are two problems with this scenario:

(1) everybody will not voluntarily accept the haircut in the CDS market; somebody will want to collect in full from a counter-party because the sovereign debt that is being swapped has done a half-default.

(2) Greece's sovereignty does not guarantee its solvency -someone holding even the new debt to maturity may find themselves receiving less than par. That is the contingency that the hedging instruments were supposed to protect the buyers against.

Gary Rogan writes: 

True, but none of this is virtual any more than the currency in circulation is virtual, which is what you seemingly claimed/asked. There is posturing going on, and I'm sure fraud depending on how you look at it, but there is real money involved and those with the best information, and to a lesser degree instincts, are making real money. Can you imagine what a smart European flexion getting the information in real time can do? Sooner or later we are talking about real money.

 Stefan Jovanovich writes:

Some of us are old enough to remember the collapse of the commercial paper market around the failure of the Penn-Central. Perhaps the Z-Man and the others who are out there making money while us Social Security recipients are busy typing can answer these really naive questions: how long did it take for the non-financial commercial paper market to revive and did it, in fact, revive? I have no doubt that there is real money involved; there was real money involved in the commercial paper market and then…. it was all gone. Currency is virtual but it has legally-enforceable exchange value.

My naïve question was - and is-what is the legally-enforceable exchange value of a credit default swap if "credit default" never, ever happens. If the insurance company can rewrite the policies, with blessing of the insurance commissioner, the buyers for that insurance may decide to go elsewhere for their risk management. I know there is supposed to be a chair for everyone in the room except the last guy; but the history of markets is that some people stop betting on finding a seat while the music is still playing and "everyone" knows the game will go on forever.

Gary Rogan says:

Does it really matter to anyone not playing if sovereign Credit Default Swaps disappear from the face of the earth? It's an iffy concept in the case of US treasuries anyway. Who will be there to pay if off in the world where the US defaults? It's not like you won't be able to buy earthquake insurance in the East Bay, so put your mind at ease Stefan.

Stefan Jovanovich continues:

I never know when Gary is teasing. Earthquake insurance is no longer offered in California by private insurers because the insurance commissioner allowed homeowners to collect on damages from earth movement - which is a chronic problem in coastal California - even though that risk was specifically excluded from the coverage. As a result you must now buy your insurance from the State of California which, of course, people decline to do - given this sovereign's solvency. As to why it matters, the disappearance of what has been the primary tool for risk hedging may have effects as large as those that came seizing up of the commercial paper market. We owe those once in a generation bargains in 1974 as much to the inability of firms to borrow short-term as we do to Watergate and oil price surge - perhaps more.

 Ken Drees comments:

What is the percentage of uninsured homes and businesses in the earthquake probability zones? (guestamate is ok)

I find it ironic that the overdue earthquake area people are living by the dice roll.

Stefan Jovanovich responds: 

According to the Insurance Information Network of California, fewer than 12% of the state’s home owners had earthquake insurance last year, and fewer than 10% of businesses had the coverage.

I don't see the irony. Some risks are not worth the cost of insuring. This is one of them.

Russell Sears comments:

Perhaps I too am naive, but I thought this was obvious: If the messenger will not agree with the rues, extend and pretend, then they must be shot. Currency CDS /hedging /insurance contract was sacrificed for the sake of the Euro.

While there may be some value in the litigation options, currency CDS's going forward are a dead market are they not? Just like structured securities, if you cannot trust the contracts for being truthful, (in a practical everyday sense of the word, not legal twist) then they are dead.

Are we willing to live with liquidity of MBS and currencies being at the mercy of those sovereigns that still have some semblance of confidence in them? Can these sovereigns keep these bottomless guarantees "off-balance sheet" without it cracking them? The market seems to be saying for now, "yes".

Oct

10

The stock market today [Thursday 2011/10/06] is gunning it into the close ahead of a good jobs number tomorrow?

James Lackey responds:

I dunno Mr Ken, and I don't care about such things. The number will be produced by the random news generator at best or rigged by The Man at worst… but it's not a meal for a lifetime… Please do not send such comments! Thank you.

 Anatoly Veltman writes:

Lack, this is not about the number. It's about expectation, based on market moves ahead of the number. The lesson to me is calendar-based trading - where money is made because the number is scheduled. Not because you know the number. Is there lesson in that?

Rocky Humbert issues a challenge:

You guys want a meal for a lifetime? How about this meal for the day:

Here are the most likely NFP numbers:

A) between -100k and -50k
B) between -50k and 0
C) between 0 and +50k
D) between 50k and 100k

The person who best assigns a 4pm SPX closing price to each of these 4 choices — and gets the answer right within 10 spx points — will receive a dinner voucher for 2 at my favorite restaurant. (That is, an acceptable submission would look like A=1102, B=1120, C=1160, D=1190.)

The purpose of this challenge is to demonstrate that EVEN IF you knew the NFP, you still won't be able to accurately predict the market's reaction (unless it's a complete outlier).

The judge's decision is final.

 Sushil Kedia responds:

Without any intent to contest the judges decision, my two humble cents:

A reflexivist, who often is a winner in the markets, may need to put up an answer most of the time, as E = 1155, irrespective of where the NFP numbers come.

If the judge so wishes that it may be proper for a complete illustration on the futility of information being beyond markets, may consider providing such a fifth choice. Up to the judge.

The unemployment number is released at 8:30am Eastern Time on Friday. Rocky Humbert responds:

Mr. Collins: One notes that the NFP headline number was 103k — which was above the choice D range (+50k to +100k). The judges are conferring as to whether this constitutes a scratch. They will announce their decision forthwith.

Nonetheless, and for good order, here were the entries in the contest:

Anatoly: SP will drop 90 points

Jonathan Bower: 1125 1125 1125 1125

Mr. Rogan: 1130 1140 1150 1170

Tim Collins: 1099.22 1119.66 1131.24 1149.86

Sushil Kedia: An "unlawful entry" of 1155 in all cases. (Because of his "unlawful entry," from this day forward, Sushil shall be known as Mister Meanor.).

Alex Forshaw: 1155 - 25= 1130; 1155 - 35= 1120 ; 1155 - 45 = 1110; 1155- 55 = 1100

Rocky Humbert writes further: 

I am penning this at 3:43pm — and due to the impending holiday, I need to leave early and hence will not know the final challenge result for about 30 hours. The point of this challenge was to convincingly demonstrate that EVEN IF one knows a macro data point in advance, it's frequently impossible to know Mr. Market's reaction. The signal-to-noise ratio is simply too low. Whether or not my primary point is accepted, (as of this moment) it looks like I've also convincingly demonstrated an equally important truth: "Even a blind squirrel finds a nut." (Or more accurately, it looks like Mr. Rogan has won the challenge.) But I cannot depart for my day of atonement on that note. Tomorrow (Yom Kippur) ends the Ten Days of Repentance (Aseret Y'mai Teshuvah).

 It is a requirement that during this period, one must make amends to those whom we may have hurt in the past; and to ask for and to grant forgiveness to those who ask for it. It is not sufficient to ask God for his forgiveness. One must ask for the forgiveness from one's fellow man. Mindful of the fact that I've dished out some harsh words over the past year to some of you — and I apologize for that — and I hope that you forgive me. It's especially poignant that Mr. Rogan appears to be the winner of the challenge, as he has been the target of some of my more vituperative slings — I apologize to you Mr. Rogan — and I'll try to do better in the year, 5772.

 Gary Rogan responds:

 Hey Rocky, it appears that I may not have won after all, but I appreciate your apology although no offense had been taken. You made me realize how important it is to take the Prozac regularly instead of at random intervals and varying amounts so it's all good. Happy atonement!

 Rocky Humbert responds:

I have re-emerged from atonement and post-atonement eating to find an envelope with the judge's FINAL decision. The winner is: Mr. Tim Collins who was within 6 points. The biggest loser is Sushil (aka Mister Meanor), who almost perfectly nailed the closing price, but because he was more interested in sounding smart than being right, he is guilty of a misdemeanor charge of "unlawful entry" s and walks away empty-handed. There is a meal for a lifetime here too. If Mr. Tim will mail me his US Mail address (off-site), his dinner voucher for 2 at my favorite restaurant will be posted forthwith. Thank you to all for participating and demonstrating many useful points. 

Oct

5

T@leb, by Kim Zussman

October 5, 2011 | 1 Comment

T@leb: " We haven’t done anything constructive in three and a half years. " (Source: Bloomberg )

Especially advising everyone on the planet to short bonds a year and a half ago (plus or minus the square root of infinity)

Ken Drees comments:

Which reminds me is there a practice or routine that traders go through to look back on past sectors or trade ideas that stopped producing? So this short bonds was a bust but maybe now is the time? A case for me is the uranium stock group which was coasting along rather well but the sector got destroyed by the March Japan earthquake–now some six months later I see them still making 52 week lows as of yesterday. In the past I would get tired of waiting and the idea gets put into the cold case files dept –now I seem to check things more often–and that seems to be useful.

Sep

29

 I've been reading the short book Speculation as a Fine Art and Thoughts on Life by Dickson Watts and it's making me think about pliability, the ability to change an opinion, and the power of revision. "He who observes," says Emerson, "and observes again is always formidable". (this reminds me of the chair, always observing, testing, measuring).

Never "double up",  that is, never completely and at once reverse a position. When you're long, for example, do not sell out and go as much short. It may succeed occasionally but it's hazardous. Because if the market reverses and one then flips back to long and this change is then wrong, complete demoralization ensues. This is timely as our markets are reversing wildly these days. It's interesting to note that it takes a trader 3 positions for mental destruction to take hold–long/short/long and that turns wrong, and it's over mentally. Average down works 80% of the time to get you back to even –20% of the time it will bust you bad though. This is the common strategy and should be avoided.

Averaging up, does not work 4 out of 5 times, with a 20% chance of a huge gain and should be employed. The key is to cut the trade when the market comes back to your average line– do not let the market line turn to a loss, 20% of the time you will encounter a large gain from a runaway up market. To me this is like fishing. You know that you may have to try a few different times before hooking a big one. If you mentally follow the program and cut before the market breaks below your average then you can mentally frame this as a process and not failure though.

Run quickly or not at all.

Hold or close part of the interest.

Finally, some words of wisdom/thoughts on life:

Break antagonism with a joke. Recognize a fault but don't dwell on it. In youth a man forges his chains that bind him in old age. All see; few observe, fewer still compare. People forget in the rush, remember in the hush. In his secret heart, every man thinks the universe is too harsh on him. Genius consists of seeing instantly the vital point. At twenty, and again at sixty a man thinks he knows it all. Patience is sustained courage. Wisdom is seeing many things and concentrating on one thing. Old young men are invariably wicked; young old men, universally good. It is always the "unlucky man" who believes in luck. (didn't someone recently exclaim that the economy ran into some bad luck?) Beware of the "unfortunate man"; flee from the enthusiastic man. Some men are so mellow that they are rotten. A tiresome man— a man with a theory. Against flattery women are on guard. Men can be flattered into doing almost anything. All men travel in circles. A few increase the diameter of the circle —–( a shout out to the good men and women of the list!)

Sep

28

 I am sitting here thinking about how when there is an attractive massage therapist at a poignant family occasion, she will invariably say to the chief poignancy, "I have a very special session for you so let us make an appointment". Or when you get the other something very especially nice and the other says, "You deserve a great reward for this. I'll be looking forward to seeing you tonight," I can just hear the market mistress saying to one of her guests yesterday: "Well, thanks much for coming today. I am going to dig into my bag of tricks and come up with something very special today. First, I am going to go up, up, and up, for the third day in a row. And then—ha. Just when all the weak shorts who were so steadfast that things were going to the dogs last week have given up—- then I'm going to take it down a fast 2 % and kill everyone sort of like I did last Thursday when I took it down 3% in the last half hour. And the beautiful fun part of it is that I'm going to wait until the last possible minute or two like 3:20 to do it. Abandon all hope, ye who dare to doubt me".

Vince Fulco writes: 

I like to call these "something for everyone days". The strength and conviction of the n-day move trend players disappears like flash paper.

Ken Drees adds:

And it did the trick just well enough below 121 SPY downtrend line to beat the profit takers and upturn the new shorters who were waiting to deploy at that level–so the technicians were thrown to the ground as well.

Well done–finishing the day in no man's land, mid range, everyone edgy. 

Sep

19

 It's very hard to throw a tennis game. And when the two daughters played against each other in Wimbledon everyone who knew the game had a strange feeling that something might be amiss. Agassi describes how hard it is to throw a game, and how he threw a game against Courier so he wouldn't have to lose fairly to Chang. The public can usually see through these things. I believe the self serving ballet between the Pres and the Sage will come back to haunt them as it has the imprimatur, the badges and emblems, as they say, of wrong doing and duplicity.

Anatoly Veltman writes:

Reminded me of a checker game I was ordered to throw in 1976. I was 15 and up and coming. My opponent held the most international titles in history. He was Iser Kuperman, in his 50's and a Soviet flexion in his own time. I was called into the mayor's office, and the Head Sports official showed me 800 roubles ($1000 US), which "was paid" by the flexion. Underage, I was told that the money will be held in trust for me, and ceremoniously placed into a safe. I scratched my head and went into the tournament hall to play the grand-maestro.

After about 4 hours, the crowd of on-lookers thinned out and I made a series of suicidal moves, allowing him an instant win. He missed; and then it dawned on me that I, in fact, will never see the money. So I proceeded with uncharacteristic insightful for me end-game and won on clock at the end of the sixth hour… The resulting wrath pushed my family back a number of years in queue for the new government-sponsored flat!

Reflecting on that game, I would have never bested the maestro, if he were not assured by the officials that I "was in his pocket". Which brings forth a suspicion that it may be easier to throw the game than be on the receiving end!!

Ken Drees writes:

This is interesting to me since the weight of "cheating" must have been on your opponent's mind moreso than yours in that he missed the easy gift. After deducing the double cross you then played unorthodoxly and he blew it on time since it wasn't supposed to be so difficult and that must have had him flummoxed. I believe that inside knowledge or cheating is a burden like a drug that slows you down–you may win a few but you are losing your mental edge piece by piece.

Like a liar has to remember all his lies, and all the wasted effort and inventory management takes away from other worthy actions. The truth needs no such constructs.

The market lately looks like a lie, built up on shaky constructs, hokey relief rallies, and endless promises of further easing support lifts.

Sep

17

Canada, Mexico, S. Korea, USA, UK all have chart patterns that have held the August 11th lows and have zig-zagged sideways to up.

Many more "weaker" countries have broken those lows and are rallying, from lower levels: Italy, Belgium, Switzerland, Malaysia, Netherlands, Austria  , Spain, France, Singapore, Taiwan. I am referring to etfs like ewi, ewk, ewl etc.

So it's west vs the rest. So the question is–are the western lows going to hold and do western markets lead up or do they follow them down into another leg of bear? Is the Euro fix baked into the markets or not? QE seems a given, a Greek default is a given, a two tiered Euro is the only real answer, gold going to new higher highs is a given, then do all markets follow up after a shriek down on crocodile tears bad news (Greek out) ???

I mean everyone knows it's bad bad bad bad….

Jordan Low comments: 

Could Nikkei vs SPX in 1990 be a guide? Both fell until Sept 1990, and rallied from Sept 1990 - Mar 1991. Thereafter, decoupling occurred.

Aug

31

Imagine the pressure.

The first earning report under his watch should be just as normal and clearly beating estimates if possible — can you imagine the market reaction to anything less?

He must be living in the mindset of "don't mess anything up" — keeping it PG of course. The quarter after should be Christmas sales blowout — and once again, "don't mess up, just keep with the program". Stay in the background as much as possible, don't do anything stupid. etc.

Aug

29

For those who trade frequently throughout the day — if your late day buy and sell choices tend to prove less profitable, there may be a good reason…. check out this article "Do You Suffer From Decision Making Fatigue?"

No matter how rational and high-minded you try to be, you can’t make decision after decision without paying a biological price. It’s different from ordinary physical fatigue — you’re not consciously aware of being tired — but you’re low on mental energy.

Willpower turned out to be more than a folk concept or a metaphor. It really was a form of mental energy that could be exhausted. The experiments confirmed the 19th-century notion of willpower being like a muscle that was fatigued with use, a force that could be conserved by avoiding temptation….Part of the resistance against making decisions comes from our fear of giving up options.

Ken Drees writes:

I attended a mental toughness seminar once from a sports psychologist/ business executive improvement guru. At the end of the seminar when we were worn down he talked about diet and how levels of glucose dropped during the day, etc. Thats when he pulled out his product line of carb tabs — little wafers that would boost your levels without a lot of calories — needless to say we got some free samples and the order form was passed around and there was psychology 101 all over the room as no one wanted to not buy for fear of being a loner, and those that were worn down said what the heck, lets give it a try. You had your excited female buyers as the whip for the tired guys to give it a try, what can you lose — come on be mentally tough and make a decision to change your life. So that is what is in those cardboard boxes at the back of the room — carbo tabs. This was before Adkins so there was no anti-carb thinking back then.

A snippet from the article:

The benefits of glucose were unmistakable in the study of the Israeli parole board. In midmorning, usually a little before 10:30, the parole board would take a break, and the judges would be served a sandwich and a piece of fruit. The prisoners who appeared just before the break had only about a 20 percent chance of getting parole, but the ones appearing right after had around a 65 percent chance. The odds dropped again as the morning wore on, and prisoners really didn’t want to appear just before lunch: the chance of getting parole at that time was only 10 percent. After lunch it soared up to 60 percent, but only briefly. Remember that Jewish Israeli prisoner who appeared at 3:10 p.m. and was denied parole from his sentence for assault? He had the misfortune of being the sixth case heard after lunch. But another Jewish Israeli prisoner serving the same sentence for the same crime was lucky enough to appear at 1:27 p.m., the first case after lunch, and he was rewarded with parole. It must have seemed to him like a fine example of the justice system at work, but it probably had more to do with the judge’s glucose levels.

Aug

29

Yesterday, the sage deal was supposed to anchor the financials but they got sold off; today the market found legs from the "tech" sector of all places with money going into the goog and apple.

Will it work or will it reverse off like the bac stuff?

Victor Niederhoffer writes:

One is reminded of the classic reaction to assassinations and crashes. First a terrible decline, and then starting the day after, a rise to on average where the decline started from with much variability.

Gary Rogan writes: 

It's pointless to anthropomorphize the market, but still enjoy imagining this reaction: "No QE3? How horrible, we can't have that, off with their stocks! Wait, come again? No QE3? Hm…could it be GOOD? Yeah!!!"

Victor Niederhoffer replies: 

A hypothesis was rejected. The market can not go up unless we get qe3. + all the Gavekal boys and other smart analysts who correctly figured he wouldn't dare to challenge the Texan had a minute to cover at 1133 ish but then when they realized that the market is rational and does not respond to cardinal events but to meals for a lifetime, they had to cover in avalanchian fashion. + the threat is always better than the execution. Now, he can hold out the possibility of "maybe" I will. From Annie.

Gary Rogan writes: 

And yet the immediate "mainstream" analysis I saw from Reuters was "when parsing the speech the market was disappointed to see no QE3 but when it realized there is no concern for inflation and thus no outright rejection of QE3 it went up on the possibility", which just goes to show for the umpteenth time people see what they want to see in anything even mildly complicated. That's why the same facts lead to different conclusion about say Global Warming depending on one's disposition.

Aug

21

Can a theme be casually constructed from the tragedy of HP (going out on a limb with a questionable plan) and the slow bleed of RIMM (no real plan) that elder tech stocks with low PEs, and hoards of cash be actually quite dangerous to invest in due to their honey dripping "value-ness" that traps a spec with its stickyness?

I would like to learn something here about these situations as a takeaway–to get something of an education about this sector that rewards high PE and high growth but treats its elderly companies with hostility via market and opinion beatdowns.

Aug

8

All that money flooding into that NY bank so they charge you for parking it there — boy, did we all miss that one, what a tip-off in retrospect to the S&P downgrade, connected money dumping bonds and parking cash to avoid Monday morning.

Jul

25

 When I read this article I instantly thought about price and if it was going against me (looming) in a trade or if it was going in a profitable direction (receding). Time passage does seem different under the two conditions and thus my mindset and behavior must be different.

In fact, some investigators have suggested that the amount of energy spent during thinking and experiencing defines the subjective experience of duration. In other words, the more energy it takes to process a stimulus the longer it appears as a subjective experience of time. Something moving toward you has more relevance than the same stimulus moving away from you: You may need to prepare somehow; time seems to move more slowly.

Jeff Watson writes:

One of the best things in surfing is when the wave is breaking hollow and you can get inside and surf completely covered up by the wave in all directions except in front of you. This is called, among other things, "Getting Tubed," and although it's a very short experience, it's one of the most exhilarating things in surfing.

Surfing legend, philosopher, and master, Gerry Lopez , one of the best tube riders of all time, once observed that "Time expands inside the tube." He's right, as the typical time spent riding inside the tube is a couple of seconds, but to the rider it feels much, much longer. Here's a short video that captures 1/100th of what it's like inside the tube of decent waves.

There are other, holistic benefits to one's health gained by regularly riding tubes, but the benefits cannot well be described on paper as they are of a more metaphysical nature.

Jul

21

Monday morning serious scare tactic. Tuesday afternoon O reaches out, market slings higher on political hope as gold gets old and tired at the round. AAPL blows out earnings to take the market into the next electron orbit tomorrow. Now that is power that comes from a crouched position. What a day for a public hearing and a foamy pie in the face– best market up day all year!

Jul

19

 Have the dept of treasury's statements ever not been a theatrical farce?

Ken Drees writes: 

I was taken in by the hushed tones of interviewer, Steve "lies" man, the dimmed lights, the Maria Bart dusky set, and the hunching closeness between the two — I thought it was a soap opera. I thought either a kiss was coming or an unannounced visitor was going to enter stage right.

I mean if Obama doesn't get his tax hikes we are gonna get it — screw the seniors, scare the markets with a down day after the t secretary gets in your face on fin tv (lesson here), and all the other drama that this market is trading about. I mean monday morning theatre!!!!!!!

Is this the norm? Maybe this is not a meal for a lifetime –but it's surely market popcorn. 

Jul

15

 I never look at the news, but I usually can tell what the news is from the market moves, and I would guess at 7 pm, S&P issued their catch up warning on rating change, and yes, I would guess that those selling at 3:55 pm bringing the market to 1301.5 knew that the S&P would join. But they were temporarily discommed by the Google announcement but then baled out by the 7 pm announcement, and then people thought that the first announcement by Moodies did not make the market open down, so maybe like the last announcement that dropped the market to 1301 this one will not have a staying influence, and then the problem is that the options expiration is tomorrow and the "market makers" usually have positions bearish when the market has been going down and 1300 is a target. How to play it? What evil lies in the hearts of men. Only the Shadow knows.

Ken Drees writes: 

Skulduggery indeed. That darn Google is messing up my arrangements. Tessio, the underboss who brokered the meeting with Barzini.

Alston Mabry writes:

This sounds like revolution to me. Bond vigilantes riding through the night, striking fear into the hearts of the king's men.

Kim Zussman adds:

"why Moody's or S&P or Fitch or anyone else's rating on US Government debt should have had, or continue to have, any obvious and/or immediate effect on the S&P500 price"

Perhaps in part a conservation process: a back-and-forth conversion of equity capital to political capital. Markets regained much of 08-09 losses in great measure due to government interventions, creating a debt for the beneficiaries. Payment by the class that owns stocks can take the form of higher taxes or lower asset values, in either case accruing to the creditors.
 

Jul

11

A new phase of the European crisis started with the attack to Spain and Italy in particular. It was launched by rating agencies and supported by strong forces. Some hope it may find self sustaining strength. This side of investors or speculators or financial armies are close to those who have an interest to profit from a crisis of the euro and/or of Europe in general not only financially but also from a geopolitical standpoint. The beginning of this phase was carefully orchestrated. It may support the dollar and the perception of the American system as a safe haven in a critical moment for the US and the Wall Street establishment. Mors tua vita mea. And actually it is Europe and the Pigs that are the weak part of a declining western 'system'. In a balance based on relative strength and weakness who goes down first could matter. With the huge outstanding debt, it's hard for these countries to defend themselves.

Ken Drees writes:

In a Bacon type fashion instead of one at a time like Ireland, and then Greece last year, we now have the two largest countries hit at once.

Jul

8

 Is it perhaps an indication of the media's solicitude for the current President that every poor economic report is termed "unexpected"?

While poor economic results under the prior President were somehow not so surprising since he was such an incompetent boob?

Kim Zussman adds: 

As with many time series this month was similar to the prior month, which was different from the month before.

Victor Niederhoffer adds: 

All are part of the regression fallacy.

Ken Drees writes: 

So now we wander into "needed and now expected qe3" type thinking and should not the market go up due to this stimulus?

Sam Marx adds:

Three Thoughts on the Reported Unemployment Rate.

1) The Unemployment Rate is probably higher than the government reported.

2) Compared to the Reagan Recovery this Administration's economic plan is a failure

3) With Socialistic Policies you have high employment rates and I don't see much hope for great improvement.

George Zachar writes: 

As luck would have it, Bernanke delivers one of his regular reports to Congress next week.

No doubt, this report will put that question high up on the agenda, and he'll be spending the weekend formulating his response.
 

 

Jun

30

 There are several reasons that cynics are on the rise in my opinion.

1. People assume the cynic is the expert. The cynic has an aura of authority.

2. Cynicism is masked as realism.

3. People assume the cynic is a healthy skeptic. On first encounter these two are hard to distinguish.

4. The cynic guards against disappointment.

5. The cynic creates an “us” against “them” world. "We won't be fooled again" by "them".

6. It is easier to find a problem than create a solution or even understand how complex creativity works.

7. It is easy to ignore the positive. Hard to ignore the negative.

8. People assume their bias is only one sided: When they like something too much. People recognize their biases when there is favoritism but justify their biases when there is disdain or prejudice. The cynic reinforces that their biases are the only morally defensible ones.

 9. The cynic has many times when he is proven wrong, but it is often hard to pinpoint the opportunity cost to that cynicism (for ex. the profit he missed by staying out). However, when he is proven right, it is very easy to see how much he has saved.

10. The belief that Type II errors or believing falsely in a person are much more damaging than Type I errors or not giving a good person a chance. Despite the time it takes for a person to prove she is proficient and the moment it takes to lose trust-worthiness.

11. The cynic is elevated as “your own man” by the media and politically. Thus becoming the “go to person” when they want something said or done. This creates all sort of side agreements and quid quo pro understandings.  Every TV program needs the phone numbers of a few favorite cynics.

12. Ironically, the person most likely to publicly be called down for their cynical tendencies is the person that is cynical towards the celebrated cynic.

Con-artists understand deeply the appeal of cynicism and use it against their prey.

The cynic is the ultimate champion for the status quo. The cynic can define people by their weaknesses not their strengths. Since everybody has weaknesses, they can dictate who is important by defining who is not important. Old man’s disease is giving in to the appeal of cynicism.

Rocky Humbert writes:

 "A cynic is a man who, when he smells flowers, looks around for a coffin."

H. L. Mencken

In the spirit of not being a cynic, I note today's news story reporting that volunteers in Japan are being asked to grow sunflowers to produce seeds … so even more sunflowers can be grown in areas contaminated by radioactivity from the Fukushima disaster. The proponents say sunflowers can efficiently absorb radioactivity from the soil in a process known as phytoremediation. Here's the news story.

The skeptic (as opposed to cynic) in me thought that this sounds like an example of "green" people confusing Flower Power with nuclear physics. But a little bit of research reveals a bit of "sunny" science for the weekend. There is REAL science here! Sunflowers (and certain other plants) CAN decontaminate radioactive soil faster and cheaper than many other approaches. Chernobyl was a large-scale proof of concept. Here are 2 of academic papers on the subject:"Screening of plant species for comparative uptake abilities of radioactive Co, Rb, Sr and Cs from Soil,"Gouthu et al ; Journal of Radioanalytical & Nuclear Chemistry" and  "Uranium Absorption Ability of Sunflower, Veiver and Puple Guinea Grass," Roongtanakiat et al (2010)

SO THE MORAL OF THE STORY IS: "A cynic is a man who, when he smells flowers, looks around for radioactive contamination."

 

Pitt T. Maner III comments: 

The phytoremediation and bioremediation fields have bloomed to aid companies tasked with difficult cleanups. Even earthworms can be useful with certain contaminants (PCBs).

Larger trees also can be used to influence the flow of impacted groundwater so that contaminants do not move offsite—effectively they act as small pumps (think of all the Florida maleleucas used to drain wetlands, now designated as "noxious weeds"). Trees can help with the treatment process through the uptake and concentration of contaminants or the breakdown of contaminants in the bacteriologically-rich portions of the root system .

The economics can be interesting and one can only imagine what they are in the Japanese case and how they affect current land values. Those with an understanding of the actual risks involved and the ability to cost effectively clean properties have in certain instances done well:

"Acquisition, adaptive re-use, and disposal of a brownfield site requires advanced and specialized appraisal analysis techniques. For example, the highest and best use of the brownfield site may be affected by the contamination, both pre- and post-remediation. Additionally, the value should take into account residual stigma and potential for third-party liability. Normal appraisal techniques frequently fail, and appraisers must rely on more advanced techniques, such as contingent valuation, case studies, or statistical analyses.[11] Nonetheless, a University of Delaware study has suggested a 17.5:1 return on dollars invested on brownfield redevelopment.[12]"

Kevin Depew writes:

Why do you believe cynicism is on the rise? In my opinion, the < 35 generation doesn't really understand it or ignores it. I don't have access to it now, but I saw some large scale polling data on Friday that was remarkable in the cross section spreads between < 35 and those over, especially > 65. The gist, based on this polling data, is that if one is > 65, one is likely to find the country going to hell, the economy going to hell, that politicians are evil and stupid and that all bankers and finance people are crooks by a wide, wide margin over younger subset. If interested I'll forward data when I get back in office Monday. I was looking at it in the first place because there is a wide divergence between consumer comfort and confidence data vs market that is outside of 25 year norms and was just curious about the asymmetry in both economy and the polling data.

Victor Niederhoffer writes: 

Artie wrote a book on cynicism in the police force that attributed cynicism as a variant of the authoritarian personality. He believed that police became cynical because they saw so much evil that their own persona looked relatively good compared to all the evil, and their cynicism and corruption was a natural outgrowth of the impossibilities of fulfilling all the requirements of an all too demanding job with conflicting goals. I believe we become cynical on the list because we see such ephemeral behavior by the public and funds, and such inside maneuvering by the cronies and flexions. It's hard to maintain a proper chivalrous attitude when confronted by these things day after day.

Jeff Watson adds:

But that cynicism, if allowed to fester, will have profound effects on one's trading. I've seen it happen too many times to people and they end up losing their edge.

Ken Drees writes:

Cynicism towards markets and politicians is healthy, but toward general mankind or society, probably not so well placed since hope and belief in goodness of the total gives one an overall positive tendency towards world view but also a well placed skepticism at certain segments.

The idea of erosion is interesting where the rigors of the job or the constant focus on conflicting outcomes that collide with the overarching worldview wear down the person's belief in good. One thought along these lines that I have is that by the end of one's life you are so distilled down in terms of your true character that its impossible to change. You are either that positive and generally nice old person, or a frown wearing old crank; the thoughtful scientist who never stops learning, or a worn out 24/7 TV watcher.

Russ Sears adds: 

I believe it also has to do with the narrow vision we have of public versus personal life of the cynic. We do not see that like a partying narcotic addict, the soul has been sold for a very narrow gain. The personal life is full of turmoil and eventually rots the productivity out of the person. Think about the cynicism required of the steroid user or EPO user for example.

I believe that many companies demise starts when a new "C" position arrives within it- the Chief Cynic. If not confronted as Artie did, often this position is allowed to become an all consuming cultural force.

Vincent Andres adds:

"the cheaper money tends to drive out the dearer"

(the money of lower value drives out the money of higher value)

–Nicolas Oresme

(« la mauvaise monnaie chasse la bonne » )

Jun

28

 As specs we snicker at the lottery player, he is a sucker. We smile when we hear how the crowd is routing for the hometown favorite when we know odds favor the other side. We hopefully carry out the canes when the crowd is tossing down the tickets in disgust, we sniff for value when there is no value there–so says the financial press.

But what is our own attachment to this concept–catching a falling knife, holding a loser, getting involved in some fiasco stock since the market is beginning to bore, riding a coattail that turns into a skid, throwing in "just this once"? Why do we fail to follow our own good sense from time to time?

There must be a thrill or an ego impulse underneath this temptation to turn from the path and into the wind of long odds–"cause we can handle it".

Victor Niederhoffer writes:

Our own attachment should be based on quasi scientific study., not riding a coattail. 

Ken Drees writes: 

True, but do we fasten our own rickety reasons from study based on the past which has no real reason to work in the future other than past frequency, tendency and relationship, and thus delude ourselves into thinking that our proof more than compensates for the new speculation? And if finding tendency and causality can be negated by the speculative theme of ever-changing cycles, and also trumped by the unknowns –how do we believe this and thus risk capitol?

I think that the chair has outlined many great themes in speculation, almost like laws:

1. Methods must be tested in order to find relationships of validation.
2. The laws of ever changing cycles are present in the market at critical-mass moments.
3. There is a high degree of relationship between markets and natural systems. What can be said of the "unknown"? What is this speculative doomer, the whispy apparition above the pond at days end? What law can be attributed to this unknown force that seemingly has uncanny timing?

Ralph Vince writes: 

Ken,

I think it's simpler than that.
-The past gives us a proxy for the distribution of what can happen.
-We can amend that distribution of what can happen based on how we foresee the future diverging from the past
-That very distribution can now be used to determine how aggressive we might want to be withing a given risk (drawdown) constraint.
-If we don't exceed that drawdown constraint, and our distribution is reasonable of the future, the profits accrue.

Gibbons Burke writes: 

 I wrote this in a previous thread about the difference between speculators and gamblers, and I think it holds true: "Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose."

At bottom, and at one time or another, most of us are gamblers. It takes a very disciplined, brilliant, and perhaps unrealistic person to only play games where the odds are in our favor. The reasons many engage in knowingly losing propositions are greater than the stars in the night sky in rural flyover territories. Entertainment and division rank high among them, sociability, peer pressure, guilt about the money they are risking (unconsciously disposing of it), fear of success, self-disgust, compulsive addiction to the stimulus-response loop, adrenalin junkie.

But all these are all proxies for the thing everyone is really seeking, usually unconsciously: a desire to be in union with the godhead, the creator, the divine purpose. As St. Augustine wrote in the opening lines of his autobiographical "Confessions": "You made us for thee, Lord, and our hearts will be restless until we rest in thee."

Phil McDonnell writes: 

When I ask people why they do not invest in a guaranteed savings account or short term t-bills they usually respond that they are too boring. And they are, or at least used be because they could not lose. Most traders unconsciously seek to lose because it represents action and excitement. While I think the usual arguments that it takes assumption of risk to increase return have validity, at the sub-conscious level the desire is really no more complex than risk seeking for excitement.

Ralph Vince writes: 

I agree — this is what frightens me about individuals who are out investing their own money — no kid needs to relive the station wagon as home for awhile as a consequence of Dad's gambling proclivities.

I'm beginning to think institutions are just the individual lambs in the wolves clothing of trading with other's money.And the reason I say this is because, again, not only can they not articulate their criteria for being involved in this, most criteria involve the ultimate metric of "what is the probability of getting smacked x% in the coming y period(s)."

And I don't see ANY of them operating that way. Rather, their risk metrics are ones that don't really tell them anything, analgesic salves that do not stave off the infection. 

Russ Sears writes:

Personally, my record shows that I am more often guilty of trying to catch the falling knife on an individual stock and on an option trade, than I am on an allocation strateging or long term market timing basis. I believe this is because of two reasons, One reason is I am just to gullible for a single stock, and buy the story the more it goes down the more I am convinced it will pop, often averaging down. I believe most businesses as a whole are running honorable businesses, that is they are trying to do what is best for the long term. However, the exceptions happen and there are frauds/crooks and businesses that have agency problems (businesses run for the executives or employees short term interest) The second is that I am often guilty of believing that the studies timing is much more stable than it actually is. It may be that the market is over sold and will bounce back, this results is the crux of my "edge, but the time period is often part of the ever changing cycle.

I have helped this some by giving myself some boundaries or a do not buy or sell if held rules of:
1. If the market believes the board or leadership is not acting in the stockholders interest, based on key decisions they have made.

2. If there are union grievances making the press.

3. If there are rumors of fraud or accounting problems.On options buying time or gamma seems to work better. And in general I have learned to not do as many option trades as I am not as good at them as I think I am.

These rules are simply my adjustments for my own shortcomings.

Jim Sogi writes: 

The heuristic at work here is risk aversion where one would rather face a known small risk with bad odds of a big win, rather than a 51% favored odds with a risk of a large loss. It's very hard to overcome the natural tendencies.

Jun

21

 I was reading about the famous double slit experiment and then thinking about the Heisenberg uncertainty principle, the math, and the observer effect. I wonder what types(if any) of market implications could be attributed to the observer effect.

Ken Drees writes:

Interesting. I was contemplating this more than a few weeks ago too, but let it drop. It made me think of Schrodinger's Cat:

Schrödinger's cat is a thought experiment, usually described as a paradox, that Austrian physicist Erwin Schrödinger devised in 1935. It illustrates what he saw as the problem of the Copenhagen interpretation of quantum mechanics applied to everyday objects. The thought experiment presents a cat that might be alive or dead, depending on an earlier random event. In the course of developing this experiment, he coined the term Verschränkung (entanglement).

I was considering how a trade is alive and real only when one puts it on or opens the box and everything else is meaningless– the counting, the theory, the expected outcome– all meaningless unless you commit and then make it real and apart of consciousness, reality, an entity. 

Michael Cohn adds:

 Schrodinger's kitten's also interesting as a thought experiment across space and time. What I recently learned about the uncertainty principle was that there is a different way to think about it. I always thought about it in terms of how the observer may be creating the uncertainty in measuring both mass and acceleration with the instruments. What I now understand is because of quantum uncertainty these particles actually don't really know exactly where they precisely are at a given point in time beyond a prob distribution so if they don't know where they are I certainly can't help them as much as I would likes to be able to do so…

Jim Sogi comments:

2 closing related issues:

There's the insidious cursor and key watcher viruses.

Another related aspect is the inadvisable practice of putting your cursor over the execute button onscreen and having it execute without having touched the mouse, or accidentally touching the mouse or keyboard at the wrong time triggering the trade. Been there, done that.

There is also the issue of order field depth, which is a form of "disclosed" watching, and other order related manipulation issues perhaps posing, perhaps honest bid, perhaps flow bashing or bandwidth hogging, flashing. Lack surely can speak to many of these techniques he sees in individual stocks.

Russ Sears adds:

 If risk is defined as what is not known in the future that if it happens would hurt you, than imagination of what could happen causes you to avoid and prevent that perception.

Done to extremes this creates new risks from the over abundance of care and lack of focus on any other risks even to the point of altering the minds ability to cope. Think interest rate duration management and the creation of the tranches in the securitization process and modeling of those securities. Done in mass this creates bubbles, hysteria, or pop-stars. ( I believe this is the "Lady Gaga" "Apple" link. It is not mysticism but the creation of popular mystic.)

Much of psychology is the study of how unrealistic risk perception creates a difficult life and alters their reality for the fearful and anxious. Why should the markets be immune?

Ken Drees comments:

Lady Gaga is to Apple as Amy Winehouse is to Rimm.

Jun

16

 I have always loved a good library. And some of my happiest days have been spent wandering the stacks of the Widener Library and Baker Library at Harvard, the University of Chicago Library and the University of California, Berkeley libraries. Indeed it was a visit to Lamont library which contained old volumes of the Monthly Weather Review with the great article on runs in sunny days that started me on my hopeful but sometimes fruitless quest to uncover regularities. I never know what I am going to discover in the stacks, and going through the books on a subject as opposed to looking through an index catalogue opens up new worlds, and horizons and puts me in touch with the greatest things that people have ever thought and written.

 On one of these forays, exactly 50 years ago I discovered the Fitch sheets that contained every transaction on the NYSE and ASE. I discovered evidence of microscopic reversal and macrospopic momentum and systematized it, and I believe this was the first of one of the first microstructure of markets studies.

Subsequently when I was still in the orbit of the palindrome, we would frequently meet a common friend as we entered the tennis courts or a gathering and they would out of a attempt to harmonize with the palindrome, "what are you doing these days. Same old thing?" and before I could say "yes" the palindrome would always say "yes, unfortunately".

I often think he's right and that over the last 50 years, I have not discovered much new. And yet, here are 10 things I have discovered since then that are simple but I believe have wings.

1. There are always interactions between markets but they are always changing. Witness the bond stock relation and our colored chart on the site.

2. After a regularity has been doing well, it tends to do badly and after it does badly, it does well. This is a variant of the principle of every changing cycles.

3. The interrelations are always different on different days of the week, weeks of the month, months of the year, hours of the day and minutes of the hour.

4. The market likes to force the flexions to take actions that will be in the interests of the top feeders and cronies in the market.

5. After pessimism is at a high level it is good to take out the canes.

6. Inactive markets like islands in the Ocean have a completely different microstructure than active markets. and as activity in a market change,the microstructure changes. Never try to make money in an inactive market or as I say, "never play poker with a man named Doc".

7. The markets have strong regularities but they have as much non-random tendency to do the unusual, so no matter how much a regularity appears, one must manage his money properly to take account of the unusual.

8. There is an upward drift to stock markets to compensate for the return that entrepreneurs need on their money. The higher the necessary compensation, the greater the return.

9. Most technical analysis which is based on shibboleths and seasonality is only good if you are going to reverse it and take account of the vagarious prices that emerge when transactions engendered by such pseudo things are filled by the strong.

10. A major purpose of markets is to transfer resources from the weak to the strong, so that the infrastructure can be augments and stabilized, and everything you read or hear about the market is designed by an invisible evil hand to put you on the wrong foot so that you will contribute and lose more than you have any civilized personage has any right to do.

I've got a few others up my sleeve but I'd like to hear your ideas on this.

Craig Mee writes:

 Regarding point # 6, I think, Victor, there may be a medium hand in this, and that markets under modest growth and less speculation may show greater structure relative to their more highly prized counterparts.

No doubt the role of harmony is present in all markets to varied agrees, and the players, although they may variate size from time to time in their chosen poisen, are fairly consistent throughout. 

Russ Sears writes: 

1. There is a rational often sophisticated explanation for every bubble or to paraphrase Proverbs, "there is a way that seem right unto the market, but the end thereof leads to death."

2. A corollary: to be really sophisticated you must accept some form of willful blindness. Most people will learn to ignore those blind spots. They are blinded by the light. Those that understand where the blind spots are will stuff all the risk into those spots. Then short those blinded.

Ken Drees:

In the stacks of a library one may come upon a book that one would never have thought to look for in the card catalog– like at a garage sale, how you never know what treasure you will find. Same thing with newspapers, when you open them and scan the ads and story headers, you may read something that you would never had googled. Really there is something to be said for this type of information interaction that will be lost for a time…until it becomes the new thing to do. 

Jun

2

 Weather.com's Knabb wrote a piece about cities that are overdue for a hurricane. He wrote that:

"Only one hurricane is known to have ever directly struck the coast of California with hurricane-force winds. I cannot show you a satellite image, because it happened long before satellites were invented. I cannot show you any video of the hurricane's damage in California, because it happened before movie cameras were invented. In fact, it's been such a long time that it took some extensive work by researchers within the past decade to dig up sufficient, relevant documentation of the event, such as old newspaper accounts and surface observations, to paint a clear picture of what happened.

"That one California hurricane struck San Diego on Oct. 2, 1858, producing sustained hurricane-force winds there and resulting in extensive property damages. Winds of tropical storm force extended up the coast to near Los Angeles. Another hurricane hasn't hit California since. Why is such an event so rare?

May

31

 What will the bottom look like for US housing?

Sale-hungry, real estate agents tout low interest rates as the best time to buy, and that of course would be today. But are we at "the" bottom? I say we are not. Here are some bottom recognition themes that I would expect to see if the economic contraction continues and the bailouts ultimately fail with high commodity prices persistent.

1. First time home buyers (young couples) will turn to consolidated renters-move in together and share an apartment. The average age of 1st time buyers will trend higher. First timers under a certain age may need a 30% dp and a co-signature.

2. Prevailing sentiment sentence: "You own a home, you are either rich, old, or crazy".

3. Why own a home, there are no tax deductions anymore?

4. Real estate agents will be scarce.

5. Most unsold homes consolidated under a government/bank/insurance entity, General Homes (GH)?

6. Large sections of most all major cities like Detroit will have huge inner city areas bulldozed clean of empty homes. People living in homes on streets that are scheduled to be wiped will be given an equal or greater value home in a different part of the city that is earmarked for urban homeowners.

7. Large corporations or entities will purchase huge city open acre zones to rebuild gated communities and downtown oasis business zones that will be the new coveted land. These areas will be far from the urban sections that house the remaining hangers on.

8. "Owning a home is an anchor. In this economy mobility is key."

9. In the event of natural disasters, like the recent tornado, that wiped a town in half. New act of God clauses will be written into insurance and fema guidelines to get those people who have been made homeless to not rebuild but to migrate to unsold homes nearby owned or not by GH. This will take homes off the supply list.

10. Imagine a terrible new Madrid quake-Diaspora of population will take large amounts of homes out of supply due to no rebuild rulings.

11. The cost of home maintenance and upkeep due to raw material pricing will make it even more difficult to build new homes or maintain existing ones, although labor will be lower in cost for these services due to high unemployment.

12. Saving up very large down-payments and/or paying for a home in cash will be in vogue.

13. Neighborhood demographics will be very important in determining where to live. Longevity of intact healthy home zones will be key to long term stable values and reselling ability. Questionable areas with unlived in homes, many elderly, poor schools will continue to decay.

14 Home with an empty lot next door will be more common. Empty lots may be turned into garden zones, for neighbors.

15. Farms make a comeback since the home's value may depend on its own earning potential. Urban farms are already springing up in some inner cities.

16. The decision to buy a home will be considered as one of the most important in one's life.

17. Corporations may decide to buy bundles of cheap homes near work locations to rent to employees. Offering living quarters as part of total compensation will ensure home upkeep, intact resale zones, and ultimately profit.

18. Your carbon footprint will be taxed based on your home's energy characteristics. This would lead to high efficient energy themes, smaller homes, and conservation of utilities. This will reflect disdain for older homes and lead to the reduction of older homes through teardowns. Increased EPA restrictions on remodeling are happening now.

19. Lowes or Home-Depot, Sears, one will be gone or combined.

20. You will have to pay a real estate agent a trip fee to be shown a home.

21. Expect further consolidation of real estate companies.

22. Home Builder bankruptcy filings will increase, expect a big name or two to go away.

23. Gated communities will become more the norm. Knowing your neighbors will be an important theme in terms of security and safety.

24. The starter home section of the market will devolve, breaking down into a more energy efficient, higher quality home. The move up home will become the new permanent home for most. The high-end homes for the wealthy will cost more, be taxed more and will not change much. As the middle class shrinks the homes will be more straddled-either higher end or junk/rent.

25. Condos, a double edged sword -great when filled and no vacancies, bad when values are down and vacancies must be shared as a burden to all association owners-will either thrive as high end high security safe zones or be bulldozed. The condo concept may merge with the home zoned concept. Fort thinking may surface where a condo buyer may want to pledge too not sell for x years-getting a place in the fort is what counts.

26. Homes far away from employment areas will suffer. Long commutes will be a large factor in a buyer's mind. Homes in solid employment zones may be coveted and handed down from generation to generation like apts. in NYC, or old plantations in the south.

27. The amount of crime relating to copper thieving and siding pulling will come down due to lack of hood home supply and or higher security of homes still intact.

28. Home security, already a growing sector will grow in terms of round the clock surveillance -google home watch, automated stun defense systems, etc. Castle doctrine shooting of intruders will increase.

29. Pet ownership will drop since less homes and more people renting which usually employ no-pet clauses. Large eating-machine pets and high vet bill pets will shrink. The McMansion has died and soon the black lab will be a memory. Animal hoarders will be prosecuted severely.

30. Remodeling for college return grads will be even more in vogue. Mother in law suite, will become elder child accommodations.

31. As more home based businesses increase watch for the home office deduction to vanish, to further tax the homeowner.

32. Double houses will take on a charm once again if near safe areas or employment zones. Owner occupies half and rents out the other. Security, tenant control and income stream makes this concept more appealing. Builders may build new double homes with upgraded features-this may be a budding area of green cutting edge trend for builders, a healthy niche.

33. Concept homes for divorced persons who need to stay in same home with kids will evolve.

34. Foreclosures start to dry up as the eventual end comes into view.

35. High interest rates return and cement the death of housing and the bottom will be in. Home ownership will be considered a luxury.

Sam Marx writes:

I live in FL, and 5 or 6 years ago we had 2 back to back hurricanes in my area and for the next 5 or 6 months, Waste Management trucks could be seen hauling away the debris, lots of branches, etc.

I know it sounds ghoulish, but investments in Waste Management type companies in the tornado belt area might be a good investment.

Pitt T. Maner III writes:

I remember a run-up in the price of a small powerline repair company (don't remember the name) that did work in the SE and maybe on some of the Carribean Islands after Wilma (?).

Powerline repair, telephone line and tower repair, etc. can come into play after big hurricanes particularly since the wind speed and forces are often higher as you move above land surface.

In West Palm Beach there was a rather dramatic example a few blocks away where heavy power line cables running in a north-south orientation started swinging and ballistically broke and cracked what looked like strong, rebar-encased concrete poles. Several very large electric support towers collapsed out in the Glades too.

After a big storm, there can also be a multi-month need for rental equipment to cut, clear, and load vegetation and debris and to rebuild structures.

It seems like it took 6 months to a year to clean up after Andrew.

May

30

 One has to wonder why this whole "college is a waste of time" meme has suddenly become so prevalent. Is it because so many people have trouble with college loans? Too many writers who have nothing more to say about O's birth certificate?

Thinking one can predict the future based on what one does in the present is a persistent human foible. For sure a lot of kids go to college who don't need to. But is this truly something new? Would anyone sensible make a decision based on what they read about this subject? Unfortunately some probably will.

It remains to be seen how employers of the future will react to resumes that state "I am really smart but I didn't go to college because I read online that it was BS; but I really am smart."

One of my kids is 1/2 way through college and the other is just entering this fall– and I don't spend any time at all thinking it's a waste of time or money; it's been a path to prosperity in my family where none of the previous generation had any education past high-school (if indeed they finished that at all).

On the other hand my wife and I went to CUNY at a time where the cost was $35/semester. That's not a typo.

But I still wonder what's behind the impetus to discredit higher education?

Ken Drees writes:

I get the vibe that the intent is more of a cost justification issue. You don't send a kid to college who gets middle of the road grades and majors in marketing anymore. The job market out of college is poor and will continue to be poor. College now will set you back serious money as a percentage of household income and there will be serious debt burdens on the student and parents upon graduation. You can't put the college payments on the credit card or the home equity loan anymore.

I believe that a college bound child needs serious career planning up front, which is tough to do since kids sometimes do not know what they want to do prior to going off to the higher education arena. Like the union bubble which is feeling the backlash from the debt riddled state pockets empty reality, colleges need to step back, cut back, stop the pay raises–else enrollment is going to crater and the pie shrinks.

Victor Niederhoffer comments:

 A college education will always serve as a signaling device to employers and partners and parents that one is capable of being admitted under highly competitive circumstances and then has the fortitude to stick with the program, and finish the requirements, and the moral fiber not to have been kicked out. The signaling will always be of value and the rate of return from college should stay relatively constant.

Russ Sears comments:

Very similar qualifications could be said about homeownerships, commitment to paying a mortgage and good citizenship of being a good neighbor. When a persons limit to leverage has no bearing to what they could reasonably expect… many with nothing to loss will gamble with somebody else's money. This of course creates a bubble in some areas where there will be large oversupply of X degrees. For instance everybody will think in 2022, "what were they thinking taking forensic science and $100 grand of loans?"

The problem is when you use the argument that is it "should" be worth it to argue that everybody has a "right" to upgrade there lives. Further when you grant this "right" to any 18 year old capable of getting a high school degree you are bound to get many that should not have been given this privilege without working a few years and tasting responsibility. I still believe orginially there was a segment of responsible people that were granted sub-prime loans. These people however, proved to be the exception to the rule when everybody was given this right.The difference may be that those youth that are the sharpest will see the "bubble" within these areas and avoid them.

Could we be looking at the class of 2011? on a resume and subconsciously think what a deadbeat?

James Goldcamp writes: 

 I agree with chair's analysis of the signaling value of education, but one also wonders at what cost. I would find it hard to believe the return on invested capital has not gone down with both greater real costs and general degree (volume) inflation over time. It occurs to me that a rigorous self study program with standardized tests against which one could be compared might provide some lesser but nonetheless valuable signaling vehicle at 1/20th the cost of the current college education. Interestingly, one hire we had years ago was more known for his perfect SAT than his multiple Ivy degrees.

Thomas Miller writes:

This anti college education and anti home ownership "debate", seem to reflect a negative attitude that is growing in this country. The theme seems to be "dont even bother to go to college or strive to own your own home. it's not "worth it." just give up and settle for less." Of course college education or home ownership is not for everyone, but those that propagate these defeatist platitudes, (especially the ones that do it on internet blogs read by a large audience), are doing a great disservice to young people. "just settle for less" is not the attitude that made this country great. A generation ago, many that chose not to pursue college could get a decent job with benefits and be fairly sure of being able to retire from that job. There are very few of those jobs available now. The gap between those with a college degree and those without will continue to widen.

Russ Sears comments:

 I believe those that are "anti" college are saying take more risks start a business instead.

And for those that it will not turn out for the better, it's not good government to guarantee the loan. More responsible decisions will be made if they have to compete for access to loans like anyone else.

Ralph Vince replies:

I cannot speak for others, but I am not advocating a "give up," or defeatist attitude here. I speak with those who have children of college age frequently, as well those who ARE of college age frequently too. One of these day, I'm going to stop speaking to people who don;t take my advice (most people are incapable of taking advice, we simply have to learn things the hard way, and usually more than once)

I hear an awful lot of talk from all of these people that a college education is necessary to enter the American job market, as though it were a ticket to the dance, a means to an end as it were.

(I should point out in full disclosure I do not have a college education. I am self taught. When I decided I should learn math, I started with algebra, geometry, trig, analytic geometry, calculus, topology…..eventually stochastic differential equations, which is used (with near exclusivity) to model prices with (a nice target for a math track for someone interested in the markets, but I find these methods model prices with a degree of reality akin to Oz modeling Kansas). When I wanted to learn literature, I started with Homer, then Virgil….through to the 1950s. Of course one cannot study everything and anything, you have to make selective, intelligent decisions (which is where talking with others comes in) and someone must WANT to dispal their ignorance (and this is the key attribute, the acknowledgement of our ignorance and a desire to overcome that — whether formally educated or not).

The last time anyone ever asked me about my educational background was probably when Reagan was running against Carter.

So when I look at what people are learning, and WHY they are learning it, I DO come away in MOST cases with a "Why bother with that?" attitude.

So once we acknowledge that there are two reasons for edication:
1. To dispel our ignorance, and ultimately, to study material we are passionate about, should have such good fortune, and
2. To make ourselves, personally, a marketable product (i.e. posses a marketable "trade," be it electrician, brain surgeon, or truck driving certificate)

people can make better decisions. Unless they are fortunate enough to be a trust fund kid, they need #2. A mere college degree does NOT provide that — this is a wives tale that floats about America wherein a lot of money is being wasted in its pursuit.

#1 is a luxury — one must have the good fortune of finding what fires their jets at a young age, aside from pornography, and find a way to pursue it. If they have the resources and time, college is the way to go. If not, anyone with a spark and a modicum of resourcefulness will find a way to pursue it.

I've spoken of this before. The number of persons from the 2000 census to the 2010 census is up 20%, the number of households, nowhere near that amount. Clearly, in the not-so-distant future, either much housing must be created or much work must be done to convert the "cul-de-sac development" McMansions into 2 and three household homes. What young person is a yeoman plumber out there, or plasterer? Not many, certainly not many over the past 10 years — but it is the fastest track to acquiring #2, above, for most.

And most need #2. Not everyone needs #1, and if they have that luxury, nothing will stop them from pursuing it. But the notion of borrowing a lot of money for a ticket to a dance based on some parent's misguided model of reality (Oz!) is something the educational institutions feed on, benefit by and play to.

Jim Lackey writes:

 College is the time to meet your mate, your equal. For the fortunate men, it's  the better half you spend life with.

In your college years, there is only so far you will go…. Either to fake it, to fit in/get ahead or rebel against, to get off easy and/or explore the adventures of danger. The gist is how you act when no one you know is looking. Sin may resurface later in life. For certain people, the hypocrisy of life will rear its ugly head. If a married couple knew each other during these years of growth and uncertainty it's near impossible to argue later the lack of full disclosure prior to marriage.

A grievance can always be resolved. A slight, an imaginary hurt, the lack of full disclosure–the "I thought I knew that person". That person will hate you til the day they die.

My guess that is how/why bitter divorces ruin families… vs the much higher than average success rate of current marriages from my anecdotal evidence of family, friends and cohorts that married some one they knew from school.

Jeff Sasmor writes:

Good article on "What's a Degree Worth" :

What Are You Going to Do With That?

For the first time, researchers analyze earnings based on 171 college majors

By Beckie Supiano

Tuition is rising, the job market is weak, and everyone seems to be debating the value of a college degree. But Anthony P. Carnevale thinks these arguments are missing an important point. Mr. Carnevale, director of the Georgetown University Center on Education and the Workforce, has argued that talking about the bachelor's degree in general doesn't make a whole lot of sense, because its financial payoff is heavily affected by what that degree is in and which college it is from.

Now, new data from the U.S. Census Bureau sheds light on one big piece of Mr. Carnevale's assertion: the importance of the undergraduate major. In 2009, the American Community Survey, the tool the bureau uses to collect annual estimates of population characteristics, included a new question asking respondents with a bachelor's degree to give their undergraduate major.

After combing through the data, Mr. Carnevale says, it's clear: "It does matter what you major in."

Laurence Glazier writes:

After the signalling provided by college qualifications, the deliberate undertaking of full-time employment may signal the willingness to allow creative fruit to wither on the vine. A shibboleth of perspective. So many wait for retirement (which may not come) to allow vent to such aspirations, but the law of the farm dictates regular irrigiation throughout a lifetime.

To this end there would be much benefit to all if full-time work became less the norm. The end of government subsidy of unsound housing loans would reduce the pressure on people to suppress their finest qualities.

The Harry Potter books emerged not in spite of the writer's modest circumstances, but aided by them.

David Hillman writes:

Very astute observations.

A laborer can be trained to dig a ditch to a certain depth. A monkey can be trained to dance to the organ grinder's tune. Even a plant can be 'trained' to grow in the desired fashion. But few of the former are, nor neither of the latter can be, trained to *think* and creatively problem solve.

One might speculate that emphasizing skills, specialization and technology in educational curricula and employment qualifications may be the culprits.

While a college education being increasingly available only to the affluent because of financial considerations is, indeed, an issue, perhaps another of our chief concerns should be that we are creating a nation of people who are trained, rather than educated.

Kim Zussman writes:

The "education ruins thinking" argument has value, but simply looking at dollars a college degree pays more than just HS diploma. BLS stats below shows increasing income with formal education: about $400/week more for college grads - which of course does not include harder to value assets like volume of learning, tutored critical thinking, facility of life-long learning, status, access to better mates, good memories, signalling, etc.

One would need about 10 years of the additional (median) college grad salary to pay for 4-year private degree (ignoring taxes). Would the degree be worth it if it took 20 years to pay off?

Unemployment rate     Education attained        Median weekly earnings
in 2010 (Percent)                     in 2010 (Dollars)

1.9%            Doctoral degree            $1,550
2.4            Professional degree         1,610
4.0            Master's degree             1,272
5.4            Bachelor's degree         1,038
7.0            Associate degree           767
9.2            Some college, no degree           712
10.3            High-school graduate           626
14.9            Less than a high school diploma       444

8.2                     All Workers                        782

Note: Data are 2010 annual averages for persons age 25 and over.

Earnings are for full-time wage and salary workers.

Source: Bureau of Labor Statistics, Current Population Survey

Rudolf Hauser writes:

The question of a rate of return on a college education is not that easy to measure. For one, it will vary greatly on the college attended both by cost and quality of education. It would also vary greatly by the course of study and how much a person actually learned as opposed to just getting by and having fun. Even taking account of these variables, it is not an easy question to answer. The math is a simple discounted present value calculation, but the inputs are something else. For one, the attributes of those attending college and those not attending will differ. Those with an interest in learning and working hard, more personal discipline and more ambitious are more likely to be attending college than those who are not. Those people are more likely to earn more than the group that does not go to college even if they had not gone to college. So while the value of the education is the difference in what they earn in the future compared to what they could have earned had they not gone to college, one cannot just assume the latter is what those without a college education currently earn. In addition what is actually earned will not be a single average or medium figure but will have a wide distribution around it based on good or bad fortune, who you know, and countless factors beyond one's control. Costs while being educated in addition to direct costs of tuition ,books include difference in living costs relative to what they would be had one not gone to college and opportunity costs of lost potential earnings from working rather than going to school. Then there is the question of how much of the difference is due to signaling as opposed to the value of what was learned and contacts made during school. That is real but could change if the marketplace found alternatives to such signaling. If lower education had more strict criteria for graduation and grades the signaling value of a college education might lessen as employers had more confidence in that and prior work experience. The cost of loans may also vary, so that how the education is financed will matter a great deal.

In addition to monetary economic measurement, there are other benefits that might be gained. Meeting a spouse has been mentioned by list members as one such benefit. Learning about many areas and learning how to learn, may enrich one's life as a person, contributing to the value one has to society and family and to one's personal richness of life and happiness. But if prospects do not turn out as one hoped, it can also lead to unhappiness. The question then is how much one wishes to pay for these other potential benefits or negatives (i.e., the probability of disappointment). Some areas of study such as general liberal arts, might be expected to have a higher risk of low or negative economic returns than more specialized fields, but specialization runs risks if those skills become of less use to society.

 
On a personal level, I do not believe it make sense to send a kid to college unless they are actually going to work hard to learn. If not, it might be best for them to work for a time and see how difficult life can be without a college education. Often they may then go to college and actually make the most of it rather than going at a younger age and goofing off.

I might also add that education need not be in the classroom. The time spent learning on one's own is also education. One need not attend college to learn. It might not have much signaling value but it certainly helps in many areas. The cost is the value of the time spent either in terms of the value of one's leisure or economic opportunity cost.
The ability to learn might be enhanced by a formal education. One of the things I would advise a person attending college to learn is how different disciplines think. The way a lawyer thinks about problems, the way a scientist does, the way a creative writer thinks , the way an economist thinks differ and are specialized in some ways that takes a time to learn. The first course in microeconomics is difficult for many students, for example. The more ways of thinking one understands, the broader ones ways of understanding the world, understanding other people and in solving problems. Some of the great innovations come from taking of advantages in knowing something about other areas of learning that provide insights into the problems in your area of interest.

David Hillman writes:

Ok, then, I meant the focus to be on the point of training versus education. If it requires more updated or timeless references than those to the 20th Century, so be it, and I beg pardon.

(1) Backhoe operators are *trained* to operate them, but there are many instances of heavy equipment being stuck because the operator failed to *think* about the application.

(2) Musicians can be *trained* to play an instrument, but without a proper foundation, i.e., *education* in music theory, history, etc., while the music may be technically correct, it is often dry and mechanical, uninspired and with an 'off-the-shelf' feel.

(3) An air traffic controller can be *trained* to direct aircraft, but when an emergency arises, he/she must *think* of how to resolve it, not unlike,

(4) A 9-1-1 operator being *trained* to follow protocol, but when that protocol does not apply, hopefully, that individual may be capable of *thinking* of a way to prevent loss of life.

And, what of entrepreneurs like you and me? How can one be *trained* to brainstorm an idea out of thin air, then take it from the drawing board to reality? But, one can certainly be educated broadly enough to think creatively, make connections, take calculated risks and solve problems. Even in strategic planning, one can follow a plan, but the successful execution of it requires feedback from the real world and adjustment, which requires the ability to think, not just the ability to follow an SOP manual.

Clearly, a liberal arts education is not for everyone and the rise of tech schools and alternative forms of education and training should be applauded. For those who require training, the more well-trained they are, the better off will be all of us who depend upon their services. But, one should not necessarily depend upon them to do anything other than the job for which they've been trained, nor to be able to *think* creatively when faced with a situation or event for which they have not been trained. Trained mechanics may depend upon a diagnostic computer and trained line cooks upon a recipe, whereas a great mechanic might 'feel' a rough idle and a great chef might improvise a dish. The latter two have the ability to think and create, some of which is natural, but a good deal of which may also come from an education.

Nor is a college education always the right thing for someone at any given time. There are plenty of examples of individuals who failed to perform well in college as a recent high school grad, but did stellar work 'going back to school', my own being one of them.

Some eschew those who are 'too educated' as being 'troublesome' precisely because they can think. However, if I knew nothing of one's natural intelligence, and had to choose, I'd probably go with the educated over the trained.

That said, neither education nor training has much to do with 'smarts.' For that, you either are, or you are not. Some of the dumbest guys I've known have had PhD's, but so have some of the smartest. Likewise, some of the least educated have been the smartest and most capable, but there have been many that are dumb as a box of rocks.

As someone once told me, "it's better to healthy and rich, than to be sick and poor." I'm kinda thinking it might also be better in the long run to be smart and educated, than to be dumb and trained.

Stefan Jovanovich writes:

David is right. If there is any fault to his argument, it would lie in his optimism about the capacities of higher education. But, then, my cynicism about schooling comes from having literally grown up in the business and from being a 2nd generation academic bum. (There are not many fathers and sons who share the distinction of having gone to graduate school in English literature solely because they had no better idea of what to do and the GI Bill would pay for it.) School, like most things, is what you make of it. My difficulty is that "education" is now what "national defense" was in the 50s and beyond; an open-ended appeal for more money that is always justified in the name of some higher good that is incapable of being questioned.

Jeff Rollert writes:

I concur with Ralph, and if you believe in the concept of singularity, then a repetitive answer method is most likely to be replaced by a machine.

For me, I believe that standard problems will have standard solutions already applied to them before I'm even aware of the problem. So if one were to find employees who where good at sensing/finding the "unknown-unknowns" then they would have to have a non-standardized approach - in other words a non-academic approach.

Lastly, in a logic sense, how can something be a "value" but still be "expensive"? Aren't these mutually exclusive?

Tim Melvin writes: 

We have dealt with both sides of the college issue here in the past few years. My daughter on her quest to be the world only libertarian teacher had no choice. To teach you must have three degrees and credentials. She has on semester left and has pulled a 4.0 throughout. She may have learned some basic teaching techniques she did not know but the general education element was lost on one who reads like her. When I look at the top 10 majors in US colleges I have a hard time seeing what we are producing except middle managers. Teaching and nursing are the only to that offer a truce vocational choice. I would love to have had four years to study literature, but I question the employment value of the degree itself. The top tier schools may be different but is seems to me that our universities are teaching fixed values and information, not how to think. How to think has to be either installed by your parents or learned on your own. I cannot see where this can possibly be worth the cost today. Perhaps Colonel Depew can add a though on this but I think teaching the young to read the Great Books Curriculum would go farther than the current middle management factory that are most schools today.

I never went to college. Truth be told I dropped out of high school at the enthusiastic recommendation of the local authorities. What education I have I obtained from between two covers in the style of Louis L'Amour– I suggest that book as a manual on learning to think by the way. I read constantly when I was a kid. My mother was wise enough to let us read anything we wanted regardless of content. If there was something we didn't understand she made us find the source material to explain it..and this was back in the day when Encyclopedia Britannica was still the source of knowledge not the internet. I have continued to read ravenously all my life. I read anything and everything. I have found that even fiction often contains lessons for life and can be a source of knowledge. As an example, I read two or three of Robert Parker's excellent Spenser series. Great detective books, but read a few and you will learn two or three good quick dinner recipes, several literary quotes worthy of further research and how to win a fight. Many of us on the list have followed the chair's lead and studied the great lessons of Monte Walsh, Don Quixote and Patrick O' Brian. Randy Wayne Whites Doc Ford novels often contain insights into the biology of floridian waterways and the everglades. Knowledge is everywhere if you know how to think. I fear today's world of standardized testing and assembly line universities may not be teaching that valuable skill.

Think about this. The two greatest innovators and business men of the past thirty years both dropped out of college. Some schools may be worth the price tag. I suspect most are not.

My son on the other eschewed school in favor of making a few bucks. He discovered he had a real talent for and love of business. Within six months or so of going to work at Boater's Worlds he was managing one of the top producing stores in the company…at the age of 20. We talked about school and he told me flat out "I can't see the value of spending the money. I have two MBAs working for me now because they can't find jobs that pay enough, and my part time staff includes a phd in English." He moved on when the Ritz family folded the chain. His former district manager brought him over to his new company and he is moving up the rank there. He just undersands the art of working hard and making money. He may need a few accounting classes some day but four years at some state university would have been a waste of time and money.

We need more thinkers who have a passion for knowledge and more curious explorers and fewer managers and chair holders. That's on us as parents as much as the schoools. If our children go onto college make sure they know how to think and the univerisity allows them to do so.

Stefan Jovanovich writes:

Dropping out can be useful even for scholars. Peter Green (the #1 biographer of Alexander the Great) did it.

So did Eddy's favorite professor who didn't teach art history.

Eddy's most treasured legacy from 4 years at Cal was giving Professor Jacobson the recording of her version of the Super Mario tune. He had heard her play it on the UC Carillon and wanted it for the ring tone on his phone.

Dan Grossman writes: 

Found this interesting blog post by Steve Sailer proving the value of higher education:

 A column on a new Gallup Poll asking "Just your best guess, what percentage of Americans today are gay or lesbian?"

"The mean guess was a ridiculous 24.6%. Only 4% said less than 5%, which is probably the best guess.

Polling companies seldom ask questions on which people can make obvious fools of themselves, since those can raise questions about the value of opinion polls.

Looking at the demographic crosstabs, it's evident that low intelligence people were most likely to wildly overestimate the percentage of homosexuals: 53% of people making under $30,000 annually said that at least 25% of the population was gay, and 47% of those with no more than a high school education. 43% of Democrats versus 24% of Republicans got the question wildly wrong.

In general, people are terrible at estimating or remembering demographic statistics. A 2001 Gallup survey, right after the release of 2000 Census results, found that the average American estimated that 33% of the population was black and 29% were Hispanic. That adds up to 62%, but who's counting? Not most people.

In that 2001 survey, nonwhites estimated that 40% of the population was black and 35% was Hispanic (adding up to 75%). In contrast, people claiming postgraduate degrees estimated that 25% were black and 24% Hispanic (only about double the Census numbers), which proves the value of advanced education."

May

26

 So if there is no NFL, where does the entertainment dollar get spent? Or does it even matter? Are any of the possible destinations for the consumer dollar of the correct size to be seriously impacted by the NFL dollars?

I.e, if 100% of the NFL entertainment dollar goes to NASCAR, does that matter to NASCAR related businesses? (actually, that would about double NASCAR's revenue). Not sure if the seasons overlap, just what came to mind.

Ken Drees writes:

No NFL season impacts economy greatly:

Dave Gibson wishes he had such a safety net. Gibson is sales director for a Holiday Inn located one block from Reliant Stadium in Houston. Here is how heavily his hotel's bottom line is tied to the NFL: The food and drink tab on a typical weekend is $2,000; it's close to $12,000 on a weekend when the Texans are home. There's also a bump in occupancy. All 238 rooms were rented for both preseason games last year and they sold out for a Monday night game 1 months in advance, which never happens, he said.

May

17

 Jeremy Grantham is a well-known "bubble-burster"– who has spent decades studying popular delusions and the madness of crowds– with a mean-reversion mindsight. It's therefore shocking that he has declared the multi-year commodity market rally to be in a "paradigm shift" (as opposed to an asset class due for mean reversion.) Admittedly, the timing of this April essay couldn't have been worse….

Without offering any opinion on his arguments, Specs may find the essay interesting– and especially Specs who cut their teeth over the past 100 years with a doctrine that real commodity prices must decline over time.

Ken Drees adds:

Generally, when you hear "paradigm shift" or "this time it's different, it's under bubble froth conditions" or "well on the path of", Grantham is fleshing out the conditions and making the bull case even though we have had a temporary bubble top in 08. This research seems pretty straight forward and understandable based on current conditions.

I wonder what the path of least resist is for oil– seems like most people already stopped crying about 4 dollar gas.

May

17

 The previous Indians manager Eric Wedge who always was criticized for too many pitching changes came back for the first time to Jacob's Field as the mariner's skipper in the opening game of a three game series. His pitcher (fister) dominated the tribe for the most part going 8 strong innings. With a 4 - 2 lead in the ninth, he pulls the pitcher and goes to his closer a right hander. The Indians get a rally going, a man gets driven in and its 4-3, man on third base, first and second base open and Hafner comes to the plate– the left handed slugger of previous years who has been slowly rehabbing for the last two years, and this year seems to be showing some healing promise. The Indians lead the league in ninth inning walk off wins. Hafner is hitting 333 at the plate after striking out looking last at bat. He drills an 0-1 sinker over the center field wall for a walk off two run homer. The biggest walk up crowd all season goes wild, and they linger in the stands waiting for fireworks– the party is on!

Wedge had his old memory of the rehabbing hitter who had seen better days– it was the closer or nothing else but the matchup favored Hafner. First base was open, and they could have given a free pass and pitch to the next batter and get better odds on field outs. Now the ailing Mariner's take another body blow to start a series and will have to fight even harder today. When the closer came on the announcers were happy saying– at least Fister was out and maybe the tribe will have a chance to come back. Indians best record so far. City starting to catch tribe fever again.

DF, dean foods hitting a new 52 week high last friday seemed similar. An older strong company being rehabbed– Tepper involved, and the GS upgrade was the pitch down the middle that was easily crushed.

Apr

27

 Umberto Eco wrote a great essay about how when new products start they are used first by high end users, and then gradually diffuse to the masses so that by time the masses use them, the marginal utility keeps reducing and the first users that got real value out of it stop using them. He points to such things as railroad use and cell phones as examples.

We have see how IPO's prospectuses follow this model with info in it being completely worthless as they have to go through so many hoops that it becomes merely a boiler plate to reduce the settlements in class action litigations when the case is settled.

One notes now the apparently standard thing in financial statements "cautionary note regarding forward looking statements".

I note in a company like Rimm 30 cautionary notes including "difficulties in forecasting quarterly results" and "regulation certification and health risks". My goodness, there was a time when management statements could actually convey useful information that had a high marginal revenue.

Could we attribute this syndrome to crony capitalism or flexionism or just a natural outgrowth of the law of diminishing marginal utility? 

Rocky Humbert writes:

While the chair's assertion that disclaimers have proliferated since the passage of the PSLRA is correct, there is scant evidence that management statements ever have consistent predictive value w/r/t either the organic performance of the business or its market valuation — over a reasonable investment time period. See wikipedia on the Private Securities Litigation Reform Act.

One reason for this is that companies which are performing well have no need for management cheerleaders or CEO soothsayers; the market will eventually figure that out on its own. In fact, the worst companies are the ones where the CEO is front and center (giving "upbeat" guidance) when things are rosy, but then when things turn challenging, release 8-K's on Friday afternoons using terms such as "exogenous factors" and "one-time adjustments" (and the CEO is nowhere to be seen.) Citing Philip Arthur Fisher's Rule #14: "Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?" It's a rare company that does an IPO or secondary when business is sickly (the exception being banks which sell stock at the behest of regulators.) Hence the entire IPO process can be viewed as a possible violation of Rule #14.

On a related point, one notes that INTC stock (which was mentioned recently by Dr. P) has a compound annual return since 1982 of about 15.6% per year (versus 11% for the S&P). During the same period, AAPL stock has produced a 17.5% compound return. Yet, right now, INTC has a 10x p/e and AAPL has a 17x p/e. Both of these companies have demonstrated good long-term organic growth, RoE, product innovation, and impressive market dominance. Yet, if Mr. Market would reward Intel with only a market multiple, it's return-to-shareholders would blow away Apple — demonstrating once again that Mr. Market's valuation at any given moment dwarfs every other factor for a profitable enterprise. I submit that it's folly to attribute this irrefutable statement to crony capitalism or flexionism or the law of diminishing marginal utility. The blame should be place squarely on the market participants who continue to make the same mistakes (such as buying INTC at a 70x p/e on 3/1/2000) but shunning it at a 10x p/e on 3/1/2011. 

Ken Drees writes:

Consider the cell phone and its recent tracking news out of apple– or police being able to plug a device into your cell phone and download all your data from it– the high end user will now need tech applications to shield their privacy and will demand a next generation product that the masses do not have– a private communication device. The cycle keeps moving forward. Maybe a self destruct feature will come on the scene.on the subject of mumbo useless jumbo in fin states. Is not persistency of litigation like ants digging into the timepiece to blame for the creeping destruction of worthy information?

Bill Rafter writes:

In looking to eliminate stocks in mergers or merger talks I cannot always get that information as quick as I would like. Sometimes I have to resort to looking at the individual stock's news headlines. Before I even get to the news about the merger I see the inevitable: "The law office of Dewey, Cheetham and Howe launches an investigation into possible breaches of fiduciary duty by the Board [of the company]…"

That, I contend, is why you don't get useful information.

An Anonymous Commenter writes:

I recently read an article that the author was try to further disgrace a Euro based company whose board member had made a remark at a meeting referring to "the weaker sex". The article told of the various ways, non business groups and political active parties tried to protest these remarks. However while raising a good smoke screen; the parties complaining were inefficient and did not understand business. Has any body done a study on the stock price of a company whose leadership made non PC remarks? Could it actually increase the price, due to the signal of boldness and management willing to think outside the box? Would not such a study have been quoted in these articles that hold a company up to ridicule? Could such a study have been done but be not published due the opposite than hoped for results?

Apr

24

 I have been asked if a lower yield after seemingly bad news like the S&P downgrade is bullish for bonds. A lower yield than before happens often. Is it bullish or bearish? If you specify the time and the magnitude and the other conditions it can be tested. Such tests must be made conditional on the time of the day. As a hint, such tests as of the end of the day do not support anecdotal assertions being made here about qualitative factors, and sensible sounding technical shibboleths. The problem with qualitative analysis is that there are so infinitely many smart people constantly tinkering to get the right price, that the right price is the result of so many people like Paul DeRosa and the palindrome, the former of whom is completely sagacious and knowledgeable, and the latter of whom takes along with him trillions of fellow travelers that are part of the affinity group, as well as the wisdom of all the flexions that rely on such as the upside down man and he for guidance as to what they should do to finesse their positions along. Furthermore the wisdom and the access to such info from all these types is always varying, and depends on the ethos with which they look at things, which is often right during bad economic times for example for the Man of Many Books. Sometimes they're good and sometimes bad. So it's hard to follow a qualitative guru, and even more difficult to find a qualitative divergence. Certainly impossible is to make money following a shibboleth that hasn't been tested, and to extent it has, one wouldn't be writing that it's worthless unless it were truly wrong.

Rocky Humbert responds:

Here are some stats:

1. Japanese National Debt/GDP = 228%. Yet their currency is very strong; and their yields remain near record lows.
2. Italy Natioanl Debt/GDP = 115%. Their yield is 120 bp over bunds.
3. US National Debt/GDP = 97% (if you include social security etc); 60% if you don't. Yields at 10 bp over bunds.

Although academics try, it's clearly impossible to draw a straight line between National Debt/GDP and nominal sovereign debt yields.

Furthermore, and more on point, last week Gallup (and Google Trends) showed the US Budget Deficit had risen to be the "Nation's Most Important Problem." This story moved to the front of the pack — displacing job; war; healthcare; and Charlie Sheen.

That Obama gave a speech on this and that S&P issued their non-news is simply a mirror of the established public mood. Therefore, definitionally, it's in the price.

One more thing: Normally, a company PAYS MONEY to S&P to get a credit rating. That's not the case with S&P's rating of US Government debt. Hence I think we taxpayers should all thank S&P for their incredible generosity — providing their useful, cerebral and predictive analysis of the United States of America — totally free of charge. (Either that, or you get what you pay for.) 

Ken Drees writes:

Looking for the next trend or meme– could this all be a preamble to QE3 in June or the no mas to GE? So it's a battle stations type of market that comes to us this summer with much more volatility then we have been conditioned for? I wish I could quantify the persistence of trend beyond the rational into some type of indicative feature. Financial alchemy– chasing that idea.

Gary Rogan comments:

How high the debt to GDP needs to be before a country goes kaput is clearly numerically an unsolvable problem, especially for sovereign money printers like US and Japan. If the bond market keeps buying the debt this can go on essentially forever. If the economy is barely making it but trending upwards there doesn't even have to be any appreciable inflation for an unknowable period of time. Therefore it's not clear what the rational approach should be to evaluating the situation, and then people focus on the differences like the Japanese debt being owned so much by the internal population, and that population being so thrifty. Clearly part of the reason that the debt has risen in importance is not the absolute level but the seemingly uncontrollable actions of those who are creating this debt while paying lip service to "living within our means". People don't like it because to them this symbolizes irresponsible behavior, because they know that their neighbors or relatives who do that get in trouble, so then there are political consequences to this behavior and the opposition party makes even a bigger issue, and so it goes and goes. This is totally different from the bond market making a judgment about the country in question defaulting. I personally think its the ridiculous that the main generator of this debt has just made a speech in which he proclaimed that we can't spend more than we take in, and have heard it compared to Colonel Sanders making a speech declaring that we can't just go on killing chickens this way. And yet I don't know where it's all going any more than the next guy.
 

Apr

15

I found this good article on the blog Money Matador about begging called "Good to Great: 5 reasons why some beggars earn more money than you."

I would add another tip I found on a wikihow article on panhandling:

Swallow your pride. Most people find it difficult to quietly beg for
money from friends or relatives; it's even harder to beg from complete
strangers where everybody can see you. Still, you're going to have to
suck it up and be humble. If you've already exhausted the alternatives
(see Tips) and begging is your last resort, it may help to keep in mind
that in many countries, begging does not hold the stigma it does in most
of the Western World, and in some places asking for alms is considered
an honorable profession.

Victor Niederhoffer adds: 

The flexions from the banks seems to have intuitively mastered this, especially with their dress code and their need to protect them from such disasters as "breaking the buck".

Apr

8

 The path is very key in markets. And I have been remiss in not taking into account the road that is taken by a market rather than concentrating on just it's last x maneuvers. "The road is better than the inn," as they say. If He Will, Let that be the heroic thought for the day inspired by Rocky, as one is being beat up markets today, and must confine ones attention to current activities rather than heroes from the past or current.

Ken Drees writes: 

Carlos Castenada–who wrote the Teachings of Don Juan, A yaqui way of knowledge– comes to mind here when through a vision of true seeing explained that the way to clearly "SEE" and understand a tree for example, was to concentrate on the spaces between the branches, the spaces between the leaves, and then one can fully see the tree's truest form and dimension and uniqueness. Similar to the post on black and white with color as an attract function that eliminates the true picture structure– the cheapened eye seeks the easy answer, look its just a tree.

The market's rode is like the leaves or the branches, what lies in between these daily prints that have not been touched may truly indicate the path.

Pitt T. Maner III writes: 

Which is somewhat similar to being able to draw. You have to look at an object in a different way and see the spaces and judge the proper proportions.

One of the first exercises using the following method from Betty Edwards is to turn a picture upside down so that it is unrecognizable to the left, judgemental side of the brain and then try drawing it—it is pretty amazing what you can do. Perhaps there are benefits to be gained from additional exercises for the right side of the brain as well as the left.

I am not sure how it can be applied to stock picking but the results are impressive for the before and after drawings shown and draftsmanship is a useful skill to have.

Apr

8

 A good friend told me, "The longer you live, the closer you are to dying." I got a good laugh from that one.

Ken Drees adds: 

or, "Life, its designed to kill you".

Victor Niederhoffer comments: 

There is great deep truth in this as applied to markets. Although like the micro organism the body likes to let into the body, a slow death is programmed so that the maximum of chips can be obtained from you, and other poor fool humans will maintain hope so that they can sustain the similar microorganisms that will appropriately sap away the life of other market players. Thus, what started out as a joke has all too much applicability. The purpose of the Market. Ha, it's to take away the chips from the weak, so that the flexions and other top feeders can prosper. That's a terrible but beautiful thought, I think.

Mar

31

 I never saw a resigned CEO on fin tv before doing some "splainen"– Sokol. Nice of them to invite him on.

Victor Niederhoffer writes:

What was his explanation for those who don't have the luxury of a tv? Did it seem to be favorable to the sage by indirection? Or seem to indicate that it's the kind of thing that the sage wouldn't do (any more)?

Ken Drees writes:

It was pro buff– and you would have like the analogy used by the talking heads– buff wouldn't have anyone on his staff that wasn't playing directly in the field of play, a tennis analogy that he doesn't tolerate behavior in the organization that is even close to the line but in play. So the dealings by Sokol in lub stock were technically ok, but really not up to full standards of mount st buffet and really it had nothing to do with him "resigning" anyway.

So why all the chatter about the stock dealings if it didn't matter? Sokol wants to be a mini buff now career wise. Thank goodness he didn't resign to spend more time with his kids. The whole thing is odd.

Mar

25

Here is an interesting article about oil: "we are in the middle of an epochal tectonic shift" by Lars Schall.

The hegde funds and banks, who control and own the NYMEX, the ICE Futures and the Dubai Exchange, are using the Middle East events. I think they want to try to use that to push the price up to maybe $ 150 to 200 per barrel over the next months. And why? In order to put massive political pressure on Germany and the European Union.

[…]

Since the end of the First World War, I would say, that the quality of the strategic economic thinking in Germany has become significantly reduced, especially after 1945 and the US-guided German "re-education" efforts. How well the Berlin government understands that this is a currency war against the euro, because the euro is the only currency on the block today worldwide, certainly not the Chinese Yuan or the Japanese Yen, which could challenge the hegemony as a reserve currency of the dollar, I can only speculate. That euro challenge has to be eliminated from the game. The next target will bw Spain. If they can crack Spain, then they will move on to Italy – and then it will really escalate into a colossal mess for the euro as an alternative to the dollar.

Stefan Jovanovich writes:

The numbers for U.S. energy consumption suggests that the U.S. might only need to put one knee on the ground. 37 years ago, with 214 million people, the country consumed 6,453,000 Barrels per day of Gasoline and 2,552,000 Barrels per day of Diesel Fuel. The most recent numbers have consumption of Gasoline at 8,779,000 Barrels per day and Diesel at 4,099,000 Barrels per day for a population 50% larger.

Dylan Distasio writes:

I found your original link very interesting, and hearkening back to the 70s energy shock, I would not put anything past Henry Kissinger, but I don't know what to make of Engdahl's theories, quoted above. The conspiracy nut in me finds them appealing, and after what we've seen happen over the last few years of the "financial crisis," nothing would surprise me.

That said, and this may simply reflect my naivete, but I don't believe the oil market can be easily manipulated long term. I'm sure speculators help trends in motion stay in motion until the positive feedback loop breaks down and the music stops, but I am skeptical of his beliefs that this is a coordinated effort to bring down Europe and China.

This may be my ugly American speaking, but I think the only thing propping the Euro up is the interest rate differential between the USD and it, and the perception that the Fed will continue to allow easy money to flow while the good burghers are tightening the reigns. I don't see the underlying structural issues with the PIIGs going away anytime soon, and despite the US's fiscal mess, still believe it will end up growing faster than the Eurozone ultimately. I don't think it is going to take $150 oil to bring down the Euro.

But concerning this: 

CNG has always been 40 percent cheaper then gasoline," Oldham said. "Everyone fears that gas will hit between $4 and $5 a gallon, while CNG is expected to remain steady.

I guess Mr. Oldham, in that article, has not heard of the concept of supply and demand. Granted, the shale finds have changed the face of domestic NG supply, but if the demand were to change radically for NG, the price is going to go up significantly. There is still the issue of the cost of building out a national infrastructure as mentioned also.

I'm not arguing CNG is a bad idea, just that it is foolish to assume prices are not going to move towards a new equilibrium compared to oil if we start to get power plants converting over to NG on a widespread basis combined with this hypothetical fleet of CNG vehicles on the road.

Paolo Pezzutti writes:

The issue is about using energy as a strategic weapon to win currency "wars" and much more… Does it make sense or is it a delirium of pseudo opinionists or worse "conspirationists" at any cost?

Ken Drees adds:

"The conspiracy nut in me finds them appealing, and after what we've seen happen over the last few years of the "financial crisis," nothing would surprise me."

Do we all have a little conspiracy flake inside, the need to believe an extreme idea, the need to see one more card and maybe hit that straight, the need to go short against the trend, the need to date that "troubled yet sexy person", the need to get some action to offset the boredom of accepted reality, accepted principles, the correct fold of the hand, the trend is your friend continuation trade or the usual date or evening at home?

Our gambling flake needs to be rewired into a creative outlet that excites the spirit yet reshapes risky behavior into worthwhile enterprise. risky activity is rooted in ego and power–that force needs to be applied in a new direction instead of being repressed.

 

Mar

21

 One should never use the habits of the Boy Wonder as a source for emulation except in the field of romance and good times before the inevitable last days. Certainly everything he did in speculation was wrong except for his ability to cheat the bucket shops by betting on reversals arising from the concentration of limits at the bid and the asked.

Ken Drees comments: 

I don't know if you are judging him too harshly or not, but I read somewhere that he suffered from clinical depression and at that time was not a known ailment– maybe this led to his "trade–all the time" mentality and other outlets for passions. Beating the bucket shops who cheated the public at their own game seems counting card like to me– which led those cheats to get a bigger and bigger shoe– to keep the metaphor extended.

And maybe I am too harsh on the schooling aspect– but less chit chat, what do you think about the market talk is better for me as I try to extract longer term trend trades and stay with them. As an example, the Middle East shakeup in my mind means one thing, trade wise, and that's higher oil price. I try to minimize the back and forth headlines as much as possible. In that vein, Livermore's isolated trading office was set up to keep outside influence away. I think there is something good to take from that.

Victor Niederhoffer replies: 

One would think that he suffered more from excessive inebriation and the aftermath of womanizing too much than clinical depression. The depression was likely caused by his extravagant and unsustainable life style and vig paying.

Mar

21

 A couple of months ago I was trying to put together a container of coffee from Indonesia, and my experience is somewhat different from SBUX. I find that the "speculators" responsible for the very tight current supplies are the coffee producers themselves. Many farmers have seen prices going up and up, and they therefore hold on to their current supplies in the hope that they can get even more for them. If you do manage to buy some coffee you must be very careful that what you receive is what you tested because there is strong incentive for the farmer to mix in lower-quality beans. Thus it is very hard to put together a large order of high-quality beans. This situation will only rectify itself when prices start to decrease. In this part of the world, that may be around June or July when the new crop comes in. Buyers are now having to consider buying for their anticipated yearly needs at once and storing the beans. Of course, due to their heavy volumes, SBUX has been using forward contracts for a long time, so they have been partially insulated from price hikes.

Though I do not yet have much experience in this field, I do think that higher coffee prices are here to stay. The gross margins on coffee are pretty high, leading to an inelastic demand curve. There is more and more demand for "specialty" coffee, which sells for higher prices and is not price-sensitive. It is also interesting that pricing for Indonesian beans tracks very closely to the New York price.

Ken Drees writes:

If you do manage to buy some coffee you must be very careful that what you receive is what you tested because there is strong incentive for the farmer to mix in lower-quality beans.

An unscrupulous cantonese tea farmer in the late 1700s had the idea too: a very detailed account of tea and its trading, of how it was evaluated, graded and which trading houses bought which varieties was described. The usual cheating methods were illuminated for the reader-stale tea added to fresh tea, chopped willow leaves added for increasing bulk, additives of Prussian blue added for brilliant appeal.you needed a good Chinese point man at the cantonese port to ensure that what you bought was what was loaded onto your ship for the return trip.

From Otter Skins, Boston Ships and Chinese Goods by Gibson.

Craig Mee writes:

When looking at traditional gold mining in local areas of Indonesia, I noticed I could buy good physical 10% below spot, however this was unrefined, and no doubt paying the bro, and slippage would negate the edge in this case. Then with the added query of dealing size, and you really need another 15% off for "local" risk.

I spoke to local geo about one such query, about a new mining venture. He mentioned a company who had claimed the title got approval for mining (no easy task), shipped in all the machinery, and at the 12 hour, a man's brother appeared out of the forest waving a "title paper", and they had no choice but to pay him off.

It seems there is no better place for knowing your market and its participants.

Mar

21

 Traders who communicate make more money. A great post by Jonathan Lehrer. 

"Herds on the Street: Why messaging traders are like scared fish" .

Ken Drees comments: 

I think of schooling more related to crowd behavior and not specs– but maybe this author thinks small minded traders are like bait fish in that they react and must constantly tweet, chirp, burp, ping, belch, touch fin, and keep swimming as a group so that when the big gaping maw makes a pass one would be in the 80% not affected and the poor sorry bud from the other end of school gets chomped.

This constant talking and interaction saps my energy– I use the chatter a a contrary filter and in some cases just turn it all off.

Contrast Livermore in his silent trading room to the adolescent instant messaging of the trading crowd.

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