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.

Mar

15

 Thanks God the panic indicator is back!

The telephone started ringing early in the morning with frantic if not fearful voices of all sexes, inquiring if it was the right moment to dump Asian, European, American, shares, Oil, Natural Gas and start investing at zero percent on Swissie and JPY. As the trading day went by, along with the Dax 30 down 5.5 percent, down went the tone of the panicky voices and up the inquiries to sell.

To say the absolute truth, one does not yet own the Magic to foretell future with unfair odds, but some gut feeling mixed with reasoning as to the speed of the sell off, yes, that we have. Thus the perfect buying moment came as the "oneandonly" came in asking in despair what I thought of the Japanese Market. Indeed, it was not a question. It waited no answer, as I tried to calm the chap down and work out some figures and logical thoughts about NIkkei, and stock markets in general.

Yet, everything to no avail. The answers were already built in by the fear of further losses, irrespective of the possibility of cane buying or economic prospects rosier than these sad times are telling us.

Probably some bottoming out process will have to take place before we can ring the "all clear" siren, but one first, small sign was visible in the depth of the fearful investor's eye.

Steve Ellison writes: 

Recently I reread "A Specialist in Panics". The author recounts:

As a constant reminder I printed a sign with my name at the top and beneath the words:

Specialist in Panics

Below I put this query with a blank space for the answer:

Question: Panic Today?

Answer:  ____________

I decided to buy only when I could truthfully write yes as the answer to the question.

For the first time in 2011, one might have answered yes during the last 24 hours.

Ken Drees writes:

This reminds me of Justin Mamis' work– paraphrasing here:

Buy only when your hand is trembling with fear as you can hardly pick up the phone to call your broke.

Mar

12

 1. Today was a classic in that the frustration aggression hypothesis of stock market movements was totally satisfied. The lead S&P had been above 1300 continuously since January 31 and had not set a new 20 day low since august 26 , 2010. It had set a within day low four times below 1300 in the previous two weeks but each time closed above. The Nikkei had been above 10000 since Nov 30, 2010. Thus the evil invisible hand of the market had not been satisfied. There were stimuluses that should have led to massive selling so the strong could capture profits from the weak but an inappropriate displaced response had occurred in Skinnerian terms. There was frustration that a proper response had been blocked. An aggressive displaced action in Dollard - Millerian terms, was required. It all happened at Midnight when the Nikkei broke 10000 for a minute and the stock market broke 1300 going down to 1278 thereby luring a whole medley of weak holders and fixed system people into doing the wrong thing. Okay, finally a appropriate response happened with all the breaks. Alternatively a climax occurred, and once it did everything was de rigeur again and the market promptly was ready to go it's merry driftingly way up.

2. Could there ever have been a day when a content analysis of the news would have been more negative with floods, earthquakes, tsunamis, war, and bad economic numbers galore. All we needed to put it at all time most negative was news that the president was holding firm on trading off an increase in the service rates in exchange for a reduced budget deficit. It shows the idiocy of the programs that monitor the news to get that ever so difficult trading edge.

Ken Drees writes:

Very beautiful summary. And notwithstanding the monster earthquake (which doomers prayed homage to since the 80s as the secret to knock the Nikkei to its knees– 25 years too late and still it didn't work) and on the eve of Friday trading, this seems to be masterful piece of frustrating market action.

Mar

4

 Thanks to Tim Melvin and to the chair for hosting a contest that truly evoked good solid investment ideas and themes.

Tim's idea of busted banks as low priced calls on the sector led me to consider a market area that was no where on my ideas list for 2011. In all humility–thanks! Using Tim's idea of fbc and shbi as vehicles, I stumbled on to hmpr. Then diving deeper, a large financial deal was in place through Carlyle, Tim pointed out that the financing and equity stake would minimize the threat of liquidation (one of my trade downside risks).

The year end tax loss selling washed out the stock completely and then huge (actually over the top piggish) insider buying from a bank insider (flexionism) was all the footprint I needed to risk a throw.

44% winner on one closed trade so far. Now I gotta be careful because sometimes my hand gets caught in the cash till on the subsequent forays.

Feb

17

 Say you're a little perplexed by a slow creep-up in commodities last few sessions. On the one hand, most commodities have been now climbing day-in day-out for months - so naturally a contrarian, or value seeker would look to be a seller. On the other hand, you are not really getting a tremendous spike, a blow-off into which to sell. So here comes Cotton to your rescue!

You see, Cotton just nearly tripled in the two-quarter period. Obviously, it's a top-of-the-needle daily war of attrition right now between the Longs and the Shorts in that market. Margin hikes by the exchange, price-limit moves adjustments and all that jazz… So watch closely; and the moment that Cotton finally reverses - there will be your indicator that the drift is changing in commodities. Whether it will be orchestrated (in Cotton) by one or another power-party - the jig will be up that, temporarily, Bull market deflation is favored by someone with influence

Ken Drees writes: 

A friend just called me this morning saying he heard on Glenn Beck radio about cotton and clothing price hikes– I would be in the cotton correction camp, if I traded this item–usually when a not often talked market is in the news it's time to consider exit door locations.

Anatoly Veltman reponds:

Because of likely limit lock-down in many of the sessions– the outsiders will be confused as to "real" dimension of price changes and balance-of-power day to day. My point was that someone not taking position in Cotton per se– will still get a hint of shifting wind for all of the inflated markets! Remember that today's markets are arguably the most manipulated in decades. Thus, it's doubly important to be tipped-off as to when the flexions decide to loosen the upward pressure valve.

Rocky Humbert writes: 

I think Anatoly's focus on cotton as a "tell" is misplaced. I think the entire commodity complex is keying off of Netflix stock (NFLX). As soon as the farmers stop watching videos and get back on their tractors, Netflix stock will crater, and so will the grains…

(Calculating the R-squared between Netflix and one's favorite commodity is left as an exercise for the reader.)

Craig Mee adds:

Talking to a mate in Singapore today in a trip to the sunny island, and he mentioned a farmer in China, who has stock piled cotton: "he has 6 tonnes of the stuff, taking up every inch of his shack, stock piling with price where it is, no interest in selling." I suppose why would you, with price ferociously in the one direction. Though two questions remain, is this a trait of the Chinese race in general… accumlate accumlate… and for such a specie position…is it another reverse market indicator?

Feb

12

 Listening very occasionally through this streak to Byron Scott explain how his team is trying, and that injuries have decimated the team, and that some young talent is getting a lot of NBA minutes– the same theme over and over in every interview and post game radio show etc. No emotion from Scott—

Then the mild mannered Scott lost it after loss number 26– to tie the all time losing streak in any pro sport. Maybe he realized that his name will forever be tarred by this streak and maybe he will never coach again. So maybe he finally got angry enough to hold closed door half time and after game team meetings. Maybe he finally coached. I will not understand the fans– it was pandemonium like we won a championship– we won a game, the first win since Dec 18th when they beat the Knicks in OT.

This win over the Clippers was at home in OT. JJ Hickson had one of the best games of his career and the cavs were tenacious on defense. Prior to this game announcer, Joe Tate– who is probably the best play by play announcer in the NBA, gave his first phone interview after heart surgery and rehab. He fell ill after never missing a game in some numerous years last year– coincidentally right around the time of Lebron James' "decision". I thought that Tate was not going to make it and that his last announced game was last season's dissapointing end. But now there is hope and a fresh start. Before the game Joe was asked about the cavs coach and Tate said that Scott was the man to lead the Cavs into a turnaround to the upside.

Whatever it was there was a spark and a fire not seen on the court in a long time– and it wasn't one dominating ego, there was TEAM last night.

Feb

4

I was asked by an investor friend if bashing was a real tactic. I didn't know for sure but I hunted for some info:

If it does exist, and in my mind in does to a degree, one main point would be the following:

Lesson 1: Remember, BASHERS NEVER Bash A BAD STOCK. Check the boards for stocks with no potential. They never have any Bashers. Bashers only go after stocks that are moving up or have excellent potential to do so. Bashers work to bring the price down to either increase their position at the expense of others or help a Short make their bones

Feb

1

 For anyone interested in big natural events, check out this article: "Yasi could become category five monster ".

 At the moment it's eerily calm… very, very strange. I woke up this morning and there were no birds flying around, no sounds, absolutely nothing. It's like the wildlife knows there's something going on.

CAIRNS resident Carl Butcher is taking a stand against the might of oncoming Cyclone Yasi– he has vowed to keep tweeting through the terror of the storm.

Butcher, whose Twitter handle @cycloneupdate is fast gathering followers worldwide…

Victor Niederhoffer writes: 

There are many books by Henty, favorite author of Getty, that describe how frontiersmen could tell what was happening 30 miles away, especially massacres by Indians, by the bird and insect cover in their own settlements. There are numerous market implications of this. I'd be appreciative of other references to the wisdom of birds, and how the layman can improve his profitability based on observing birds.

Ken Drees writes:

Here's a great article about bird behavior prior to the Longbeach earthquake in 1933.

Jan

31

 In a nice article about the failure of Hewlett Packard's directors, written from a liberal perspective as are 99% of the stories from b (which caused me to cancel all my subscriptions there, thereby saving much contemplated expense, but probably disrupting the rhythm), he refers to duos that have been successful: Jobs Wozniak, Filo Yang, Page Brin, Hewlett Packard. I know of a number of 2 person partnerships that are successful, but have always felt that 3 person partnerships are very unstable and unhealthy, as was mine when I started with NCZ. I have always felt that the reason is that it's too easy for any two to form a coalition against the third. Have others here found the 3 person triangles very dysfunctional, and is there an economic reason aside from the all too prevalent attempts to better themselves at the expense of another that lies within the human heart? What are the market implications of such?

Bill Egan writes:

My experience is also that two person partnerships work much better, and adding three or more people leads to a mess.

I believe there are three reasons for this. For two people:

1. You have time to try to understand the other person's viewpoint.

2. Combinatorics are in your favor. With two people, there are only four
possible positions to discuss.

3. No politics because no one can get an ally.

With three or more people:

1. You have less time to try to understand the other peoples' viewpoints, which creates more opportunity for misunderstanding and miscommunication.

2. Combinatorics are not in your favor. With two people, there are four possible positions. With three people, there are eight possible positions on any given issue.

3. Politics can get ugly because person one can get an ally (person two) against person three, etc.

Ken Drees writes: 

Treasure of the Sierra Madre comes to mind.

Trader Craft writes:

In gravitational physics, two body systems are orderly and predictable. Once you get to three bodies, the system becomes chaotic.

Stefan Jovanovich writes: 

The Founders' direct experience with bicameral and unicameral legislatures led them to oppose both Franklin and Hamilton's preference for a single body. What the Founders did not anticipate was that the Federal judiciary would become a co-equal 3rd branch. IMNSHO, the instabilities of our system have their source in that unexpected development. For some of us, James Marshall is anything but a hero.

Jan

31

 There was a Spencer Tracy movie on this evening: 1954's "Bad Day at Black Rock".

Besides being engaging in regards to prejudice against japanese americans during wwii in the USA, there was a really good line:

"A man is defined by what makes him angry".

T.K Marks replies:

Having never seen the film I don't know the context in which it was used, though it would certainly appear able to stand alone almost anywhere. A great, informative line.

Come to think of it though, the consequences of it's use remind one of a fundamental principle of dramaturgy.

That is, if a gun is shown on stage in Act 1, no matter how fleetingly or incidentally, that gun should be used before the curtain comes down on Act 3.

Or else the audience has been meaninglessly distracked by its appearance in the first place.

Similarly, I would imagine the same precept would extend from stage to screen. That is, if a character says early on that, "A man is defined by what makes him angry," then somebody at some point is going to "express" themselves in a most unabashed fashion.

It's almost guaranteed. The forces of proper structure would be cross otherwise.

Jan

24

David "Buy Everything" Tepper Will Make An Encore Appearance on CNBC Friday

 Ken Drees comments:

There must be a huge request list for his bullish tunes—second time around play–eh?

Craig Mee comments:

Like a trend, while in the top 10 and runs on the board "I'm all ears" but be quick adjust to those melody changes.

Anatoly Veltman writes:

Tepper comes across a totally brilliant man. His September Bullish call at near 1000.00 SP came out as simplistic no-brainer, and it did mark acceleration ofthe upside trend. Tepper's current call is widely perceived to predict 1500.00 SP within a year, although he did remark that current near-1300.00 market contains that much more technical risk - in pursuit of the fundamentally-justified gain.

It's hard to understand why perception of currently-embedded risk appears to completely escape just about anyone's attention. I contend that current market condition, technically, will not allow much enjoyment over 1300, period. Let alone the distant 1500 prospect. We have the market that nobody appears to want to Short anymore; everyone speaking about the market is totally spent out of any will for Bearishness whatsoever .

Ken Drees responds:

State of the union and 12000dow / 1300 s&p nice rounds at a nice time.

Jan

24

My ten yr old is reading it now:

Cube gambling game mentioned — six sided cube, one side red the other five blue.

Red pays 4 to 1, all other sides house wins.

Says house always wins in long run–but no details mentioned on game, betting amounts.

Jan

24

In the school parking lot on the way to basketball for my son's game today I decided to do some "outside the norm driving" in the snow and ice covered lot. My son, used to my conservative and lawful ways, was very impressed with the donut skid around one hairpin turn and the other half donut around the parking area into a perfect parking spot.

"Dad, whoa what was that whoopee, yeah– oh wow do it some more". its like a movie stunt—

"Now son, you know I am an experienced driver and did you notice me looking front, rear and all around twice before I did each skid to make sure no one was in the way, coming or going, no chunks of curb, light poles, or other items in the way?"

"whatever Dad–you rock"

Reminded me of the time my father decided to do something mildly driving-wise illegal. He got on the freeway on ramp once (in our sexy station wagon (v8 engine), and just kept accelerating onto the freeway well over a hundred, put it into neutral and coasted to the next exit and got off the freeway. My heart was pumping as I looked at him and he looked at me as he floored it–he said he wanted to see if he could coast to the next exit, so he had a reason it seemed. I thought my Dad had this coolness in him that I never knew before.

Jan

20

"the bottom is always 20% below my bleakest worst case scenario". Author Unknown.

I am thinking of this saying and I am gazing at some metal stocks at the moment.

George R. Zachar comments:

I was explaining short selling to my teenage son last night, and had difficulty communicating the idea of asymmetrical risk. I settled on this: a long stock position can only go to zero. A short position can go to whatever your capital can withstand…plus 10%.

Craig Mee writes:

I was too considering quotes today, and feel that there is no better quote for markets , trading , p and l, the whole spectrum of speculating then the fairly well worn ..'the darkest hour is just before the dawn".

It seems to cover every area that needs to be covered.

The English theologian and historian Thomas Fuller appears to be the first person to commit the notion that 'the darkest hour is just before the dawn' to print. His religious travelogue A Pisgah-Sight Of Palestine And The Confines Thereof, 1650, contains this view:

It is always darkest just before the Day dawneth.

The source of the proverb isn't known. It may be Fuller himself, or he may have been recording a piece of folk wisdom. In 1858, much later than Fuller of course, Samuel Lover attributed the notion to the Irish, in Songs and Ballads:

There is a beautiful saying amongst the Irish peasantry to inspire hope under adverse circumstances:- "Remember," they say,

"that the darkest hour of all is the hour before day."

T.K. Marks writes:

Back in the pit trading days they can recall at times not being entirely above resorting to such folklore logic when the clearinghouse's margin call police came a'callin' about a half-hour or so before the open.

Ken Drees comments:

darkest before dawn always good–agreed.

I like the x% below the worst estimate because it illustrates that the market usually over punishes and it also amplifies the fact that markets have the ability to humilate my best and well thought out assumptions of value—knocking me off kilter. In this flash crash world –the markets can now pulverize any stock, anywhere, anytime.

Maybe an updated version would be:

"The bottom is usually a jaw dropping amount below my worst case scenario, intraday"

Jan

13

The first paragraph of this article "Could Apple Hit 1000" reminded me of a spec post recently using the XOM measure:

" OK, I give up. Apple $1,000?

Eighteen months ago I questioned whether Apple stock could keep up its amazing momentum: "Over the past five years the stock has gained an average of 56% a year, an extraordinary achievement," I wrote. "For the shares to rise at a similar rate from here would take it to $1.25 trillion by 2014. Even to grow at a more modest 20% a year would take it to $333 billion-more valuable than Exxon Mobil (NYSE: XOM - News) today

Jan

13

The Cavs, from Ken Drees

January 13, 2011 | 1 Comment

Thoughts about the coach of the Cav's, Byron Scott. This guy is a loser. Cavs lose to Lakers 112 to 57. The Cavs are done, and so is Scott after this season. He is shepherding them into last place for the lottery–the Cavs are unwatchable.

Jan

12

I just got two (I rarely get these anymore) penny stock touts. Both came in the mail today and were large multi page mailers.

ALME– the stock has gone up almost triple since December. The chart looks like it's saying step right up into this perfect buy spot.

The other HHWW looks like a heartbeat on a monitor– ready to do it again and then flatline. Anyone play against touts? i never mess with them.

Jan

8

 I recall reading in Victor's Education of a Speculator many years ago that one of his more delightful methodologies was some sort of South American cigarette butt index. Wherein, how close a discarded butt thrown in the street was smoked down to the filter was a function of the general health of an economy. The thinking obviously being that the more tobacco left unenjoyed, the more the feeling that there was plenty more where that came from. I presume that the spirited Bo Keely was his man in the field on that one.

This was back in '96 or '97 and having been previously unfamiliar with anything he had written, amusedly thought to myself, OK, this guy is going to drive the professorial drones in the academic industrial complex nuts with this type of stuff.

Ever since that initial exposure to the notion of coming up with one's own metrics for gauging the state of things I've tried to hone an eye for such.

Toward that end, one of the things that I have long noticed is that little cup of pennies that one invariably sees on the counter right next to the cash register. Oftentimes taped to it is a sign saying, "Take a penny, leave a penny", along with a drawing of one of those smiley face things.

The blight of the smiley face cliche always kills me, but I invariably just block it out and instead reflexively think of a lyric from "Ripple", a quite beautiful Grateful Dead song: "Reach out your hand if your cup be empty, If your cup is full, may it be again."

Fine enough sentiment. That said though, I noticed a few years back that amidst the red of these cups' pennies some silver suddenly began to pop up: nickels.

I'm hardly paleolithic of years but I do recall that there was a time not eons ago when one could buy a (tabloid) newspaper for but a nickel, and now they're giving the things away. Smiled one of those little, private, personal perspective smiles the time I saw my first nickel in one of those cups. It was like quantitative easing for the proletariat rather than the princely. A year or so later beheld my first free dime. Thought to myself, OK, logic is going to hold the line on this bonanza right there: At a dime.

Then just moments ago that key resistance level was breached. I'm sitting here in a Dunkin' Donuts as I type this and up in the cash register's penny cup I just spotted atop the smattering of lowly red coins, 3 quarters, looking no less out of place than a robin's speckled blue eggs would have.

The irony being that it wasn't too long ago that the simple black coffee that I'm partial to — none of that cinnamon-topped frappachino stuff — would be a far cry from the $2.49 they just took me for, with refills at full-freight.

Now they purport to give away unrequested quarters by way of karma introduction and get the customer on the back-end, the bloated cost of the actual product.

A mildly insidious business model. Seen much worse.

But should I see at any point soon dollar bills begin to appear in those ubiquitous penny cups I will know for sure that we are in a full-blown Weimar scenario, the intent of the would-be benefactor and price of the cup of coffee notwithstanding.

Ken Drees writes:

This says something to me about the public consciousness of inflation. I mentioned not too long ago the vibe of people talking to me (strangers) at the gas pumps complaining about prices. This seems to be a cohesion type behavior where people use the topic as a bridge to conversation–like a soldiers right to complain about food quality. It's better than talking about the weather.

But as a youth of 12 years as a passenger/helper in a delivery van, the young teenagers/ early 20 year old drivers in the late 70s complained non stop about gas prices and inflation– everyone was talking about it. It was the talk of every bar, every station, and every food stop.

I got the point one day when this guy lit a dollar on fire with his lighter, used the dollar to light his cigarette, and then let the burning buck suck out of the window into the winter wind– he looked at me with a stone cold face and said that the dollar wasn't going to be worth sh*t in the near future. I got the point and started thinking about money.

We are not even close to that point again. 4$ gasoline will start it up.

Easan Katir writes:

Often I carry a pre-64 silver quarter and attempt to purchase something with its melt value, around $5. So far, no takers. When someone finally accepts, I will consider that a tipping point for the fate of the US dollar.

Jan

8

List of NBA arena names/sponsors

NFL stadium sponsors/names here

:

1.. FedExFeild
 2.. Giant Stadium
 3.. Cowboys Stadium
 4.. Arrow Head Stadium
 5.. INVESCO Field at Mile High
 6.. Land Shark Stadium
 7.. Ralph Wilson Stadium
 8.. Bank of America Stadium
 9.. Cleveland Browns Stadium
 10.. Lambeau Stadium
 11.. Louisiana Stadium
 12.. Qualcomm Stadium
 13.. Georgia Stadium
 14.. Reliant Stadium
 15.. M&T Stadium
 16.. Candle Stick Park
 17.. LP Field
 18.. Gillette Stadium
 19.. Lincoln Financial Field
 20.. Jacksonville Municipal Stadium
 21.. Qwest Field
 22.. Edward Jones Dome
 23.. Raymond James Stadium
 24.. Paul Brown Stadium
 25.. Heinz Field
 26.. Ford Feild
 27.. Hubert H. Humphrey Metrodome
 28.. University of Phoenix Stadium
 29.. Oakland-Alamdea Country Stadium
 30.. Lucas oil Stadium
 31.. Soldier Field
 32.. There are only 31 stadiums. The Giants and Jets share Giants Stadium

Jan

2

Noting that the market was heading strongly down prior to the start of the new year in January 2008 and then back to back down hard into January of 2009. Sentiment was shattered, then there was a recovery year long market into January 2010 and a replay of good performance into 2011 January. So the previous 4 years are like pages in a book, a lobagola on a higher time frame perhaps.

So now the market must move into its own future once more– no pattern to reverse:

1450 S&P is the harolded number–why not 1500 —year 2000, 2007 high water marks round? Or is the 2 year party over and the bullishness of back to back years 24 months (only 8 down months) to be reversed? Noting that the last three Jans have been down months, it would seem that if a reverse year is in the offing that a bullish first month of 2011 be served up to get the old saws sharpened.

Party on?!

Dec

31

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

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

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

Kevin DePew writes:

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

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

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

Stefan Jovanovich responds: 

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

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

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

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

Ken Drees comments:

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

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

2011 March/April for this to go down?

Mr. Krisrock shares: 

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

Pitt T. Maner III comments:

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

Dec

31

UPDATE 1/31/2011:

Contestants Summary:

- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.

- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.

- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.

- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.

- The most creatively expressed entry of course has come from Rocky Humbert.

- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.

- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):

- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.

- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)

- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.

- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.

Contracts Summary:

- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.

- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.

- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.

- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.

- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.

- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.

Victor Niederhoffer wrote:

One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.

May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.

My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.

I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.

I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.

What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.

David Hillman writes: 

"I do know that a sagging Market keeps my units from being full."

One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference. 

Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:

 1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).

4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.

5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.

The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.

Market direction picks are wanted:

Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.

The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.

Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.

Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".

All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".

Bill Rafter adds: 

Suggestion for contest:

"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.

"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.

Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.

Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.

I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.

Ralph Vince writes:

A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.

If I were a Roman General I would take that as a sign to sit for next few months and do nothing.

I'm going to sit and do nothing.

Sounds like an interim top in an otherwise bullish, long-term backdrop.

Gordon Haave writes: 

 My three predictions:

Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.

The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.

Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.

The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.

The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.

In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of
0.050.

Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.

Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.

Factor                  Prediction      t       N    R sq
US Treasury yield curve      1.162    2.17      30   0.143
30-year change               1.052   -2.28      52   0.094
Trailing 5-year E/P          1.104    0.92      18   0.050
US unemployment rate         1.153    0.90      30   0.028

Weighted total               1.118
SPY 12/30/10               125.72
Predicted SPY 12/30/11     140.52

Jan-Petter Janssen writes: 

PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.

PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.

PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.

Vince Fulco predicts:

 This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.

Additional points/guesstimates are:

1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.

2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.

3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.

4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.

5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.

6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.

Potential negatives:

1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.

2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.

3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.

4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.

A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).

Mr. Albert enters: 

 Single pick stock ticker is REFR

The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.

Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).

Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.

Dan Grossman writes:

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,

Dan 

Gary Rogan writes:

 1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.

Wildcard: Short Netflix.

Jack Tierney, President of the Old Speculator's Club, writes: 

Equal Amounts in:

TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)

(Wild Card)
BONXF.PK or BTR.V (Long junior gold)

12/30 closing prices (in order):
37.84
15.83
7.20
25.97

.451

Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today

I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.

Warmest,

William

Ken Drees writes:

Yes, they have been going up, but I am going contrary contrary here and going with the trends.

1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.

2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.

3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)

wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.

Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

My forecast for the S&P 500 for the year ending Dec 31, 2011;

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011

VXX Short moc 1-21-2011, buy to cover moc 12/30/2011

UBT Short moo 1-3-2011, buy to cover moc 12/30/2011

Scott Brooks picks: 

 RTP
TSO
SLV
LVS

Evenly between the 4 (25% each)

Sushil Kedia predicts:

 Short:

1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky

Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):

My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.

2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.

Tim Melvin writes:

Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"

Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.

 Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.

Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.

Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.

I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.

I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.

I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.

I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.

PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.

I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.

Other than that I am clueless.

Kim Zussman comments: 

Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).

Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)

short GLD (looks like a bubble and who needs gold anyway)

short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)

Alan Millhone writes:

 Hello everyone,

I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.

For myself I will stick with what I know a little something. No, not Checkers —

Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.

I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.

Happy New Year and good health,

Regards,

Alan

Jay Pasch predicts: 

2010 will close below SP futures 1255.

Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.

99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.

SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.

SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.

The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.

Chris Tucker enters: 

Buy and Hold

POT
MS
CME

Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

Mr. Ed Seykota once outlined for me the four essential rules of trading:

1) The trend is your friend (till it bends when it ends.)

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.

Cheers,

Gibbons

John Floyd writes:

In no particular order with target prices to be reached at some point in 2011:

1) Short the Australian Dollar:current 1.0220, target price .8000

2) Short the Euro: current 1.3375, target price 1.00

3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70

A Mr. Krisrock predicts: 

 1…housing will continue to lag…no matter what can be done…and with it unemployment will remain

2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3

3…with every economist in the world bullish, stocks will underperform…

4…commodities are peaking ….

Laurel Kenner predicts: 

After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.

Short the 30-year bond futures and cover at 80.

Pete Earle writes:

All picks are for 'all year' (open first trading day/close last trading day).

1. Long EUR/USD
2. Short gold (GLD)

Short:
MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)

Long:
PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8

J.T Holley contributes: 

Financials:

The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.

Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.

Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.

Metals:

Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.

Long lithium related or raw if such. Technology demands such going forward.

Energy:

Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.

Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.

Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.

Agriculture:

Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.

Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.

Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.

Sex and Speculation:

Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.

Music:

This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.

Other:

Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.

Long - Counting, you need it now more than ever. It's as important as capitalism.

Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.

Long - Common Sense.

Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.

Short - Politics. It isn't a spectator sport and it has been made to be such.

Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.

Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.

I had to end on a Long note.

Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.

Russ Sears writes:

 For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.

Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.

The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.

Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.

The stability or even elevated food prices will have some big effects on the heartland.

1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.

2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?

3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.

4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year. 

5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…

Yanki Onen writes:

 I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.

Now the ideas;

-This year's lagger next year's winner CSCO

Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.

You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)

-Sell contango Buy backwardation

You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.

Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.

- Leveraged ETFs suckers play!

Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!

If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!

Vic, thanks again for providing a platform to listen and to be heard.

Sincerely,

Yanki Onen

Phil McDonnell writes: 

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.

George Parkanyi entered:

For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open

BUY SILVER at open

BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open

SELL and then SHORT SILVER at open

SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open

COVER and then BUY SILVER at open

COVER and then BUY CORN at open
Hold all positions to the end of the year

WILD CARD
3 JAN BUY PLATINUM and hold to end of year.

RATIONALE:

. Markets to unexpectedly carry through in New Year despite correction fears.

. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2

- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)

. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas

. Also assuming seasonals will perform more or less according to stats

If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.

Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency. 

Marlowe Cassetti enters:

Buy:
FXE - Currency Shares Euro Trust

XLE - Energy Select

BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:

Buy:

VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than
vigilantism)

Dec

29

 We've all seen too many black swans over the past decade. But why must all the black swans be negative? Why can't we have a black swan on the positive side?

This is NOT my prediction– but it's worth contemplating the following from Jan Hatzius (GS). In a nutshell, he alleges that much of the recent economic sluggishness is attributable to deleveraging in the private sector. And he suggests that this is coming to an end.

As a thought experiment, I'm analyzing how Hatzius' outlier prediction of 6% or 7% growth in 2011 might affect my portfolios. I routinely fret about double dips, and triple dips, European crises, and $30 oil/$200 oil, but I haven't spent much time fretting about 7% growth…but I probably should! Is it possible that we'll look back at QE2 with the same funds that we look back at the final Fed rate cut during the summer of 1993? (It's left as an exercise for the reader to see how stocks, bonds, and commodities behaved in 1994.)

And, why is Hatzius' prediction any wackier than Mr. Roubini's repeated predictions in 2005 and 2006 and 2007?

(Oh, and by the way, the US commercial truck fleet age is now the oldest that it's even been!)

From the FT:

Jan Hatzius, chief US economist of Goldman Sachs, is one who has become more positive. "There's been a clear improvement in underlying final demand," he says. "My explanation is that we're seeing a slowdown in the pace of deleveraging in the private sector." Deleveraging is the fundamental reason why the economic recovery since 2009 has been so slow. It explains why unemployment remains stuck at 9.8 per cent.

The call on consumption is contentious because debt levels in the US remain high by historical levels. Household debt, at about 90 per cent of GDP, is back to levels seen in 2005 but it would take years of deleveraging to return to the 80 per cent seen in 2002-03. Consumers do not need to stop saving, however. They just need to stop increasing the rate at which they save for the economy to grow.

If the US populace really does begin to catch up on consumption after three miserable years then growth could hit 6 per cent or even 7 per cent in 2011. The chances of that remain modest – but if it happens then the boost to confidence may feed on itself and the nastiest US downturn in decades might truly start to feel as if it is over…

Mr. Albert writes:

For what it's worth, Prof Roubini just bought a Manhattan condo…

Kim Zussman writes: 

Which begs the question where did the energy of the housing bubble (and related lending/spending) go, and is it now durably irrelevant?

The attached charts Shiller real home price index, which shows the 2006 bubble dwarfing any prior local maxima/minima for the last 120 years. Real home prices are now near where they were in 2004– which is still above all prior levels.

The FED over-rules the law of post-bubble over correction?

Ken Drees comments: 

1. this is a warm and fuzzy outlook (especially after 2 years of up market)
2. this is good to think about because its the white swan
3. if growth were to hit 6% it must do it in three quarters because it will take 1 quarter to pay off fourth quarter frugal fatique binge
4. if growth hit 6% it would ramp up quickly in a 3rd and 4th quarter burst
5. the ben factor about putting on the breaks would be argued down–can't hurt the president's reelection chances with a rate hike
6. Inflation would be running probably higher than 2% (fed measured) and no doubt inflation factors would be influencing growth–tainting real growth
7. Market would surge–second half after it wakes up to the fact of growth without a fed bummer.
8. banks would start to lend more in second half.
9. Real estate would firm some and so forth–growth begets growth.
10. Fed would leave it alone and overheat in 2012 would be a risk.

Jobs and job outlook in the spring 2011 would be key to overcoming recession inertia. I don't know if we are there yet–3 dollar gas with some predicting 5 next year will not help the prospect of saving less. Gas prices need to be 2.50 or less to give this scenario a fighting chance. 5 dollar gas would be an inflation goose (swan).

Bill Rafter writes:

I would agree that Hatzius is certainly correct in that a lot of the economic malaise can be attributed to deleveraging. It is evident in the Fed series TOTBKCR, CIBOARD and TOTALSL, bank credit, commercial and industrial loans and consumer credit respectively. You can also look at the monetary aggregates (going nowhere) and make calculations of the velocity of money (so low as to be underneath the outhouse).
What I cannot justify is the prediction of a turnaround. Admittedly at some point those who wish to deleverage have nothing else to deleverage. But that only manifests itself in a mean reversion of the rate of decline. It does not necessarily manifest itself in increased leveraging activity, presumably a result of economic growth. Thus we believe that those who see a decline in deleveraging as evidence of upcoming economic growth are extrapolating way beyond what is reasonable.

Many of the indicators we follow are extremely bullish, and yet others scare the daylights out of us. This is a time of mixed signals. The speculator must make certain that he goes into his activity without preconceived ideas, for if he perceives things to be bullish he will certainly find indicators which reflect that belief. But here's the rub: it's the same with the bear.

It may simply be too soon for the unequivocal good things to happen or be evident. I believe there is evidence that decision makers do not act on anticipated tax relief, but wait for it to actually take effect. Also, the recent tax legislation was not a drop in costs, but the suspension of an increase, which is not the same. Other than taxes, entrepreneurs tend to find a way to cope and then a way to eke out profit. No one is sitting around just waiting for the deus ex machina. To some that means outsourcing (perhaps overseas) and being maligned for doing so. There have been some private equity deals lately. All of that repositioning is good eventually. Maybe we just need to wait for the fog to clear a bit.

Fred Crossman writes:

Rocky, there could be a black swan event next year, but probably not in GDP growth. The last time we had over 7% growth was in 1984. This past recovery in 2002-2008 only had one year of GDP growth over 3%. That period had very low rates and benefited from tremendous credit expansion with huge housing growth, a construction boom, massive home equity withdrawal, etc. only 2003 had a GDP over 3%. It was 3.8%.

If hatzius believes in 6%- 7% GDP growth for 2011 or 2102, (basically the 2002-2008 recovery replicated next year at over twice that past period's 3% GDP rate growth) in a current environment of high unemployment, negative home equity and facing city and state layoffs, then he would be worthy of more than the black swan award.

Dec

27

 Most books and movies have a indirect way of indicating that their talent and authors are fellow travelers. The common thing is to have the radio or tv on showing some stereotyped situation where the rich are living in mansions while the homeless are on the street, or a Republican President like Regan or Bush or Nixon saying something that looks evil and cold-hearted when taken out of context. A new technique would be "Fox News would have us believe that"…."tenure gives university professors the green light to teach that revolutionary overthrow of the capitalist system is appropriate." What are some of the other techniques? How does financial news color the news to make us do and think the wrong things?

Scott Brooks writes:

It doesn't matter what you say, it can be edited to be anything that the "opposition" (whoever they may be) needs it to be. Witness Alan Grayson's attack on Dan Webster.

In today's MTV short attention span 10 second sound bite world, the media can easily manipulate the 90% of the population that are the "unthinking masses". They lack the critical thinking skills necessary to put 2 and 2 together to get 4. Unfortunately, in today's society, the world is much more complicated than 2 and 2. The media, the government and complicit so called capitalists industry (which they are not) have complicated things so much that we're way past 2 and 2….we're easily at 3 and 3 and with the housing market derivative meltdown we're at 4 and 4.

Asking 90% of the population to put 4 and 4 together is ridiculous…..you may as well ask them to explain how gravity works.

Ken Drees writes:

Looking back at 2010 and market / news coverage related trades I would confess that I missed a big one–being taken in by fear even when intuitively I knew I should have tried to buy that fear.

BP

The coverage was oppressive. Obama was going to keep a boot on the throat, x billion was for "starters". BP would have to sell off divisions, they would be constantly garnished—every market guy on tv said BP this and BP that but always ended the interview with "Of course I would not buy it at this level yet".

I made up my mind to pass it up since I couldn't figure out how the USgov was going to handle it. BP CEO looked out of touch–yacht racing when he should have been in the bunker, then he gets sacked. Someone was buying all that BP stock and Jeff Watson framed the big picture of how much was spilling into how big an area–but the logic of this was weighed with the fact that cap was still leaking and the blowout may need a nuclear option and the shrimpers were committing suicide.

The news was the most bleak and black–and not only network news but blogs and such. In the end I missed a biggie—there is a lesson to be learned here that I still have not completely distilled out in terms of what triggered me not to even "try" a trade. Even when the leak stopped–it seemed like it would not hold!

George Coyle writes:

Having recently read some books on screen writing techniques, it becomes apparent that certain structures are conventions and are generally present (or should be if one wants to sell dreams to studios for production). Also, the biggest grossing films tend to be either love stories or Horatio Alger style rags-to-riches tales of the poor boy turned not so poor. People love these stories because they allow escape into the ideal growth toward fame and fortune (financial or otherwise) and provide hope. We don't see many modern videos selling being green or moral values either…it is all g5 this, bling that, etc. Take Avatar of late, crippled none-too-bright man on earth becomes champion of a new world, gets the girl, becomes the leader, etc. Hollywood is notorious for sticking with what works and the fact is selling love and rags-to-riches tales just trump the alternatives because who wants tragedy in fantasy or to come out of a situation we paid for feeling bad, life provides more than enough of that. It is a story telling norm and is rarely violated in mainstream commercial profit seeking films. So patterns not only exist, they were specifically tailored to what made a profit last time and will again. As pretty much everyone is seeking more wealth and/or love and wouldn't turn down becoming the hero of a new world we all become fellow travelers on these stories. The stories feed our hope of being something greater.

As for popular media, especially the financial variety, they seem to filter their speakers to suit the topic du jour. During the crisis Roubini was a financial God and was quoted by everyone I knew but he doesn't get near as much air time at present with the spx nearly double the crisis lows. Should the market collapse again they will undoubtedly trot out the doomsday seers to explain why the longs got it so wrong. Media giants allow price action to dictate program lineups such that when markets go one way or another out come the biggest advocates of that move to tell us all why. It serves as a reinforcing phenomenon and can foster buying more or widespread panic depending on the environment. But I feel people will generally believe what they hear on tv (especially people who aren't market professionals). It would be interesting to see the p n l of following the recommendations of all of the commentators. Who knows if they are telling us the truth or dumping their positions profitably to the general populace.

Galt Niederhoffer writes in with a comment:

Movies have always been a populist medium and the structure of the plot is best suited for very simple ideas to be proven or disproven with beginning, middle and end. I don't think writers are socialists by nature. I just think that movie plots best lend themselves to tales of good and evil and it's easiest to prove the error of new, mass or radical ways than the opposite.

Gary Rogan writes:

The most important tool at the disposal of the information industry is choosing what not to cover. If it's a politician they like, they will not cover significant concerns about their background, like the lack of basic information about their past. If it's a financial bailout, etc. they will create an illusion that there is a consensus supporting it by concentrating on those with the "right" opinions.

Dec

16

 Thanks to Stephen for recommending the book The Last Full Measure by Jeff Shaara, which is such a rewarding chronicle of the civil war through the eyes of one of the bravest, coolest and toughest regiments in the union army. From their volunteer start from the "western frontier" to their valiant and heroic participation nearly three years later at Gettysburg in the east–the book is woven with soldiers viewpoints via letters, diary accounts, and excellent narration from Moe. Not a book that bogs one down with dates or with the gore and carnage of war– although its difficult to not present it, the story marches through in such a way as to the tell the real story from the soldiers perspective.

Some themes:

–the respect of officers from the men even though the leaders (union) were timid and not bold enough to take the south out early.
–the lost opportunites in terms of leadership of the union during the first two years.
–the hell of marching and the moving around of the troops from place to place, retaking ground lost before, etc.
–the righteousness of the union soldier's mindset of his cause.
–the idiocy of fighting each other, why this bloodshed?
–morale was a real factor in many ways: camp morale, pre and post battle, etc. Not getting paid.
–there seemed to be a very effective postal system for the union.

Some items of note:

Chess, eucher, poker and baseball (this shocked me) were mentioned as games played in camp. After July 2nd, 1863 the day of the big battle including a 2 hour cannon shelling many men lost their hearing for a few days. The bayonet charge usually made the enemy run or break since guns and muskets took time to reload and if you were in a defensive fire position then you had to exit. Information was key and Lee seemed to have more of it from spies and spotters. Skirmishers were troops who held the buffer areas between troop concentrations and usually plinked away at each other in probing type engagements. Men improved their writing skills through letter writing over time. Coffee was big, hard tack was staple. Meat was scarce. Men could sleep at the drop of a hat. The way these troops survived day to day was unreal. Fighting in warm weather much harder then cool. Throwing away a coat (due to weight and burden) that only weeks before you would kill for. Heatstroke. The rebel yell really was the south's war cry and the northern soldiers didn't say it affected then much. The soldiers were never inspired before a battle, like governement employees they just did their job. They were given a speech once and they liked it from a general. The soldiers had a rubber backed blanket that they used in the field to sleep on (what is this item?).

Trading/trickery related? (as best I can here):

Gold was best, some men tricked by currency changers. Inflation of prices for foodstuffs. One soldier spent a lot of money on an apple pie and when the pie was cut into there was nary any apple. Armies usually were followed by sellers of food, liquor, etc. (profiteers–necessary evil to some degree) Whiskey for officers only was watched closely by the enlisted. Whiskey used as medicine. I took a double measure of whisk, and up it came. Never drink on an empty stomach. They came upon an earthworks with heavy cannon, upon closer inspection the cannon were stove pipe. Inside the work were some pitiful secesh (rebels). In order to not to miss high, the men were charged to aim for their feet.

In ending I have not read a civil war book in quite some time and decided to refresh the mind about it. Many emotions are kindled by reading about the war and what the country went through. The first Minn. as a model of coolness, obedience, level-headedness, bravery and tenacity to name just a few qualities is worth one's time to get acquainted with.

Dec

15

Just looking at the muni index funds can be a little misleading. The actual funds are bid down today a lot more than their NAV. Also munis seem to be a lot more affected today on the longer end of the curve (2021+)… though there are debatable interpretations of that.

Everyone seemed to react frantically to the Fed in early afternoon, even though it seemed to me to be exactly what one should expect at this point… "likely to warrant exceptionally low levels for the federal funds rate for an extended period." Did this really catch people by surprise?

Kim Zussman writes:

Here is updated ratio of California muni etf / Treasury etf (fairly well matched in duration, symbols CMF/IEF).

Still above the November low, but since then both munis and treasuries have falled down in price.

 

Ken Drees adds: 

I found this good article on this topic: 

QE 3 ?

Reasons for the Muni Selloff

1. Unwinding of the "sure-thing" Quantitative Easing trade
2. Selloff in bonds in general because of budget and inflation concerns
3. End of the Build America Bond program (BABs)
4. Increasing default risk

Of the above reasons, 3 and 4 are the most important on intermediate and ongoing basis.

BABs was excluded from Obama's compromise tax proposal. Hopefully it stays that way. I discussed why in Time to Kill Build America Bonds (BABs)

The short version is "Taxpayers are already on the hook for hundreds of billions of dollars of Fannie Mae and Freddie Mac debt. We should not extend the insanity to government guarantees of municipal bonds"

However, now that the government guarantee is gone, yields are poised to rise, especially with increased default risk rising.

Here are several examples of rising default risk:

a.. Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011

b.. Miami Commissioner Says Bankruptcy is City's Best Hope; Chris Christie Says New Jersey Careens Towards Becoming Greece

c.. Oakland California Bankrupt - Councilwoman Pat Kernighan Calls Rest of Council "Crazy and Irresponsible"

d.. L.A. Controller Says City Could Run Out of Cash by May 5

e.. Chicago's Mayor Daley Discusses Bankruptcy For City Pensions

All it takes is one brave municipality to lead the way and others will follow. When that happens, the baby will likely be thrown out with then bathwater. There is no reason to like Munis here.

By the way, bankruptcies are a very deflationary event.

Mike "Mish" Shedlock

Dec

5

Amateur Watherman Preditcts January Could Be Coldest Since 1740:

Amateur weatherman Harry Kershaw, 84, from Sale, correctly predicted that last winter would be similar to the 1979 Winter of Discontent. Now he believes the coming January could be as bad as in 1740, when the Thames froze in London and daytime temperatures failed to rise above -9C. He said: "Between August and October the weather seemed to be the same as 1986, which was followed by the coldest January since 1740.

"I believe the last three weeks of January and the first week of February next year could be the coldest we've had for 270 years."

Harry, who began forecasting as a merchant seaman, uses a system developed by the German army during the Second World War known as 'similarity forecasting'.

Seems like market TA backed up with data observation.

Nov

30

Mr. Round Day before end of month harmonizes.

Ken Drees adds:

It gave bears hope and bulls sustenance.

Dow 11000 fence straddle.

Bulls feel better below 11 and bears feel better above.

Basketball play where the team purposely slows the tempo and slowly walks the ball down floor for a planned play comes to mind here.

Steve Ellison comments: 

EUR/USD at 1.3002.

Gary Rogan writes:

It continues today: now S&P at 1200, dow at 11200. NAS can't quite find a really good round number after yesterday's 2500, but still glued to 2550.

Nov

25

 Thanks and Giving: A Working Community Program as Model

Starting a local newspaper is no easy feat. Keeping a local newspaper going these days is even harder. Pressure from competing technology, escalating price of printing, advertising competition and other business challenges haven't slowed down The Spirit of Bainbridge

:

It keeps standing tall and arrives free to everyone's mailbox every three weeks to the local Bainbridge / Auburn, Ohio community in Geauga county. Anne and John Bauswein are the owners of this newspaper that highlights local activities, local groups, organizations, and schools. They cater to the local businesses, the healthcare community, and the non-profit groups that make the close knit community what it is-a network of caring and committed people all trying to improve the hometown and stimulate others to get involved in local affairs and events.

But what this husband and wife newspaper team started 20 years ago is a quieter and more remarkable creation-it's the "Pantry", or better known as Bainbridge Area Food for Friends. John Bauswein told me that after working closely with the community in building a successful newspaper, a person winds up knowing more about the town than most people know. After talking with the police, the fire department, the schools, churches and synagogues, He found out that not everyone is always "fine". One finds out that hard working people sometimes run into hard times. And you find out that the "government programs" aren't always working for everyone. There are gaps where people don't qualify for assistance. And sometimes people are too proud to apply for a welfare program.

Bainbridge Area Food for Friends was created to bridge the gap. To provide a program that connects a person or family in need with the local giving strength of the community. This program ensures that your donations stay in the community and help the people that are essentially your neighbors. A spouse passes away, you get laid off, you get hurt and can't work, a daughter and a baby move back in, medical bills pile up-the list of conditions that can temporarily set a family back are too numerous to list. But these families do need help, even though they might not be classified as impoverished. These are working folks who will do what it takes to keep food on the table. If they fall short, fall on tough times, a helping hand is ready to take the pressure off of the family for a month.

The program will give the family enough groceries to get them through 4 to 6 weeks. This includes canned goods, fresh vegetables, and meat. It takes away one major daily worry and buys time for the family to financially recover from the setback, whatever it may be. There is no government official involved, no red tape or paperwork, and the pantry visit is made discreetly and with a smile from a volunteer.

The pantry started as most great inventions do, out of a need not being met. The institution grew and flourished through old-fashioned hard work, promotion, grass roots organization and inclusion of business and personal donation.

How does the pantry stay stocked? Count the local schools to have multiple food drives. The local businesses offer product discounts for food donations. The fire and police departments sponsor events, and large chain stores give money and products. The worship community always is there and even the local post office has a massive food drive once a year where they collect bags of food hung from the mailboxes on their postal routes.

The Bausweins housed the pantry initially in their basement, then it moved to a local church, then to a larger building in the township, and now Bainbridge Area Food For Friends is under co-sponsored control of the Bainbridge Civic Club-a long standing organization that prides itself on community involvement. What a journey over twenty years! It took a lot of effort to start, but now it's a local institution that has a life of its own based on the individuals who give it a life that keeps giving back to the community. Thanksgiving is a holiday once each year. But local business owners, John and Anne Bauswein, created a giving gift that channels the good of the community to the thankful every day.

Be inspired to create your own local food pantry. This is the type of organization that our founding fathers believed in, no government role–community supported. Harness the generosity that is there in your owb back yard and create a program that uses local donations to help your own neighbors that need it the most. Charity begins at home and this type of gift can help keep a community strong, especially in these tough economic times. Happy Thanksgiving all year round!

*** Official Information Below from Bainbridge Area Food For Friends

Bainbridge Area Food For Friends continues its tradition of serving those in need, and is anticipating an increase in families needing assistance during the fall holiday season.

We remind local organizations, school groups and churches that the local pantry receives no government funding, and relies solely on the generosity of local people and organizations.

Currently, the most needed items at the pantry include: toiletries, toothpaste, canned pumpkin, peaches, pears, Manwich and jelly. Monetary donations may be made to the Bainbridge Area Food for Friends account at PNC (formerly National City Bank) on E. Washington Street in Bainbridge. Non-perishable items may be dropped off at the pantry (lower level of Bainbridge Town Hall) or in the lobby bin at Bainbridge Library.

If you or someone you know needs the confidential assistance please call 543-6181, 543-7901 or 708-9829 (leave a message).

Anne and John Bauswein founded Bainbridge Area Food For Friends in 1990. Now co-sponsored by Bainbridge Civic Club and Spirit of Bainbridge, it is a local entity supported totally by local donations and fundraising events.

The pantry is open every morning, call for an appointment. Emergency food is provided to those in need during a temporary hardship in Bainbridge Township, Auburn Township, and South Russell Village. Eligibility is determined per case and not for those eligible for government or other assistance.

Nov

22

 My wife makes a suggestion. How about a list of the 100 most hated companies. Dilbert's Scott Adams points out that he hates Wells Fargo, because they bought all the companies that went bankrupt for him, including Worldcom and Enron, but their stock went up. And he hates Apple so he bought that one too. Taking a look at the companies that the sage owns, one would hate them, and even the average person must know what a sanctimonious self serving poseur he is. Perhaps they would be good ones to buy also. But how would you come up with the other 98% ?

Steve Ellison comments:

I would actually nominate Apple as one of the most loved companies, with many users having a near-religious devotion to Apple products. However, I have many politically liberal relatives and Facebook friends who regularly express outrage at "corporations" (said with a tone of disgust), especially the following:

1. Wal-Mart drives competitors out of business and allegedly underpays and denies health benefits to its employees
2. The entire "Big Oil" sector raises gasoline prices whenever it can and pollutes the environment; Exxon Mobil is the biggest company, but BP is now more hated.
3. Halliburton got no-bid contracts to profit from the war in Iraq
4. Monsanto develops genetically modified crops, never mind that humans have been genetically modifying plants and animals for over 10,000 years using lower-tech methods
5. Microsoft is a monopoly
6. The tobacco sector allegedly tried to suppress evidence that smoking is harmful to health
7. News Corp. owns Fox News and the Wall Street Journal
8. The utility sector raised rates and built nuclear power plants or CO2-emitting coal-fired plants
9. McDonald's serves unhealthy food that can lead to obesity; some interpret the sight of a McDonald's restaurant outside North America as a tragic destruction of local culture.

Jeff Watson writes:

Somehow, I suspect the most reviled companies are probably the best run, most profitable companies in their sectors. The general public always despise a winner that does it on their own terms, a la Readon. 

Ken Drees suggests:

Halliburton and BP are hated as enviro haters.

Nov

17

What a market backdrop for GM. Can the weather be any worse for this ship?

Nov

13

 Do you all have any suggestions for childrens money books? Any ideas for a ten year old? I read The Richest Man in Babylon when I was 22– if that gives you any idea on the lack of money/market books in my young life.

Alan Millhone writes:

The money books I had when ten were by Whitnam, and there were slots for collecting dates of Lincoln pennies and buffalo nickels and mercury dimes etc.

Dylan Distasio responds: 

Hi Alan,

Thanks for bringing back some wonderful childhood memories for me. My father passed on coin collecting as a hobby to my brothers and myself when we were children. I haven't been very active with it as an adult, but I used to love sorting through change bags from the bank in search of silver coinage or old pennies to fill my Whitman coin folders. I grew up in the 80s when you still had a chance to come across some silver ones (granted they were not in very good condition). I also have some old Morgan heads and other assorted issues. One of my favorite coins as a child was the "steel" penny from 1943.

More recently, I've collected proof sets of the state quarters series, although not for hopes of financial gains, I just love the look of a proof struck coin and find the state quarters interesting.

Nov

10

 This morning's lesson with my son involved a mate on the move problem with double check being the application.

The power of ++ is that it removes two of three methods of check deflection from the king's choices– interpose and capture and forces the king to move. Aron Nimzowitsch wrote that, "Even the laziest king flees wildly in the face of a double check." And I kept the lesson up as we waited for the bus adding on that the ++ always involves a discovered check (a surprise) and that it even gives the checking player a "tempo" in that the opponent is forced to flee and not make a truly organic move and now this lesson has percolated into thinking about markets.

Now in silver was the raise of requirements of margin the discovered check, and the piece that moved out to create that discovery was the price of silver itself? This example maybe doesn't work so well as a double check, but simply a discovered check. Or a certain stock was moving very aggressively higher and then a surprise downgrade premarket occurred. Was the potential downgrade that was aiming all along at the stock price hidden and then revealed at a critical time
For a double check scenario–maybe hike of margin requirements and a new contract amount limit rule being imposed at the same time would be more appropriate. Causing extreme contract liquidation (a move by the king only).

Double check in markets is interesting and in my opinion is associated with a negative ( a check) to the rising item. A surprise inclusion of a stock into an index combined with a stock split may be an upside example of double check. One more facet of double check is that the piece you move or even the piece giving the discovered check can be left enprise or at risk for the move, giving the ability to extend the piece's power and range –a springboard of sorts. A suspension of consequence for a short time.

Nov

9

No sooner said that increase in inflation expectations might change the schedule of flexionic payments, then bonds go to a 3 month low. The vigilantes finally do their thing.

Vince Fulco writes: 

Especially on a day when the former Harvard head said the Fed "needs to do much more".

Ken Drees comments:

Back to back red days per dailyspec calendar– recently rare.

Nov

9

1. –qe2 now bad, good, needed, loathed, ok, in a box, maybe not have to do it after all if inflation shows up. qe3 qnd qe4?
2. –china raising rates again, no like qe2, no like Japan, rare earth tough luck, don't tell us about our currency float.

3. –commodities going up and up and up–and oil is lagging, silver was rigged all along (who knew), copper hot, cocoa yummy, and yellow cake.
4. –gold keeps on keeping on and all that broken jewelry already melted for cash.
5. –Bam on the run (is he coming back?) —tax hikes coming, health care costs a coming, no cola to wash down high prices. Bam parties on!
6. –nat gas flickering–Rocky's indicator?
7. –jobs, no jobs, unemployment stuck, 99 weeks over with repubs in, states unhappy, state govs cutting jobs, local gov cutting jobs.
8. –iran, israel—where did that go? Oil back almost to 90.
9. –europe rebails coming? — bailouts ok here but usa qe2 is bad example.
10.–dollar breathing heavy. dollar this - dollar that, everyone (brazil too) talking about dollar. the dollar is linked into every trade on the face of the planet (cnbc).
11.–inflation is low under 2% and Ben wants above 2% shadow stats says inflation already 6% can we handle a fed 2%+ number?
12.–qe2 is a blunt tool and that causes bubbles in other asset classes–stone knives and bearskins—how can we work with these tools?
13.–housing is wrecked. rico coming, can't foreclose, can't sell, can't redo mbs now, fannie needs more money.
14.–"Structural" used as modifier for (unemployment, pipeline inflation, housing problems, lack of gdp growth, dollar woes)
15.–Bonds—do they matter, like deficits? Poor ranting Santelli– get over it Rick.
16.–Stocks are being targeted by the fed for pumping. We all know that this means we are good to go. SPY up 9 out of last 10 weeks.
17.–GM — gotta float the big gov boat. Its simply a question of perfect pricing.
18.–Holidays are coming, year end coming but no one is selling. The market buried the hindenburg indicator!
19.–G20—so what.
20.–Hillary, what is she doing? What about Bam's cabinet —more change coming?
21.–3-5 banks closed every weekend–so what, who cares, old news.
22.–lot of cash still on the sidelines. where is it going—everywhere!
23.–holding cash is stupid says Cramer–a bonehead move.
24.–its a GLOBAL thing now –we are all in this thing, a simmering market stew.
25.–Lets look towards 1st quarter earnings–there is nothing else to think about.

Nov

8

There's an interesting chart illustrating Livermore's point that when a market goes above a round number (1000) it is bullish. Gold approaching 1400, - round numbers at 1200 were temp turning point but runs through other 100s show no tendency to reversal. A whole study has to be done with as is data on individual stocks.

Alan Millhone writes:

All I know is reg gasoline over three now and killing the average citizen. Gold will push two the way things are faltering.

Ken Drees writes:

I am not hearing the gas price complaint yet as it seems that many are very conditioned in the high 2's and even the low 3's may seem not worth complaining about.

I think a round "4" handle on the gas price will start up the wailing and gnashing of teeth this time around.

Sam Marx prophesies: 

$4 gasoline will occur at or before the 2012 election.

Nov

4

 Stock market highest since day of the flexions.

Ken Drees writes:

Coupled with a tone of "don't fight it", "go with it" and "long term hate it but short term love it", and you have a very potent potion.

Victor Niederhoffer adds:

Very good for owners of Fed in that all bonds they have would be bought. 

Rocky Humbert writes:

One notes that the Fed's rhetoric turned bearish (and they hiked the discount rate and some thought the fed cycle had turned) when the bank stocks were at their cycle highs back in March/April. one wonders whether the tell will again be the bank stocks (XLF)? Shouldn't the Fed's P&L look similar to the generic banks' p&L? Or has the banking system been zombified by Dodd-Frank, and the only profitable lender left standing will be the Fed? 

Nov

1

 Market Tricks and Treats:

Thackray's 2011 Investor's Guide refers to the effect as "Super Seven Days": The last four days of the month and the first three days of the following month typically yield higher returns than other periods during the month. Reasons for strength are month end "window dressing" by institutional investors and new monthly fund inflows into pensions and mutual funds that subsequently are invested into equity markets.

The month-end trade phenomenon is notable around Halloween. Gains are not related to sales of candy and spooky costumes.

Kim Zussman responds:

Checked this with SPY (2000-2010) by comparing returns of super seven days to the seven days just before (paired t-test):

Paired T for super - presuper

                 N       Mean     StDev   SE Mean
super         129   0.006008  0.031161  0.002744  T=2.43
presuper    129  -0.003947  0.030088  0.002649
Difference  129   0.009955  0.046565  0.004100 

Definitely worked in the whole period. However dividing data into 2005-10 and 2000-05 shows the effect was mainly from the older period and recently faded out:

Paired T for 2005-2010 - 2005-2010pre

 N       Mean     StDev   SE Mean
2005-2010       63   0.006552  0.034890  0.004396  T=1.4
2005-2010pre  63  -0.002733  0.032691  0.004119
Difference       63   0.009285  0.051677  0.006511

Paired T for 2000-2005 - 2000-2005pre

                    N       Mean     StDev   SE Mean
2000-2005      66   0.005489  0.027395  0.003372  T=2.1
2000-2005pre  66  -0.005104  0.027578  0.003395
Difference       66   0.010594  0.041495  0.005108

Oct

29

How would the speed up stuff (see below) work in trading?

Trading while standing up?

Trading with a gun rather than a mouse?

Taking a fast 4 ticks?  (guaranteed to lose money unless you have the infrastructure of a flexion)

Trading 3 markets in succession??? 

Larry Williams adds:

Going from yesteryear's 200 day moving average to a shorter one? Trading instant spreads? 

Jim Sogi writes:

It's a whole new skill set, both different motor and mental with a learning curve. Years of practice with certain tools cannot be discounted. Like switching from squash to tennis to ping pong. Or longboard to shortboard. 

Ralph Vince writes:

Great questions. Based on my own, limited, life experience, I would add that there is an element of a certain mental "groove," to all of this, necessary to success, not altogether very different than that of an athlete on the top of his game (we have discussed this at length in this forum– some great discussions on it I think) or when you are thinking a problem through– a very difficult, elusive one, threatening to drip off the edge of your consciousness…….and I'm not so sure that is even timeframe-specific, so long as you find your groove.

When I put on a trade, I KNOW I'm going to make money on it, I'm not worried about it one jot. You get into certain habits, which are a function of your cadence, and "settling in' to that, whereas I think it IS timeframe-specific, seems to be timeframe specific to the individual and how he trades.

I very much believe that the kind of "hurry up" trading you are describing here may fit certain individuals and may sabotage others. Even if on a purely mechanical basis. What comes to mind for me on this is trying to play simple, basic strategy blackjack at a table with a fast cadence– I can't handle it, and am certain to fumble it.

Ken Dreees writes:

It would be interesting to create a dynamic trading skills test in which you had mutliple positions open in multiple markets and were then given simulated info in a real time sense that caused market disruptions. You would be graded under criteria such as:

1. exiting safety

2. capital protection
3. Finding and exploiting panic etc.

Like a trading version of star fleet's test.

Jeff Watson adds:

Here's an interesting site with info on CBOT full seat prices from 1898-2004. There's a handy little excel download in the site with the high/low of CBOT seat prices on a yearly basis. 1942 was the year to go long the CBOT. 

Russ Sears comments:

My opinion is that building up the endurance to concentrate for long periods of time is not like riding a bike. If you've been away from it a while train yourself back into it.

Taking scheduled stress relief breaks should be required to be on your best defensively, especially in volatile markets. 

Oct

29

 A few months ago, I observed that there was a bull market in bearishness underway. In addition to the AAII bearish consensus that rivaled the 2008/2009 lows, there was a consensus that the Fed had run out of bullets, that Europe was kaput, that HFT bots had taken over the casino; that a January hike in tax rates would smother any recovery; that equities yielding more than comparable bonds didn't matter; that decent earnings didn't matter either because they were due to efficiency rather than revenues; that Congress and the White House would continue to pursue a stock-unfriendly agenda; and (of course) Google Hits on Nouriel Roubini spiked to a cycle high.

Today, we face a mirror image– just as we approach next week's trifecta: Fed, election, jobs.

The AAII bearish consensus at 21% has made a three year low; the Fed will launch its well-telegraphed latest policy adventure; Germany is growing, France and the UK are biting the bullet; there have been no more HFT dramas; the January tax hike is anything but certain; equities have had a meaningful rally — while bonds have been rather soggy; the Democrats in Congress are not asking "if" but rather "how bad" they get spanked; and Mr. Roubini's google hit count has fallen below the radar. The only bearish story that I can find right now is the banks continuing ability to shoot themselves in the foot…

I make no attempt to "call" the market on a day-to-day basis, and I'm neither particularly bullish or bearish — and have no clue whether the next 5% is up or down. But as someone who likes to always have dry powder on hand (for both fading the nattering nobs of negativity and avoiding chafing after warm showers), the previous paragraph demands that I put a few canes away in the attic before next week's trifecta. In addition to my concern about equities, I'm especially concerned about industrial metals.

No matter how many years that I do this, I always buy early and sell early. But this allows me to go to bed early and get a good night's sleep.

Ken Drees  writes:

There seems to be a general consensus feeling that the market will sell off after the election/qe2 news– the market has bought the rumor and will sell off like textbook trading 101. In keeping with a contrary eyebrow raised, a market surging up next week may well rip any bearishness out by the roots– and send the bearish consensus plunging even more.

A better and more diabolical market may well drop 300 dow points after the fed news and then turn around and rip higher to end the day up 200. Now that would be ursa major horriblis.

market is flat calm today for the most part–vol is coming.

Oct

26

SPY since last week in Aug low:

Friday    Monday

Up            dn (aug)
Up            dn (mon was holiday- tuesday sept 7th treated as first trading day after friday)

Up            Up

Dn            Up
Up            dn
Up            dn (10/1 - 10/4)
Up            Up
Up            Up
Up            Up (10/22 - 10/25)
 

Fridays have been all up since low (one time only down) and since the QE has been backed up by no fed against QE, its been Fridays and Mondays up giving the market a feel of power. Best monthly September in years and now a full blown pretty darn good October.

This should be a Happy Halloween indeed for all– except Nat gas people, of course. 

Kim Zussman writes:

Another phun phact: Since 1950, if you bought the SP500 index at the
close of any calendar week, you could have bought it for less at the
close of at least one of the following 50 weeks 83% of the time.

(2601 of 3123 weeks were followed by 50 week periods with at least one week which closed lower)

Also encouraging for skeptics who miss asinine rallies.

Rallies are usually characterized by a higher % of up days (rather than just larger gains per up day), so you would expect more up-runs regardless day-of-week.
 

Oct

24

 My ten year old (just turned) just finished six weeks of beginning fencing (15 hours or so total of lessons). I am told he is aggressive and unrelenting, unafraid to be hit. I was waiting to pick him up the second to last lesson and the lesson ran a full 30 minutes longer since the teacher had brought about twenty different weapons (repros mainly) and they were passed from student to student with a short description of the time period, what region of the world, etc. The most interesting item was a "sword breaker" a short sword type weapon with strong hilt and hand guard, one edge being sharp and the other edge having grooves or channels cut into it every 1/4 inch. The idea was that you could use this and catch your oponants blade in the channel or notch and quickly snap your wrist and thus break your opponents blade.

Coincidentally at this age, my son is also newly interested in chess– I tried teaching him years ago and even bought him a small computer from the USCF. All of a sudden he is into chess and he plays on the bus and has a chess friend at fencing– they played during the break at class. The teacher was also into chess and was supportive. My son was watching the 80s movie "war games" — shall we play a game of chess??? And all of a sudden he dug out the chess computer and he is into it!

Learnings:

–just because you introduce something and the interest isn't there at first, let things proceed naturally. (chess)

–back up your fencing class with books on fencing (I had my old college book and passed it to my son). I also told his teacher in front of him that he was reading a fencing book which got the teacher excited and my son "committed" to a degree. Tell the instructor about you child's level of interest.

–From insisting on him reading the fencing book he was more ahead of the other students and relating to the teacher more than the rest.

–reinforce how brain work and body work compliment each other.

–reinforce how fencing exercises and footwork should translate into basketball balance and footwork this winter for league play.

–reinforce the idea of being educated in many different ways. fencing and chess have style rules/customs etc.

–Play up the good vibes with mentioning how good it is that he has been introduced to an olympic sport and to a royal game.

And of course never ask your son how he liked "sword-play". "Dad, a fencer would never call his foil a "sword"–get with it".

Oct

22

I was told that if a stock or security dropped below 5 dollars then that would trigger selling from margin account holders. The holders supposedly cannot hold low priced stocks in a margin account and would be forced to liquidate. That forced selling would keep the stock under pressure once it crossed 5. Is that phenomena still a force in today's market? Seeing UNG at 5 and change brings pause under this scenario if true. Or is this a dino?

Oct

21

 One wonders if by considering the distances and weight of one market from another one would create a gravitational attraction possibly related to square of distance. Would this be even better way to explain recent market moves than twitter? So many markets are up that they pull stocks with it. Every day the crude and the gold and the grains and the metals exert their gravitational attraction on stocks and it's hard for stocks to go down when gravity of everything else is pulling them up?

Ken Drees comments:

Attraction theory may also pull monies from undervalued sectors-like nat gas for example– keeping these sectors starving for investment.

Anatoly Veltman writes:

My take is the former recent relationship has been more a product of U.S. dollar's daily devaluation. Thus the commodity part of it was only a further derivative.

Phil McDonnell writes:

Imagine we are on an island with only two things to trade stocks and gold. Naturally we use sea shells for money. At any given time there is only so much money M. So the total price of stock and gold is proportional to that. In fact we can visualize the possible prices as a circle with radius M and the X and Y axis are the prices of gold and stock respectively. The locus of possible points they can lie on is given by:

M^2 = G^2 + s^2

where I have changed the x and y to g for gold and s for stock.

Since M^2 is a constant at any given time we can just call it c and then we have.

s^2 = c - g^2

showing the relationship. This is all very pretty theory but does it stand up empirically?

The coincident correlation base on daily percent changes between gld and spy for the last 105 days was about 1%, so not much linear going on. but when we look at the relationship between spy^2 and gld^2 we get a 42% correlation consistent with the formula above. When we rewrite the formula for m and not m^2 we get:

m = ( g^2 + s^2 ) ^ .5

which is just the distance formula from high school.

Thought question: What happens when the Fed adds Q to M during QE 2?

Sushil Kedia writes:

The House Money effect works the same way. There is more valuable collateral, there is a larger amount of mental wealth, there is a larger appetite for risk. Akin to the rabbit coming out of an empty hat, money grows in the minds of the market players, when things are moving up.

As one large down move comes in a widely betted asset it gravitationally sucks away the value of the collateral utilized for playing other assets. Like the invisible forces of gravity the various contracts naturally move by in varying proportions broadly in similar directions, mostly together.

I would be inclined to recognize the effect of the varying amount of bets inside different pits and the varying spread of those bets across hands of differing strengths. With that in place any static relationships in assets or contracts is less than likely to be existent for any periods of prediction worthy time horizons. The ever changing cycles are likely originating from this varying nature of the spread of the bets. The vector sum total of all current and past and future bets may indeed by hypothesized as zero. Yet the similar sum at the present moment is not zero. Every changing tick hurts or rewards different sets of people simultaneously.

So, without so much as trying to invoke my limited numeracy skills before the mighty minds, I lay a case, that the pursuit of discovering constant relationships in the markets is the innate desire of men to find a constant while knowing fully well that the meal for a lifetime indeed is the knowledge of ever changing cycles.

Ralph Vince comments:

I lay a case, that the pursuit of discovering constant relationships in the markets is the innate desire of men to find a constant while knowing fully well that the meal for a lifetime indeed is the knowledge of ever changing cycles.

What could be more true than that statement?

We build models of the market– some, with ever-increasing complexity.

Take the stochastic differential equation for price changes in continuous time, where the second term is the Weiner process:

S0 = u S1 dt + dX

Involved math for many of us– but, as a model for how prices change, …it too is pathetically lacking. Our models are not reality, just little peepholes on it's behavior at times.

Sushil Kedia replies:

To add, one early school beginner's physics question:

If gravity works the same way on a feather as well as on a stone, then why does the stone drop sooner to the ground?

Well, the air that provides so much of rest to the feather that it takes longer to come down.

Likewise, the "air" inside the markets that is the varying size of bets of any individual participant as well as the varying size of the total bets present in a market bring by the gravitational pulls to still carry wide and varying variances.
 

Oct

21

 Here is an interesting article about how twitter predicts the stock market.

Rocky Humbert writes:

One conclusion is that anyone with an off-sides short position should post thousands of tweets that read "Life sucks" to get the HFT AI-algo-sniffers to sell based on this nit-twit research. This will work until the algo-bots start generating their own "Life is great" tweets to camouflage their positions too.

All of this is way noise is why I stick to my low-frequency Westminster Kennel Club Stock Market Indicator– which is maintaining it's PERFECT track record since 1911. See this old post.

Oct

21

Counterfeit Money and the Yankee Scoundrel

Economic and monetary historians have largely ignored the role of counterfeit money in the Confederate inflation because data are not available on the amount of bogus notes. Nevertheless, contemporaries and scholars of the Civil War have noted that counterfeit money posed a serious problem for the Confederacy (Hughes, 1992). More money chasing the same number of goods created inflation, reducing the central government's take from the inflation tax. The Confederacy was unable to curtail counterfeiting because they lacked the resources and equipment to produce high quality money. Counterfeiting was such a widespread problem that people sometimes joked that fake money was of higher quality than government issued currency.

Weidenmier (1999b) studied the effects of counterfeit money on the Confederate price level by examining the history of the war's most famous counterfeiter, Sam Upham. The Philadelphia lithographer, printed nearly 15 million dollars of bogus Confederate notes during the war. Upham claims that he originally printed bogus "rebel" notes as souvenirs. Although this may have been initially true, Upham certainly became aware of the fact that smugglers were using his notes to buy cotton in the South. The businessman expanded his business to include mail orders and placed advertisements for his bogus notes in leading Northern cities, including Louisville and St, Louis. Upham's venture was so successful that the Confederate Treasury Secretary Memminger made the following comments about the "Yankee scoundrel" in June 1862: 

"Organized plans seem to be in operation for introducing counterfeiting among us by means of prisoners and traitors, and printed advertisements have been found stating that the counterfeit notes, in any quantity, will be forwarded by mail from Chestnut Street

[Sam Upham's address], in Philadelphia to the order of any purchaser." (Secretary of the Treasury Memminger to Confederate Speaker of the House of Representatives, Thomas Bocock, quoted in Todd, 1954, p. 101).

President Jefferson Davis and the Confederate government placed a $10,000 bounty on Upham. The bogus money maker was never caught and some have suggested that the U.S. government protected the businessman with secret service agents.

Weidenmier (1999b) attempted to quantify Upham's effect on the Confederate price level by making different assumptions about the proportion of Upham's notes that ended up in the South. Weidenmier estimates that Upham printed between 1.0-2.5 percent of the Confederate money supply between June 1862 and August 1863. Upham stopped printing bogus notes once Confederate money had depreciated so much that it was no longer accepted as a medium of exchange in cotton smuggling. Given that the Philadelphia businessman was one of many counterfeiters, it is probably safe to assume that bogus money makers had a large impact on the Confederate price level. The actions of bogus money makers fueled the Confederate inflation via a large increase in the money stock.

from "Money and Finance in the Confederate States of America" by Marc Weidenmeir

Pitt T. Maner III comments:

One of my ancestors kept a roll of Confederate notes in a house safe just in case outcomes changed. Evidently he also stored cotton in England during the Civil War and sold it for considerable profit post-Appomattox. With the cash from the cotton he engaged in several successful real estate ventures. Subsequent generations spent the money very quickly, squabbled over land ownerships and inheritances, and left little– other than memories of grander times.

Some of the notes have considerable collectible value today. Perhaps this also is true for the original Confederate counterfeit money.

It also is interesting to note, and Stefan can confirm this, but there were areas in the South, that were fairly pro-Union, such as northern Alabama, that did not have as large a financial interest in maintaining the cotton trade and probably resented having to fight in the Civil War.

Stefan Jovanovich writes:

After watching the Giants and Phillies play last night, I am in anything but an ornery mood; but I have to say that this article is an example of why Shakespeare was wrong - the econometric historians deserve to go before the lawyers. In the initial flurry of lunacy after Fort Sumter and First Manassas the Confederacy collected all the Southern banks' specie in exchange for bonds, which promised to pay interest and be redeemed in gold; but within months people realized that they were living in the equivalent of Zimbabwe. There are lots of "prints" of transactions during the history of the Confederacy from which to draw econometric conclusions like those by Professor Weidenmier, but the data is, as the guys from the Car Show would say, "BO-O-O-GUS". Transactions for supplies for the state militias (remember: other than the fewer than 20,000 soldiers and officers from the Regular Army, everyone who fought in the Civil War/WBTS served as a member of a State military unit; no one was a member of "the Confederate Army") were denominated in Confederate dollars but they were effectively requisitions, not purchases. Upham's "counterfeiting" (sic) was openly advertised precisely because no one - North or South - took the Confederate dollar certificates to be anything but curios. The reason Grant ordered all the Jews expelled from the Army of Tennessee's jurisdiction is that the cotton brokers loyal to the Confederacy were trying to exchange cotton in exchange for Union greenbacks which would, in turn, be used to buy gunpowder and other military supplies. (But why "Jews"? Because cotton brokerage in the ante bellum South was an exclusively Jewish trade; so, for that matter, was finance itself. No one in the Confederacy thought it anything but natural that Judah Benjamin should be the Secretary of War and then Secretary of the Treasury.) There was no Confederate inflation in any real sense because the currency never took hold in the first place. Professor Weidenmier's elaborate calculations are very much like the conclusions reached by Fogel and Engerman on the economics of slavery; the numbers make sense by themselves but the premise is complete folly. People took Confederate money in the same way that Soviet citizens accepted rubles; whenever they had a choice, they said no.

P.S. Since even Professor Weidenmier's later scholarship confirms this we may have to relent slightly and give the econometricians and the attorneys equal billing. 

Oct

20

 Some advertised black swans that are market killers:

–commercial real estate next shoe to drop
–dollar going to zoo

–Hindenburg indicator–Prechter's warning
–foreclosure mess
–healthcare going to kill us all
–astrological death formation –grand cross
–banks still closing
–hft / flash crash 2 is due
–bonds are topping for the final curtain

The "QE" moon rises into a dark and scary night near the foggy pond and the swans paddle into the shadows, melting into reeds and rushes.

Just in case –get your canes ready for a walk down to the church.

J.T Holley writes:

 My still in progress theory is the use of alliteration in Wall Street propaganda. I'm still collecting samples and building the database. 

Oct

19

 Referred to me by the folks at the Museum of Mathematics, there is a great article in NY Times that refers to M. F. M. Osborne's 1962 paper: "Periodic Structure in the Brownian Motion of Stock Prices"

Excerpt from the op-ed article "Magic Numbers" by Daniel Gilbert:

Magic “time numbers” cost a lot, but magic “10 numbers” may cost even more. In 1962, a physicist named M. F. M. Osborne noticed that stock prices tended to cluster around numbers ending in zero and five. Why? Well, on the one hand, most people have five fingers, and on the other hand, most people have five more. It isn’t hard to understand why an animal with 10 fingers would use a base-10 counting system. But according to economic theory, a stock’s price is supposed to be determined by the efficient workings of the free market and not by the phalanges of the people trading it.

And yet, research shows that fingers affect finances. For example, a stock that closed the previous day at $10.01 will perform about as well as a stock that closed at $10.03, but it will significantly outperform a stock that closed at $9.99. If stocks close two pennies apart, then why does it matter which pennies they are? Because for animals that go from thumb to pinkie in four easy steps, 10 is a magic number, and we just can’t help but use it as a magic marker — as a reference point that $10.01 exceeds and $9.99 does not. Retailers have known this for centuries, which is why so many prices end in nine and so few in one.

Gary Rogan adds:

I found this article that says a different numerical bias affects the entire universe under various guises.

Ken Drees asks:

Would it be fair to say that "deliberateness", a concept of action, is required for Benford's law to engage in natural environment. A quake, a wind, a measurable force?

Gary Rogan replies:

I don't think so. I was trying to explain to myself how something so basic yet so powerful can exist and this is the explanation I just came up with (and it's fully consistent with randomness of certain processes).

Imagine yourself shooting projectiles at an infinite log base 10 labeled axis. What are the chance that any number you hit starts with 1 if everything is completely random? My geuss was it's log base 10 of 2, and voila: I just calculated it and it's equal to .301, or the percentage they cite (30.1%). This law must characterize any truly random phenomena where the measurements are distributed over many orders of magnitude. When you don't see this law, this must indicate absence of randomness or a close concentration around some mean.

Jeremy Smith comments:

In the binary number system, all numbers save zero begin with a 1. 

Gary Rogan writes: 

The probability of the number starting with a 1 is log of 2 base whatever type number system you have other than of course for the binary system. It's just the ratio of the distance between 1 and 2 on the log axis divided by the distance between 1 and the number equal to the base of the system. There may be even a way to express it so that it works for the binary system since log of 2 base 2 is 0, but not right now.
 

Victor Niederhoffer comments:

Osborne was reporting on a phenomenon he and I studied in a number of papers see "N and O Jasa 1966" for references, and his work was not a Benford thing. it was a specialist thing with all the limit orders concentrated there. It's related to Livermore's breakthrough "the round number" and much else. By the way I consider Osborne the greatest researcher in this field to have ever graced the behavioral finance and efficient markets field. His creativity was unbounded.

Oct

18

This article on "Why the U.S. Has Launched a New Financial World War– and How the Rest of the World Will Fight Back " was a depressing item to read. But one thing is for sure–more and more articles like this are blossoming like desert flowers across the financial reading landscape.

So is the US fostering a "weak dollar" policy—Fisher Fed Head didn't say so specifically this am on CNBC, but the more often spoken phrase of late, "inflation too low", speaks volumes –short term at least.

Maybe inflation expression through prices is now unhideable and thereby "getting in front of the issue" makes them more in control in that they "own" the issue and create the illusion that higher inflation is indeed good and all according to the plan.

Oct

13

A while ago there was some discussion on the list on the Hemline index. It's of course also mentioned in EdSpec.

New research from my university finds:

Urban legend has it that the hemline is correlated with the economy. In times of decline, the hemline moves towards the floor (decreases), and when the economy is booming, skirts get shorter and the hemline increases. We collected monthly data on the hemline, for 1921-2009, and evaluate these against the NBER chronology of the economic cycle. The main finding is that the urban legend holds true but with a time lag of about three years. Hence, the current economic crisis predicts ankle length skirts around 2011 and 2012.

Thus, it is found that the economy may predict the hemline, but not the other way around, making it difficult to benefit from this finding, unless maybe one is active in the fashion industry.

Ken Drees writes:

If the recession double dips then we should expect long garments that trail onto the ground after 2012–or at best years of long floor length fashions –maybe fashions that tuck into boots?

And since this is a "recovery" maybe we get a long ankle length fashion in 2011 that has a slit or cutout along the leg line near the ankle–indicating the breather in the economy.

Oct

11

 With S&P, Crude, Naz, Dow, Euro, Bund, gold, Yen, Dax, Estox, Silver, corn, wheat, soybeans, oats, and hundreds of individual stocks at 1 month highs, it is interesting to reflect how long a bull move can last and how far it can go, when fueled by all the wealth that other bulls have and helped along by expansionary policies by the central banks.

Ken Drees comments: 

Since QE is the direct stock and bond market impetus at the moment through indirect likely promises of a recent fed statement and made very pseudo real by the never interviewed but very smart and successful David Tepper on CNBC who basically spelled it out for everyone that the markets are indeed going higher, I say that this rally lasts at least into election day and into the fed meeting where rumor/fact becomes real. All other momo markets are induced as well to grow since the QE feeds them too as collateral liquidity buckets.

As long as I read and hear topaganda I lean bullish.

Gary Rogan writes:

Wow, that was an interesting thought. On Friday I bought something for the first time in 1.5 years, and the first thing ever that wasn't a stock, and that was UNG. I just figured the risks over the next year which is the shortest period of time I intend to hold it are not that high. And for somebody who only buys at 52 week lows the chart looked like the most beautiful thing in the world.

Jeff Sasmor comments: 

Just be aware of how UNG has to roll the underlying position once a month. I happen to be in this one too– but it can grind lower and lower on you. And once a month it's gamed when it rolls to the next month. The effect has been discussed to death in many venues. So it's tricky to hold it for a long time if it stays in a range.

Craig Mee adds:

Certainly might drive the speculators out, (or clobber them if they fade it), as runaway markets present less and less opportunities if one isn't in and sitting tight.

Kim Zussman writes: 

About the only asset class that hasn't been goosed limit up is real estate. A big up-move in house prices would be very useful, driving LTV down, reducing foreclosures, and re-priming the dual wealth effects of McMansion braggadocio and cash-out refinancing. Not to mention fulfilling the campaign promise of re-establishment of the American Dream.

Oct

8

Most all articles that proclaim "tops" from wall street news sources
are to be suspect. One must treat such advertisement as "topaganda".

"Long in the tooth" is such an old Barrons phrase– often used by "old curmudgeons".

Oct

6

In general, when one is winning in life, sports, or markets or gold, it is not good to climb the high horse about ones greatness or profits.

 Ken Drees writes: 

Maybe some people are counting coup and thus only fulfilling their warrior instinct. There may be market implications here in general as one needs to be able to get one's guts into a trade and brush the enemies cheek before putting on the trade.

Oct

5

Lobag beginning anew?

Oct

4

 One of the greatest errors people make is to think that the level of good or bad economic or earnings news is related to future stock market performance. Always the market is anticipating the future, and the market now has in its sights the election, the coming increases in service rates, and all else.

It is interesting to contemplate a graph of the DJI and its 10% continuous rise in September and relate it to Iowa bets on the outcome of the November election with its steadily decreasing blue line and increasing red line graphed below. 

Ken Drees writes:

The idea that the market is a seeing creature, very blind short term but correct and on target 6 months out really has been taken for granted as an old sharp cutting saw. So what is the market seeing now 6 months out? In April when the market was topping–what did that market see for this October. Thereby in March of this year when the market was moving up–it forecasted the best September in 70 years?!

I really don't get this, but actually am programmed to believe that somehow the market sees things that the crowd doesn't. Now we are told that the market sees a republican victory and stoppage of anti-business actions–maybe the start of repeals against major programs, or at least old fashioned gridlock. What is the best way to use the market as a "seeing" tool?

Gary Rogan writes:

Everywhere I turn I read about how the liquidity injections by the Fed are what's really pushing the stock market higher. How would one go about separating the effects of the extra liquidity from the anticipatory ability of the market? 

Also, since correlation does not imply causation, could it be that some of the same underlying causes that result in high liquidity also result in the increased republican takeover. For instance:

High Unemployment -> More Liquidity to Spur Employment -> Higher Stock Market

High Unemployment -> Higher Republican Chances

High Unemployment -> Lower State and Federal Revenues -> More Need To Borrow -> More Need for Low Interest Rates -> Higher Liquidity -> Higher Stock Market

…-> More Need To Borrow -> More Dissatisfaction with High Debt -> Higher Republican Chances

… -> More Need To Borrow -> Lower Dollar -> Higher Stock Market in Today's Dollars

High Unemployment -> Higher Mortgage Defaults -> More Government and Fed Intervention to Prevent Defaults -> Higher Dissatisfaction with These Efforts -> Higher Republican Chances

… -> More Need To Borrow -> Higher Concern with the Stability of the System -> Higher Gold Prices -> Higher Stock Market to Maintain Some Parity with Gold

This can go on for a while, but I think the point is clear.

Charles Pennington comments:

It would be alarming that the public apparently trades so poorly, but I've never actually met anyone who was a member of the public, so likely the losses are not significant, and whatever they are, surely they are compensated by all the winnings at poker, for I have not heard of a single soul who loses at that game.

Mr. KrisRock writes:

Has anyone seen "my old friend" Gold…he was supposed to top out like the way "gut feel" counting Russian said it would…unfortunately, Ben Bernanke's actions have made the Russian feel like he's not welcome at the FED…happiness in when you don't fight the FED but unlike the public who are buying GOLD hand over fist, the PROS always know right.

Jeff Watson adds:

Conversely, perhaps it's us "professionals" who are the ones who trade poorly, like I did a week ago last Friday going long the entire grain complex, only to get blasted on Monday and Tuesday. Or, like some of us who play poker, people like me who play six games at a whack on six screens on Pokerstars, losing at 5 of the games. Those losses, plus the vig, the mistakes, and the admitted waste of time and talent are the real crime. 

Oct

1

 Every system has a weakness. Where or what is it? Each human has a weakness. Each argument has a weakness. Financial systems have weaknesses. Financial models have weaknesses. The last one was the mortgage system generation and securitization and rating system. That was so big no one saw it. Governmental systems have weaknesses. The prior Greenspan put was good example of a system gone bad without realizing it. This is a good place to look for the weakness in the current situation. I can't put my finger on it exactly, but this government intervention cannot help but have some very unintended consequences. Governmental incentives are not properly aligned. The caliber and tenure of government workers is low. They are rather short term and incentivized to stay in power. In China, acknowledging one party system weakness, the tenure issue is improved. It is important to know your own weaknesses and the weaknesses of the model you use for survival and defense. It is good to know the weakness of your enemies, and those of the markets or system in which you engage.

Finding weakness is difficult without lengthy understanding, study and experience. Self delusion makes analysis very difficult. The lengthy time period of the play out of over 4 years is difficult for humans to comprehend. The comprehension of humans does not extend much beyond 3 or 4 years into the future at the most.

Ken Drees asks:

Can you expand on the 4 year time frame–not sure what this is. 

Jim Sogi replies:

When you began high school could you imagine or picture yourself as a Senior? As you began college, did you imagine your self working? Can politicians, economists, market speculators conceive 4 years into the future, much less remember 4 years ago. Some deceive themselves that they can, but it is hard. Humans seem to lack some capacity for time periods in excess of 3 years. The Bible makes it 7 year cycles, but the 4 year cycle is based on my poorly articulated 4 year phenomenon. Another explanation is there are just too many variables. 

William Weaver writes:

SWOT was a big part of my corporate strategy class in undergrad and I think it holds a lot of water with regard to analyzing trading strategies, governments and other systems as well as companies.

Strengths (internal)

Weaknesses (internal)

Opportunities (external)

Threats (external)

If I remember correctly it was HBS professor Michael Porter (I think there are two; one at HBS in corp fin and another in the econ dept) who wrote two or three papers on the subject, offered through HBSP.

Sep

29

 I woke up thinking about the market–again. The idea that the market is a seeing creature, very blind short term but correct and on target 6 months out really has been taken for granted as an old sharp cutting saw. So what is the market seeing now 6 months out? In April when the market was topping–what did that market see for this October. Thereby in March of this year when the market was moving up–it forecasted the best September in 70 years?!

I really don't get this, but actually am programmed to believe that somehow the market sees things that the crowd doesn't. Now we are told that the market sees a republican victory and stoppage of anti-business actions–maybe the start of repeals against major programs, or at least old fashioned gridlock. What is the best way to use the market as a "seeing" tool?

Sep

21

PrechterPrechter says sell this rally off of yahoo finance headlines–no need to link, that's probably all you need to know about this move.

But if it is a market bluff, yesterday the market bet before the flop and today you should see the continuation bet on the turn and then a big bet to come on the river. If it's a bluff, then they gotta sell it.

Anatoly Veltman comments:

He's often quoted out of context, just like everyone else– thus everyone's track record may appear roughly same.

Prechter does certain analysis well. Those who understand his writings can benefit by incorporating some of his effort into own analysis. Those few who would actually enter trade on his conclusions– risk not knowing how/why to exit.

Ralph Vince writes:

Entirely true, Anatoly. I may not agree with his prognostications, but he does his work very well. What's more, he is often quoted in overly simplistic terms– such as to be a seller on this rally. I am certain he has a point where he would flip and go long, an alternate count or something. I am also sure he has a downside target– is it Dow 5000 ? Dow 10,500 ? These quotes of his floating around don't really tell you want his strategy is, and that's key. He's a guy who, if/when he is wrong, I have found he has not been wrong by much, often able to adapt to changing market conditions as well as any I have seen.

Larry Williams observes:

Prechter go long? Has he ever? His bearish book riding the wave came out the low the 2002, at the recent market low the clarion call was to sell. Be alert to broken watch correctness.

Dylan Distasio asks:

Hi Vic,

I'm genuinely curious as to why you lump Livermore in with the rest of the financial ne-er-do-wells. I'm not an expert on the man by any stretch of the imagination, but I've read assorted stuff on him, and while he was far from perfect in both trading and life (but then again who is?), I've never seen fit to paint him with that brush based on what I've read. Why do you have such a low opinion of him?

Larry Williams attempts an answer:

Livermore and the Reminiscences are two different stories. The Saturday Evening Post serial that became the book is oh-so well written but it is not just about Livermore it is/was a novel with a fictional character that paralleled Jesse but was also a collage.

In real life once Joe Kennedy took over the SEC, Jesse seems to have never made another penny; in other words he was most likely a runner of stocks not some brilliant trader like Steve Cohen, etc.

Sep

15

 Assume that only daytraders are left trading. Assume they all enter in direction of recent moves sometime after open. One would believe that they try to maximize profits by trailing or waiting til near close to close position, then on close close position and pull orders. What would market result be? I am guessing something like today's price action might result. It is difficult to verify this, but perhaps the assumption is not too far off or just a case of fitting the theory to the facts after the fact?

Jeff Sasmor asks: 

Are you talking about human daytraders or robot daytraders?

I doubt human daytraders have much effect on anything these days. Isn't it so that something like 3/4 of volume is robots trading about 100 stocks?

Jim Sogi replies:

The "robot" trader needs to be defined. There are human system programed execution bots, and perhaps a few "intelligent" trading systems which do not have pre-programed systems, but rather gather current info, process that, make a quick rule, test it, and trade on it, but I strongly doubt it. There might be market making algorithms which might be classified as bots, but I doubt they are making directional bets all day long looking for legs. IB has some entry algo's such as VWAP and I think a few more algos for order execution. Seems on the 5-6 flash crash some skirts were lifted with a glimpse into some order spamming systems which would have to be automated at that speed. You and Russ might be best to say what is out there and what is possible and I sure would appreciate what might be possible.

Russ Herrold comments:

 Yes, real time adaptive and intuitive systems are to some degree possible and exist– consider robotic market maker assistant algorithms, that are permitted to 'fly themselves' with no-one with sentient hands on a 'dead man's' switch, assuming so long as the market stays within known parameters [some of these gone haywire (or simply unimaginatively constrained) clearly could have been 'goaded' into playing on May 6]

I took the open question to be tested to be a restatement of the buy (or sell) at close, and to sell (or buy) at open, [perhaps biased by an anticipated mean reversion 'bias' to decide which way to lean, as a first extension].

As I recall we've had posts on this in the past here, and I was just going to run a couple of simple scenarios through some back testing and do some 'binning' or anticipated 'regime changes' based on the a look-back of 'scheduled news' calendar.

The market making algorithms that could be classified as Bots have performed well, all day long; other times, they fall off the tracks wildly as well. Thus the need for that 'dead man's switch'. The question becomes, can one train a few 'turtles' to spot regime changes that a bot cannot, at a low enough cost to pay them to 'play the video came' in shifts and cover a trading day.

Concerning what you said about how "IB has some entry algo's such as VWAP and I think a few more algos for order execution. Seems on the 5-6 flash crash some skirts were lifted with a glimpse into some order spamming systems which would have to be automated at that speed"…

The data response feedback loop rates have long since gone beyond the limits of a remote link and having an electron crawl back and forth. Local computers in a data center are competing with one another, and the trick at this point may simply to predict how the battle will progress, grab hold, and hang on for a ride!

I am set up to test it fairly readily, and that ZH listing seemed promising. I rather hate to publish my personal culling screens rather than to use one explicitly in the public domain, as I invest some effort 'sharpening' how I look at data and would lose the benefit of the effort by floating that personal symbols list.

Ken Drees comments:

The motorman–someone drives the train, someone slumps and the dead man's switch kicks in. The Taking of Pelham 123, the great movie from the 70s, not the butchered remake, was telling about an operation–a good sleuth can sniff out your footprint and catch you as you sneeze unknowingly. Gesundheit!

Robots all have humans in charge and humans are chained to their human condition and flash speed just makes a human's mouth open on occasion and then they do something emotional. We are now into the area of advanced human overload error–flash crash redux will not be hiccup. 

Russ Herrold replies:

I was approached a few years ago by a couple of vendors on the design of such feeds, and the meta-tagging to be added. An XML delivery is easy to parse with existing Open Source tools, about which I wrote a couple of years ago.

Just as one of the themes of this list is 'ever changing cycles', it seems to me that another 'ever changing scales' having fractal repetition of patterns as one 'zooms in and out' (a la Mandelbrot). Interestingly, the site includes a 100 page Word document of capsule reviews of 'The (Mis)behavior of Markets', for those of you who have not slogged through the whole work… the takeaway being that the bots can play for the penniescompeting against one another, without a lot of analytic skill perhaps; while the humans still can play in longer time frames, again (perhaps) with the benefit of deeper insight.

It is a Brave New World, every morning, and perhaps the trick is to adapt and swim with the flow of what one cannot control, and to stand firm when one can make a difference.

Sep

15

 At this moment in the earth's history, we are closing in on being in a calorie per acre race against starvation. I know food shortages have been predicted for years/decades and we have not seen them (at least in the US) yet. But population is rising, and in the most optimistic scenario arable land would be a fixed commodity (it's not, we have less each year). At some point, the math takes over.

Part of the hidden cost of organic farming is the production lost. You can't grow 200 bushel an acre corn or 60 bushel an acre soybeans or 50 bushel an acre wheat "organically".

Organic farming can be economically feasible for certain crops in certain situations. I don't see it being able to replace "modern agriculture" in production capacity.

Chris Cooper comments:

Perhaps organic farming has some benefits. According to this study, strawberries grown "organically" are better.

Ken Drees adds:

Isn't the premium paid for organic foods more than enough to compensate for yield? Of course this is not regarding staples, but for boutiques?

An organic radish commands a higher premium then a pesticide radish to the right consumer. So the cost of input to the radish crop is covered in both cases and then health benefits are the "kicker" that can not really be proven and are thus under the umbrella of cult. 

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