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. 



skateballWell, it's the weekend and a time to consider an old game system that at its heyday was the tech bomb –the cutting edge gamer biz. Gottlieb, bally, Williams, Stern (the only real one left).

I have begun investigating and accumulating machines for my game room. My son and I have already started upgrading a nice bally Solid state machine from 1980–skateball. This machine highlighted the California vibe–skateboarding, skating, surfing and the beach, sun and fun–pre nike and just teasing the 3's company TV show vibe (California fun). What a time capsule and what a way to bond with your child–advance electronics via hands on work–its all there on the internet and all parts are available! You can buy old games on eBay and craigslist and through obscure game shops. One thing here –pinball tech guys are few and far between and very busy. There is a market that is buzzing and these games are getting rehabbed and being put into homes.

Kids today do not know pinball–its a social game –"way better than video, Dad–pinball is REAL". Get a pinball and your kid becomes wealthy in terms of game status! I read an interview from Stern who said that the majority of today's games go overseas or domestically into private homes. There is no more bowling alley, pizza shop, bar, or game room to put pinball games for the public–it's now underground. Kid's today are really interested in pinball if they can be introduced to it. But too bad that today's pins cost 5grand are super computerized and who can have them in a public place exposed to the public? Maybe there is a business idea here.

Stern (his son that runs the company now) said that pinball will always be a great game because its like baseball–you have a bat and you have to hit the ball or its a strike and you are out.—I thought that was great!

Ok —here are some great links

the pinball database. Thank God for these people.

Here is the skateball link.

And please read some awesome history from the late Harry Williams—the famous "williams" pinball maker.

I really never thought of pinball as a tech industry but it was and still is. I hope the list members can contribute here–my past was the early 80s gameroom the height of games when pinball went solid state from electro magnetic and video games came on the scene. My Dad was always asking me about what games were cool–atari etc. He was trying to get a handle on the tech–I was too young to realize what i was knee deep in. But I knew one thing–it was all good!



looking down from a space stationWhen I try to run with the lead pack I usually get beat up by elbows and get my heels clipped and dinged. I just can't complete. So I dial down the trade to a longer time frame–let the zigger and the zaggers roach and take my cut when the line moves ahead.

I envision the chair and other great hunters in their space stations looking down. I gotta stay low to the ground and get my piece. Everyone feeds at the market reef.

Song for today regarding the market/economy:

talking heads: road to nowhere



what a swell party it wasSiskind thinks that resi real estate has bottomed, commercial real estate is very overbuilt because of people working at home, and retail real estate is going to get killed because refinancing wont be available and securitization makes it impossible for any other outcome beside bankruptcy.

E believes that the oil spill will create a boom in wheat. Mr. Pitt and E believe that Iceland is the biggest disruptive geo factor on the horizon.

Mr. Hauser gave me a lesson in how all the big transfers from the rich to the deserving poor is bound to create a reduction in long term growth, as well as the difference between money and credit.

The Ted Rosenthal troupe that performed Sunday is one of best jazz trios in world.

Ken Drees adds:

Remember the howl regarding commercial real estate being the next shoe to drop a year ago? Seems like it's taking longer than first feared.

Apartment REITS doing real well now.

Pitt T. Maner III writes:

My First Spec Party was a super experience. The music at both parties was wonderful and it was privilege to meet and talk to many highly intelligent spec-listers.

It was my first time in NYC too and it was interesting to see how popular dogs are in Manhatten and how people are learning to do new things out in the open. For instance in front of the mirrored side of the Metropolitan Art Museum there was an older lady teaching a young man how to cast and fish with a fly rod on the lawn. Near the south entrance of Central Park a young lady outfitted with boxing gloves was taking a lesson along a footpath from a very strong, athletic male boxing instructor. Along the Hudson there was a location where people were practicing on the trapeze. So the city is a very stimulative environment and a place for lifelong learning.

And somehow you can walk all day and still gain weight eating shish kabobs, pastrami sandwiches, egg cream sodas, gyro sandwiches, Swedish cardamon rolls and coffee, Thai food—how is that possible?

The Museum of Natural History is just a spectacular place to learn about geology, paleontology, early man, minerals and many other things–4 hours over 2 days was just enough to get a taste. What a wonderful place it is for children too to learn about nature.

Again many thanks to our gracious hosts for a fun weekend. 



horse whispererThe cathartic moves of Wednesday came just in time to create a sense of life at Jackson Hole in conjunction with the horse whispering and hiking so necessary to the research activities that occur there.

Desperate attempts to right imbalances come later in the week during the Summer than the other months because of vacation schedules at the Riviera and time with the others in the Hamptons.

To counterbalance the natural tendency to lethargy during the Summer, the market has moves approx 2% high to low in 19 of the last 20 days so that the public will not refrain any further from contributing to the overhead so necessary to keep the whole thing going in the absence of further subsidies from the centers at Brussels and the Beltway.

The top feeders must of necessity get on the same wavelength during the Summer so that they can get on the same page and possibly counterbalance the natural tendency of markets to homeostasis and this is why the trends in the summer are more pronounced than in other months.

East of Eden by Steinbeck has more insights into behavioral finance than all the studies of the so called men of promiscuous hypotheses, i.e. the behavioral finance gurus at the Universities combined.

The new Lloyd Webber show, Love Never Dies has more good work, more hummable tunes in it, a better plot than Beauty and the Beast of its predecessor than any other of his hits.

All the above assertions must be tested as to their validity to serve as a meal for a life time.

Victor Niederhoffer adds:

One wonders what the best use of horse whispering sessions there might be. Would it be to give instructions to the horses and engines that move the economy? Or would it be to receive unspoken in the native language signals as to the coming releases from the body language of the flexiopurveyors et al? What do you think? I'll award a prize for the best suggestion for the use of these whispers to any parties. Also one notes an amazingly large number of round numbers broken with SP 1050, Dow 10000, yen 85, crude 82, dax 5900 ish, nas 1800 as ever, beans 1000, and many others emerging vividly. What am I missing here? 

Easan Katir comments:

Another fascinating idea from the Chair. One recalls past analysis of Mr. Greenspan's briefcase as he walked to the Fed meetings. One thinks the main stumbling block to current and future analysis is lack of data: The viewer only gets brief video clips of the flexiopurveyors. A whisperer needs to observe the body language on his own terms to catch those small unconscious messages. Horse whisperers can't just watch rodeo clips. Maybe there is a way, but this is first reaction. 

Rocky Humbert replies:

The chancellors briefcaseIt's a cinch to note that the the horse whisperer's goal is to install a "western saddle" with its extra padding for the "fleecing," and its phallic horn. The English have no need for such contrivances for either foxhunts or dressage.

Similarly, the Greenspan briefcase indicator was developed by a group of American Anglophillys who lusted after the most famous briefcase in the world: The Chancellor's "Box"– which dates to the original leather briefcase made for William Gladstone around 1860– and which is carried by the Chancellor of the Exchequer to Parliament for the annual Budget Speech. Unfortunately, the "bulging briefcase indicator's" meaning was lost in translation from English to American– as the proper briefcase is rectangular and sold– and cannot be influenced by the battle of the bulge.

Details on the Chancellor's Briefcase.

Ken Drees comments:

The briefcase indicator was a made up cnbc gag/come-on; also Wayne Angell turned out to be not a talking font of knowledge but in court defended hinself as simply an "entertainer". Now we watch and listen to Bullard this morning–is he an entertainer, a wise font, a broken bell or a front? As Jimmy Rodger's said–get a tip from the company president and lose half your money–get that tip from the chairman of the board and lose it all. 

Jim Sogi writes:

Nik 9k

Kim Zussman shares:

Pierre-Olivier Gourinchas*, Hélène Rey**, and Nicolas Govillot***


We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an "exorbitant privilege" that significantly weakens its external constraint. In exchange for this "exorbitant privilege" we document that the US provides insurance to the rest of the world, especially in times of global stress. This "exorbitant duty" is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

Andrew Moe comments:

As the cloistered flexions whisper, a steady stream of rumors and leaks drive speculation wildly through the thinned ranks, causing the type of ranges that the former colleagues utilize to generate 100% profitable days for the greater good. 

Russ Sears contributes:

How to Listen to Jackson Hole

I currently am in the midst of writing a paper that suggests the regulators are the magicians of the markets. They direct your attention to the left, implies that your really should focus on the right. Time after time the central planners will steer the market to focus on this risk only to let the herd be blind-sided by the risk they are ignoring. There will of course be a rabbit pulled out of the hat at Jackson Hole and nobody would want to miss that. However, everybody is watching what is happening with the Feds and postulating how or even what they will do to make that rabbit pop out of that hat. Of course the assistants are in the know already. The lovely assistances will of course be able to buy all that jewelry and build castle in Vegas that such assistance need, from the crowd's tickets. But do not fool yourself that you can profit from these assistance they will only slowly get fat and growing old.

When the local college big football game is on, it is of course the time for the studious students to go to the library or simply go for a run around the other side of campus; But also it is the worst time to leave your car unlocked by the library or the other side of town. When the focus is on the imaginary, the divertive competitions of a game and fiscal policies of the Feds appear omnipotent. This is of course time to pay attention to what is real, the long term and risk all are currently ignoring.

I could specify hunting grounds and give data to validate this but will not because of the following reasons.

1. These extra-ordinary trades, without my bad ones, would seem like I was bragging.
2. I do not want to alert the competition to their mistakes
3. People do not remember what you told them yesterday, if it proves correct; it was their idea all along. History even becomes much more fuzzy, if you were right, and much clearer if you are proved wrong.

Yes, Virginia there are inefficiencies in the market, suffice to say look at the well spring of the Government's heart to find them.

Ken Drees adds:

I was thinking in a similar vein. All this attention directed to monetary policy as a myopic focus on fixing the economy (and of course the markets) when policy and the structural problems that are slow to change remain intact. The market focus is thus back on the magician and not on the real risk which i would characterize as "outside shock of any kind". When the momentum is slowing and minus a policy change –for example if Obama said that he would keep the tax cuts permanent until 5 quarters of positive sequental gdp would emerge then that would be a market booster since it would allay fears and unknowns, call it the Obama targeted tax extension business relief act". But minus a real policy change, we are back in the soup on Monday morning. We are now at the mercy of outside shocks which could very well tip us into the damned double dip—but shock could be used by pols for blame-so maybe they like that route.

If it wasn't for "x" we would have climbed out of the recession already. The economy is weak and getting worse by all measures–what rabbit will they pull–a good pro business bunny or just another QE painted hare? At election time, it's the economy stupid, will be the song on the voter–time is running out for. Maybe its just too late this time for another trick?



One thing that is totally anti TA is no man's land. TA patterns love lines and rules and levels and such. Maybe no man's land is a trading concept worth a look. One can always buy or sell based on a line break–but what about once that initial breach has happened? You are in TA desert for a day a week a month???



As many have commented it is amazing to see the fixed incomes going up up up in conjunction with the stocks going down down down. Indeed the amazingness is such that putting a littling quantification on it on a four week basis with maxima and mimina respectively, one notes that it's only happened like this on 15% of all Fridays the last 4 years. What happens in the future on this amazingly frequent 1 in 7 event? In general the fixed incomes have deferred back to their old normal with about 2 to 1 odds.

One can only guess that the reason for this unusual consilience has something to do with point 32 of a conservative diatribe I received which could have been sent by the other list itself: "when he took a huge spending bill under the guise of stimulus and used it to pay off orgs, unions, and indivdis that got him elected, people said…" Yes. crowding out, and lack of incentives, and demoralization, create a revulsion to invest and hire. Perhaps Keynes would have done better to have noted this then to conclude that expectations of further increases in bonds tend to be self reinforcing et al in creating the lm.

Alston Mabry adds:

And one must consider the whims of the flexionic organizations who can borrow from peter at zero and then lend to paul "risk free" and skim a few hundred basis points for their trouble.

Ken Drees adds:

A hint of Japanese style negative interest rates rear view mirror double play USA helps the reinforcement of trend on a "believable story basis".



 I read an article "How Venice Rigged The First, and Worst, Global Financial Collapse" by Paul Gallagher. Whaddya think?

Bill Rafter summarizes:

Skimming the article one gets the opinion that the author blames most of the 14 Century economic failures on Venetian bankers rather than on the Black Death. 

Victor Niederhoffer writes:

We must hear from Stefan on this subject to get the truth, the whole truth and nothing but. 

Stefan Jovanovich commentates:

I am feeling damn near invincible this morning having had Susan's corn meal and flour drop bisquits for breakfast (also the 10-year old boy cat's favorites) so I am going to pretend that this opinion offers what Vic requested– "the truth, the whole truth and nothing but the truth". I have read Charles Lane's book , and I do know something about the period because my own faith comes closer to what is now called the Eastern Church than any other Christian sect; and I have always been curious about its fate. As Bill tactfully suggests, perhaps Black Death had something to do with the decline in European population that the essayist blames on those awful Italian bankers. The later Crusades and the mere Hundred Years war (which, together, had relative costs greater than WW II and the Cold War combined) may also have played a part. Blaming the bankers for the decline in food production that began around 1300 also seems more than a bit of a stretch. The farmers themselves thought that the end of the Medieval Warm Period was a more likely cause.

The author is right: there was a credit bubble. But like our most recent ones the bubble rose out of a dramatic reduction in the real prices for the things people lived by (computing for the tech bubble, household and home improvement goods from Asia for the consumer/real estate bubble). The rise of the Italian city-state bankers came from the dramatic declines in the costs of transportation and protein. (Archaeologists are finding that around 1100 Europe relatively suddenly went from eating freshwater fish to cod and other salt-water species.) These changes came from developments in naval technology and an outbreak of relative peace. The Italian bankers couldn't have been able to cheat poor King Edward if they hadn't had the means of getting themselves and their gold to London and back quickly without risk of having the Vikings waylay them.

The bubble continued and then broke because events moved against people and then as now, the bankers kept their mansions but most of them lost the better part of their fortunes.The essay assumes that there was ONE GIANT FINANCIAL VILLAIN without which the rise of benevolent national governments would have continued and everyone would have lived in peace and prosperity. This essayist blames the Venetians; others have blamed (who else?) the Jews. What is indisputable is that the bankers kept better books and minted more honest coin than the governments they lent to. How that allowed them to "control the Mongol Empire" and switch legal tender from gold to silver and back again remains unexplained. But, then, so does the modern notion that the Great Depression and the rise of the Nazis were mostly a function of the New York Fed's misadventures with the money supply.

The costs in blood and treasure of WW I, the influenza epidemic and the Tokyo fire and earthquake and the Mississippi Flood of 1927 were entirely incidental. What made people stretch so far for yield that they were willing to invest in match monopolies in the 1920s is the same cause that brought people to do serial refinances with the Bardi, Peruzzi and Venetian banks. Events had left most of them without the incomes they had come to expect so they borrowed and risked more and hoped to make it back when the weather changed and they won the next war.

Phil McDonnell adds:

I have to side with Bill Rafter on this. Arguably the Bubonic Plague may have begun in Europe when the Mongol Golden Horde laid siege to the nearby Genoan city of Kaffa in 1345. The siege was only broken when the Mongols were too badly stricken with the plague and forced to go home. Within a couple of years one third of Europe had died.

I think Plague and Mongols invaders would have a strong chilling effect on trade. Conversely, a banking panic cannot cause the Plague.

Steve Ellison comments: 

One of my pet peeves is the overuse of impenetrable equations in
peer-reviewed finance publications (and I think I'm pretty good at math;
I can still occasionally help my son with his calculus homework). To
cite a recent example, it would not seem to require calculus to explain
that spending on durable goods falls faster in a recession than other

Russ Sears replies:

Mr. Falkenstein's argument should be applied to all modeling, not just economic modeling. Even in a field with time tested product pricing models as actuarial science, I have found time after time that to truly add value, you must ask "where is the model blind spots?" People drove a convey of trucks through the MBS model's blind spot in pricing and ratings. And if left to their own devices FASB mark to market models would have driven all of us to a great depression. As I said at the time, (see A modest Proposal to the SEC)

They were blind to a liquid assets that can quickly turn illiquid and have huge liquidity premium on a mark to market model.Exploit the loopholes, and if nobody ask if this is simply a blind spot that you are exploiting, you will look great on paper like AIGFP… for awhile…until it become apparent that your resource allocation has a divide by zero error in it.

Modeling and regulatory modeling in particular, have replaced the central planner of the failed communist system.



kindle on an ipod

Are Kindles good for kids?

George Zachar answers:

My 11 year old daughter was a reluctant reader until we got her a kindle. Now we can't get her to stop reading.

My 15 year old son seems to have his kindle surgically attached. He reads while doing yoga.

I recommend an iPod touch with the free kindle app. It fits in any pocket and lacks many of the distracting attributes of the iPad.




Africa from outer space

Excuse me, but I have to butt in here.

I would like to clarify that "congressional acts" have been restrictive on the money supply. Read the first two sections here on excess reserves .

All the new debt issued by .gov is counter productive to QE, proportionally.

The Fed is far from running out of ammunition. One example is that a change to this act, in the wiki article, could remove the incentive for banks to store excess reserves at the fed. This would likely force this $800 billion into other assets.

More importantly:

On the subject of being optimistic I would like to remind anyone to study the important components of any decent growth model (the importance of the idea that is total factor productivity from the Cobb-Douglas function, the Solow model, the Romer model). For the very long run, the Principle of Transition Dynamics can provide a patient simpleton with riches. Generally speaking the fastest growing nations will be those with the lowest per capita GDP relative to their ability to acquire capital, investment, institutional reforms, and education. That has been true for a very long time, probably all of human history, and I can find no reason that it will not continue.

It is commonly stated that China has been the wealthiest country for 15 of the last 18 centuries. According to the McKinsey Quarterly, Africa (yes Africa), will have the largest labor force in the world by 2030. Vietnam and many South Asians are reforming. Vietnam's average age is under 25 years old, 28% percent of the population is urban, and they are urbanizing at over 3% a year. They are not alone in these very attractive demographics. Indonesia is arguably more promising in the near term. There is an inconceivable amount to be optimistic about. Would anyone here honestly claim that there has been more at any other point in history to look forward to? The World can and will grow without the United States; our humble pie has been baked and now lies in wait for us on the table.

If we must dwell on the what we are doing to ourselves in the U.S., I would like to point out that our unemployment rate at this trough is still better than that of France or Canada at their peaks. Those are two of the premier developed nations of the world.

Ken Drees comments:

If the incentive to park funds is removed, then a flood of available funds will be gushing into the hands of the public at most likely very low rates due to excess supply. And where does hot money go first–especially if business and housing are still on their collective backs? Stocks! So really why worry about deflation at all when it's obvious that a waiting flood behind a dam could at any time be let go.

You also seem to have optimism about large demographic countries and how our high unemployment mark is much better in respect to other countries. In contrast to this last night on Covuto, Donald Trump was most vocal about taxing chinese goods to the moon and taking all that revenue and paying off the deficit. He cited unfair business practices etc. Cavuto said "trade war," Trump said, "we need to get our best business people into positions of authority in regards to china trade policy and effect a hardline approach– after all the USA built them up to what they are now through buying their goods."

Change happens.



The flag of ballyhoo deflationA respectful question to the Chair, in view of his tenet of ballyhoo deflation–can it be that this supra monied propped economy soaked in debt has no chance of deflation? Riding the surfable wave of inflation has been the way to go through the general market lift but is it now time to begin worrying about something worse than simple inflation? With the countable Federal and State growing deficits, economic structural destruction in terms of jobs, production, GDP growth, et al. and the printing of massive QE money through Fed activities and Congressional acts the chances of a deflation seem remote.

Is it bearish to see these structural facts and thereby decide the economy may not recover for some time? And if the market continues on then it is a simple inflationary hedge that is better than traditional dollars that are cheapened daily. When one stands on the beach, sand is cheap. How do you square markets and market behavior when the water that they float upon being money that is rotting–and that rot is now visible?

I am interested in how you can have neutral, steady as you go market outlooks that have roots in economic realities when those realities are increasingly toxic bearish? I know markets move no matter the wind. But are you concerned about a total change in market reality? Of course I am not privy to your thoughts not shared here, and I know you have a total grasp of the players, rules, cheats. etc. These are the actors and factors we daily engage; is there a time when you anticipate change in conditions that disturb the market fabric to such a degree that a warning ever needs to be raised?

Is it time to bring the deflation flag down and raise the flag of ballyhoo to normal economic arguments? Or simply add a ballyhoo flag to the masticated economic reporting numbers game that we all seem to live under the fear of? If a Volcker-like turn in monetary policy happens in the future then of course we can return to status quo. But the present time seems to me to be quite an anomalous one.



 One of the most common and one of the most intense irrational fears is the fear of public speaking. Even the best speaker can lose his cool giving a spontaneous speech in a high stress situation, say at job interview or meeting the in-laws for the first time (I believe they make movies about this one). On the other side however, one of the most common forms of self-destructive behavior is saying too much. I believe everybody has had an experience where they have said something in anger, spite, arrogance or some other irrational momentary emotion, destroying or badly damaging a valued relationship. Many of the most miserable people I have known are constantly spitting out acidic words, chipping away at others, often at those beaten down souls closest to them.

I've have been going to a Toastmasters club most weeks now for over a year to help me overcome my fear of public speaking. And while I believe that the Toastmasters meetings were helping me, perhaps I made my biggest breakthrough once I realized that for me, and perhaps for most people, the problem boiled down to one word. This word, which Aretha Franklin spells for us, is r-e-s-p-e-c-t. We all crave this in our relationships.

The reason that respect or acceptance and esteem can cause such irrationality is that we develop many of our conditioned responses when we are toddlers and kids. Our ideas of respect get greatly distorted as a kid. It is almost impossible for a kid to understand that their parents reactions may have nothing to do with them. Further given that parental/adult acceptance is seen by a kid as such a necessity for their survival, many distorted and warped views can develop.

Finally, much of what makes a child be held in high esteem is not the same things that make people admire an adult. Sometime they are even the opposite. Take for example our grading system and testing. We hold the kid that makes the fewest errors as the best and brightest. This training can cause several distortions in a kids view of acceptance. For example, kids may come to believe:

1. Mistakes are always bad. Overcoming errors is not possible. But as adults we find the most successful are those that failed and got back up. We admire those that overcame though odds and many failure

2. that they should only worry about what is tested. Curiosity beyond the known is not encouraged. But as adults we admire the discoverer, the explorer, those that do not accept the standard answer and therefore come up with a better one.

3. Excelling at the subjective is a waste of time. But as adults we admire the artist, the actors, the great orators.

4. Kids are to be seen but not heard or not to speak unless spoken to. But many of the highest paid jobs are for the salesman.

5. Respect adults and discount a child's understanding.

Many people are like me, they are fine talking if they are sitting down. But make them stand up and suddenly the primitive brain kicks in… and many of these distorted views from childhood on acceptance impulsively take over. 

It seems to me that much of the Toastmaster's system is designed to get you to rethink and recondition much of that training you received as a child. Everything is critiqued, however, all suggestions for improvement are supposed to be sandwiched between praise. At each meeting everybody's grammar, filler words (such as "um", "ah" "and" or "so") are counted and everybody is timed. Roles are assigned to each element of the evaluation (timer, grammarian, wordsmith, etc.), and before each evaluation, they are to explain the goal in their critique.

 The speeches for the day each have a specific purpose to help the speaker improve. Usually this purpose is rather subjective, such as "vocal variety and quality" or "getting to the point". Every meeting has chances for impromptu speaking, standing up and giving a 1-2 minutes speech on the spur of the moment. Even the meetings themselves are critiqued.

The overwhelming implication to all this is that improvement is the most important thing, that any problems can be overcome, and to build on what you did well. I was seeing some improvement in my fear factor as I went to these meetings. However, I think for me the big breakthrough was realizing not just that these fears were irrational, but that they came from my distorted views of respect, acceptance and esteem developed as a child. Not that my parents meant to teach me this, but this is what often develops, within the simple mind of a child, trying to interpret the motivation and meaning of an adult's training.

Only once I started going through my fears one by one and seeing them as an adult did these fears dissipate. I think I stopped believing in these fears. Instead I saw them as "a" childhood interpretation of what I was taught, when there were really many, often much more valid possibilities than just that simple one sided interpretation. Often what I considered my parents "response", was simply AN interpretation, one of many, that I developed as a child.

Another interesting thing I learned at toastmasters concerns body language. For instance, for the impromptu speech, I have learned to listen closely and intently to those asking the question. I consciously direct my body language to suggest that I am hanging on their words. Then when I respond, I relax. I listened closely to them so I have "earned" their attention. I repeat their question, often putting it into my own words to show that I got the emotional part of the question they were conveying, not simply verbatim rote repetition. It shows I cared. Hence as equals they should listen to me. Why should I fear them being bored or inattentive?

It would appear that ramblings and shouting are also an effort to gain respect. General McChrystal spouted off to the journalist apparently because he felt slighted by Obama's "indifference". Understanding these triggers and detonating them before they explode can help control the tongue. For example, if you are in a heated argument standing up, try sitting down. Bring them in closer. If they are a loved one try holding their hand. In contrast, if you are confiding too much, stand up. Distance yourself from them. Of course seeing these situations for what they are in the moment rather than after the fact can be difficult. Yet, if these kinds of situations seem to occur too often, perhaps reconsider whether your motivation and view of respect and acceptance might be a simple child's interpretation and consider how it might affect the situation.

Likewise one speculates that such recurring problems in trading and investing could also be improved by reviewing your childhood understanding of how to gain respect and acceptance. One also speculates if standing to make a trade encourages one to be more aggressive, while sitting more passive, and whether other body postures could help. Say when you are closing a trade, try standing to be more aggressive.

George Parkanyi writes:

An aha moment for me about being self-conscious came in my early twenties at some point, when I realized that people are far more worried about what others think of them than what they happen to be thinking about you. Their pre-occupation with themselves is deep and permanent. Their pre-occupation with you highly transitory– especially in an arms-length engagement such as a public speech. Also, people will tend to be empathetic. If you slip up, most will not be thinking "what an idiot!" but rather "I'm glad it's not me up there".

Once in a while I'll see a guest on a business show that looks really nervous and is clearly struggling. I start to feel uncomfortable for that person, mentally cheering them on, thinking to myself "come on, get it out, get it out…"After that, for me public speaking was more about being prepared, and finding ways to keep the audience interested and engaged. If you do have to wing it, stories and anecdotes are a good way to come up with something on the spot. Usually you can relate something from your past to the current situation. People generally love to hear stories. 

Craig Mee adds:

Also someone mentioned to me years ago, "just think you're talking to your best mate" But preparedness seems to help…Tim Ferriss is never far off the mark. His article Public Speaking: How I prepare Every Time is great. 

Russ Sears responds:

 Yes, understanding the truth that people are not that focused on you because they are thinking about themselves helps. However, often when the fear is impulsive, simply knowing what is right is not enough. Think of some common phobias: fear of heights, germs, etc… most often the phobic knows the fear is irrational. People are great at holding two incompatible ideas in place and impulsively choosing the irrational one to act on.

What I am suggesting is that you kill the root of the impulse– your distorted belief that is causing the fear. I am suggesting you do this by re-interpreting your childish beliefs caused by a childish interpretation of the threat. To do this you have to dig deep and figure out what your fear is. Is it making a mistake, looking stupid, indifference or several other common fears?

Then you re-interpret that childish belief, for example, that adult esteem = survival, from the adults perspective. Once this is thoroughly done, what I found was what was once held as a "truth" is shown as an immature interpretation of the situation. Hence using both, killing the old belief and giving a new one in its place can end the impulsive fear.

Further, I am suggesting that using this dual method, can improve many areas of our life. Perhaps most if not all of the hubris in trading may stem from similar simplistic childhood misinterpretations of the situation.

Ken Drees writes:

Ellen Degeneres doing standupTaking a theater course or a stand-up comedy training seminar may help by pushing one's self into deeper water and then one could recede back and take a public speaking course to put structure around the process of public speaking. I am lucky to be gifted in public speaking, but scared of stand up comedy–which I think I could do but I am frightened of people not laughing, and thereby having no defenses against ridicule, or of an unloving crowd staring back at me and not laughing.

If I was to pursue it, I would do a lot of structure: rehearse, tape myself, fine tune, do small test groups, ask for feedback–seems like a job now.

I have a tendency to become red-faced when embarrassed or in some terrible stressful moment. If this happened during a routine –oh no. I would have to come up with some sort of routine if it happened–draw the audiences attention to the red face and use it somehow as a joke routine–turn the disaster into something funny. 

I remember playing in a poker game for the first time in multi years (3-4 years ago). There was retired cop at the table (9 or 10 people) and I was bluffing in a showdown hand–I could feel the heat coming into my face and knew that I may get called because of it. The guy folded to me and the cop from the other side of the table said "you gotta do something about that red face of yours" then everybody stared at me and then everyone busted up laughing.

The cop said that in interrogation rooms he learned a lot about lying. Needless to say as time went on and practice makes one better, the red face doesn't appear at the table anymore. 

Russ Sears replies:

Surprisingly, people say I am funny. I seem to have little problem coming up with a spontaneous humor during a speech. I have found that if the audience understands that you yourself are the biggest target for your jokes, that you do not take yourself too seriously, they are much more willing to give you liberties on almost anything and find it funny. As Ken implies making fun of yourself, almost always gets some attention, if not laughs.

As far as bombing goes, the best comics sometime threw in bad jokes on purpose, just so they could make fun of the hole they had dug themselves into. However, Toastmaster's club is doing a humorous speech contest and we will find out how funny I really am.

Brett Steebarger comments:

It's a very interesting topic. Where I might differ from Russ is that many of those irrational impulses are less the result of distorted beliefs and more related to emotional imprinting that bypasses critical, rational awareness. Edna Foa from U. Penn has done very interesting work in this area that is relevant for those engaging financial markets. 

Russ Sears responds:


One is impressed after reading about Edna Foa's work, in which significant change can be measured in Vets suffering from PTSD, in only 12 sessions, by getting them to focus on the emotional events and the trauma. How does this relate to much smaller "trauma" but perhaps, much more frequent conditioning. Say taking tests weekly at school, and the learned emotional implusive response about exactly how to please the teacher and parents.

Does focusing on the emotional take less time to "correct" the irrational impluse, because the "trauma" is not intense at all? Or does it take more effort because the conditioning was wide spread and reinforced often?

Further, what does such ingraining in children teach a parent to do? Make sure that the child knows that your esteem for them is based on a well rounded education with plenty of real life experiences?

What would you recommend for my girl who upon entering high school last year is showing clear signs of test anxiety, especially in Math?



dragonfly eyeDid you see the scene in Karate Kid where he gets the fly with a chopstick? Have you ever tried to swat a fly? Flies are in a lower time dimension than we are. We probably look like the sun moving across the sky to them. 

Some of the lower time frames and tick trading by computer is a similar phenomenon. They are operating in a different time zone, and humans are not fast enough to see or concentrate. Chris posted an analysis of the level that the exchanges are gaming each other. But they still operate under fixed rules of the system, and the lines, and are programmed by programmers with psychology. Because of the fixed rules they cannot be effectively adaptive immediately. The big May crash was an example. Perhaps they are reading current conditions quickly, but there should be certain conditions outside their realm of observation or adaptation, like the flies.

Ken Drees adds:

What about dragonflies which have 30000 eye facets–the highest number on a species I think? You can never catch them really, and they seem totally above the market or pond, should I say. 



 Recently I have posited that the market to an inordinate degree shows the main attributes in its daily moves of the most vivid sports game that has not been used. I would add to this that during each hour the market is likely to move to the rhythms and dynamics of the most likely classical music being played on a classical music station in home town, for example the former WQXR in New York, in full knowledge that these programs are often selected 2 months in advance, and noting that I was a subscriber to same when I was 12 years old.

I am adding to my list of mystical encampments and predictions that the fortunes of Apple and Lady Gaga will follow a similar arc in the future, and as soon as the Lady loses her luster, or a substantial base of her gay support, Apple will be ready to nose dive.

Do you feel that because of these ideas that I should resign my post as chair of Daily Spec which is designed to deflate bally hoo, or is this just a symptom of that predilection that old men such as the sage and the fake doc have to maintain their romantic aura?

Ken Drees writes:

Lebron James' Cavs win over the bulls to end that series correlates to the spy top (04/27/10). That was the zenith of his career in Cleveland. They were then going into Boston on a full tank of expectations. The last game (as a cav) in that series marked a secondary top 08/13/10–then the melodrama begins. His great choice to go to Miami did not mark the low but was the midpoint of the latest rally—he is losing his market moving mojo–his ability to focus the market energy . So now he has lost his core fan support like lady gaga at some point will lose her core fan base. No, I don't think the Chair is that off-kilter.

Popular culture icons somehow bleed into market consciousness.

Vince Fulco writes:

I've long thought that the culture has moved into a greater phase of bally hoo, perhaps a derivative of the Romans' 'Bread & Circuses'. We are now just starting to realize or are being forced to understand that flat incomes, poorly funded retirements and insufficient skills in the aggregate set against historically outsized obligations are a recipe for disaster. Fighting falsehoods would seem to be a necessity of survival and good investing for the long haul. Moreover, one has great opportunities to choose from post deflation.

Jim Lackey shares: 

Actually no. AAPL has talent and is'nt just a fad or a show. Not sayin' that the Lady doesn't have talent, but if and when I see her write and produce tunes for others and sing Jazz, then she will be an AAPL. But no! No I did buy AAPl in 2003 when Mr. Eyerman stood right here on list and said buy it now. Jobs is back, and Itunes is brilliant. It's been a ten bagger since, which is what got me to tell the father in law naaa na na no this Xmas as he was on visit to Music City and toyed with his new Iphone all week. He's a MD and a tech freak and he said, "you know what, I don't need a PC or internet at home anymore with this"

It's not CSCO when it was on the way to a trillion dollar market cap in year 2,000. It's post crash now. Also it's no shorted up fad stock, but yes it's a fashion device an ipod in all 3 colors for different outfits. If I had to guess its a DELL circa late 90's. It never crashed and burned until much later in the tech wreck. It just stopped going up and in these markets AAPL must trade 299.75 but not 300. ha. 

Craig Mee writes:

Just like Seinfeld had the bravery to sell the high and knock back the 10Mil for a tenth season, (one of a tiny minority who do) maybe the gagas and apples should too. To keep up the product development and create new bizarreness no doubt gets harder and harder with everyone hot on your tail. Im sure income changes, say for Seinfeld, from shows to marketing, but he has been smart enough to cut and run, and keep the value. A lesson for us all. 

Marlowe Cassetti writes:

The chair has touched on a point of interest that has bothered me. I don’t know about Lady Gaga, but Apple’s climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let’s look at the facts:

There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn’t produce stuff that the world needs just what they like to have, until something else strikes their fancy.

It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.

Thomas Miller writes:

 Sometimes one's instincts or gut feelings can't be counted or explained but you feel its true. Probably based on years of different observations made subconsciously. A trader may feel strongly a market is about to break without being able to explain exactly why, because subconsciously they have seen patterns many times before. Considering the source, I wouldn't immediately dismiss this as ballyhoo. Instead of resigning, further testing is called for.

Steve Ellison comments: 

Mr. Aronson noted in his book that it is no fun being a skeptic and that the scientific method leaves deep human yearnings unfulfilled. Facts are often tedious and dull, but stories are captivating, which is why people who have bought into a narrative continue believing it even when presented with strong counterfactuals. "Story stocks" have always been prominent in bull markets.


Marion Dreyfus writes:

A new study reveals that people are at their angriest on Thursdays. Thus, perhaps deals might better be made on Friday, when people are delightfully anticipating the weekend, or Monday, when they are somnolently reviewing the events of their past free-time indulgences.

interesting … We have been doing product development on a tool to gather data, and do reduction for self-introspection to find and permit prediction of cyclic true 'more productive' highs, and 'down in the dumps' lows.

Jim Wildman comments:

I've been thinking a lot about rhythms. I've noticed on the treadmill at the Y that people tend to fall into step with each other. Being on treadmills, this is easier since you can be running at different speeds, but the same step count. It creates an interesting effect when the treadmills are on a suspended 2nd story as it was at the last gym. I've wondered how many people it would take to collapse the floor.

This study seems to indicate that there are (at least tendencies towards) rhythms in 'group' emotions. What other rhythms are there and how do they affect me? How do they affect the markets?

Vincent Andres adds:

Here is a good paper on this topic of frequency coupling

Some more infor:

Steven Strogatz

Steven Strogatz's publications

A good book

TED video (look at the part on fireflies, near the 10th minute on metronomes (1st historical notice by Huygens), near the 13th minute and the bridge (not Tacoma … but not very far !)… in fact the whole video examples are interesting). 

Easan Katir writes:

In a year when Paul the Octopus correctly picked 7 consecutive wins, well-documented to the world, when the underwater plume in the Gulf of Mexican Oil matched the plume of gritty ash from Eyjafjallajokull, and the rig explosion coincided with the April market top, who can say anymore what is mystical and what isn't. Lead on, Chair! Lead on!

Craig Mee writes:

Looks like Schumacher should of stayed off the track, as HIS value, now may be plummeting: "For all his greatness, he never knows when to give up. He is a shadow of his former self," added hugely experienced former driver David Coulthard" Ouch!



Hard to believe that it has been almost 30 years since "The Road Warrior" movie (Mad Max 2), a classic of the dystopian genre and coinciding with DJIA 800 ranges. The show The Colony, starting next Tuesday the 27th, on the Discovery Channel has a bit of that Mad Max/Andromeda Strain post-apocalyptic feel.

I just hope the poor geology professor with no practical skills makes a good showing and can at least find some water–coming from Arizona State.  She probably knows a bit of geohydrology. Did not see Season One, but this looks entertaining:

What would you do in the wake of a global catastrophe? Even if you survived it, could you survive the aftermath?

Season Two of THE COLONY introduces viewers to a new group of volunteers with differing backgrounds, skills and personalities, to bear witness to how these colonists will survive and rebuild in a world without electricity, running water, government or outside communication. Over the course of 10 episodes, the colonists - who include a construction foreman, teacher, carpenter and auto mechanic - must work to utilize and strengthen their exploration, technology and survival skills in ways they've never had to before.

Ralph Vince comments:

This, culturally, is AMAZING to me. A few weeks back I had an extended discussion with a group of very bright guys all in their early 20s — a candid discussion about their perceptions. A few very revealing things:

1. They are all very upbeat, economically, on a personal level. They feel they are smart and educated and will do fine even though they expect things to dissolve, they believe their formal education is their life preserver.

2. They all hate the boomers and consider them the "entitlements" generation — they regard the ones who were mostly their parents, the ones they refer to as "The greatest generation" as deserving of entitlements, but the boomers NOT entitled. Very interesting — I couldn't get to the logic of this other than we, the boomers, "screwed everything up, did nothing as a generation, and have a grotesque (to them) sense of entitlement to us".

3. They all, universally, expect things to decay, eventually, one way or another, into this MadMax anarchist future. When I would press them on this one, with things such as "Well you were saturated with these types of images growing up of the future, can't you foresee a less dark one, a more optimistic one?" They all universally agreed that "There is no other way the future can work out." Fascinating. Absolutely fascinating. With housing now more affordable than it ever was to any of the boomers — with borrowing at interest rate levels never before seen (and long rates banging around 4% !!!) and a protracted, decade-long-already contraction, the thought of a major up move over the next 15-20 years was something they could not possibly conceive of.

Vince Fulco writes:

Would note the release of the movie "Book of Eli" on DVD recently follows this post apocalyptic meme. Also has a fairly strong underlying theme of Pogo's "we've seen the enemy and he is us."

Pitt T. Maner III responds:

When will the post-Boomers give up on the end of "The Road " ideas and swing towards the "On the Road " themes again? Cyclicity. 

James Lackey comments:

One posits (as Mr. Vic did with movies and baseball) stock returns or better said premiums ratios are higher during futuristic movie and tv times.. see 60's twilight zone and late 90's everything was deep space futuristic.. then post crash it was all cop shows and today perhaps its true on the mad max which came in when the rust belt was dying post 70's Opec deals.

One does not say that its different this time. In my day Generation X was deemed stupid, spoiled and lazy.. It was a cultural and economic shift and we didn't know what to do, but the second we figured it out everyone I know ""just did it" hence the Nike slogan "just do it".

It's good to see the young beat up the old on the net, but quite respectful in person. I have a great deal of respect for my Son's buddies and all the BMX kids we train. Their only problem is over specialization and the quote above shows that in their belief their credentials will be their savior.

I do not agree they despise the boomers… I'd rather think we like to think or say that as Gen X ers for a revenge trade.. No Gen X er believed for a minute SSI [Social Security] would work out so for the Gen YZ kids to even think about it at all is a big joke..Ive never heard about it once…matter of fact if any Old BMX racers bring up the 3 sins of talking about Work Marriage or Politics at the track the kids ride off… the older adult pros age 18-24 say it flat out and crack me up "I can't handle this drama, I am gonna go talk to the girls" These kids today are "awesome". 

Ken Drees comments:

TV has recently been and still now is based on these themes "biggest loser" "bachelor" "dancing with the stars" "angry biker building show" "rock star real life" "idol" "top model" "fashion designer contest show" '"hell's kitchen" "next iron chef" "tattoo shop people" "dangerous fishing boat" "man in the wild" etc—a lot of contests, makeup, high energy, tears, people being eliminated, emotive overkill, action with real life injuries. All of this started with "survivor"–which is pretty much over–except they have a Spanish version of it on the Latin channel that I just flipped over yesterday so that trend must be in the last hurrah phase.

 But these themes are lottery like–taking a chance to make it to the top–be the one who can outlast the competition and the make it all the way. So maybe that consciousness seeps into markets–can we survive another day, the odds are against us but I feel the magic. A big cross section of age groups are relating to these shows—I personally got hooked on Hell's Kitchen–something about the angry language that I try to keep under control and watching that blond haired man just let his anger spew at those inept cooks. Then you get into the finalists and start rooting for a favorite —like horse racing.

Survival in a post 401k smashed world, surviving unemployment, etc.

 Kim Zussman comments:

1. They are all very upbeat, economically, on a personal level. They feel they are smart and educated and will do fine even though they expect things to dissolve, they believe their formal education is their life preserver.

2. They all hate the boomers and consider them the "entitlements" generation — they regard the ones who were mostly their parents, the ones they refer to as "The greatest generation" as deserving of entitlements, but the boomers NOT entitles. Very interesting — I couldn;t get to the logic of this other than we, the boomers, "screwed everything up, did nothing as a generation, and have a grotesque (to them) sense of entitlement to us.

Ralph please send our apologies for screwing things up for them. Ask them not to see "Avenue q", because exactly as Mr.s Rogers and Henson told them - and it is statistically remarkable - they really are all gifted, special, and specially equipped to make this a better world.

Sorry too about our house that you've been eyeing; its 20% upside down because of those college loans, and the one for your first car. At least there won't be any estate tax on it. And remember to hang that Ivy diploma proudly in the latrine - you never know when it might come in handy.

If you decide to get more education - forget about cloud quantum computing gene sequences. Go get your CPA, with emphasis on forensic accounting, and take some classes on retrieval of deleted emails, cash-tracing, and banking in the Bahamas. Also get certified to sell the plastics of the future - insurance.

Big shame about that 401 account. We were, as always, worried about you when they went below 700 and we sold everything. The good news is we got back in at 1200, so please work hard so your earnings propel it to the 12,000 you deserve.

About that screw-up: We were taught something like 2008-2009 was more unlikely than an asteroid collision. However now that the problem has been corrected, you have nothing to fear. Please tell your boss to deduct the maximum for your retirement account, auto-deposited in one of the index ETF's on the first of each month. Add to it on the taxable side too. More is better - buy as much as you can while you're young. Find a good ETF that will go up. If it don't go up, don't buy it.

Sorry about our health. We've been doing cardio for decades, so we're not going to MI like Opa or stroke like Oma. And we floss every day, so there won't be any need for chemo. But we did think to get long-term care insurance, and though you're mad hope you will pick nice nurses for us, and bring a case of Ensure now and then.

Alan Brice Corwin writes:

I've also recently had discussions with a large group of twenty-somethings, but I came away with a different impression. This may be a sampling or a context problem. They may have been less candid towards my generation because they were looking for money for their projects

The main difference in my encounter is that most of these people had boomers for parents. While most of our parents were in their early twenties when we (boomers) were born, their parents were often in their thirties and forties when they were born. There were a few with younger parents, but not very many. (We refer to our parents as the greatest generation because they beat the Nazis and the depression, but who are they referring to and why?)

In fact, I noticed a lot of sympathy for their boomer parents. Several of them noted that their parents had worked hard all of their lives and had expected to retire soon, but are now looking at having to work into their seventies or eighties. There was a general feeling that they would not allow this to happen to them. They would take care of their retirement needs while they were still young.

The main resentment that I encountered was that I was able to get my education for free. They don't think social security will be there for them, but they were young enough so that wasn't really a concern. The idea that someone could go to college for ten years and have money in the bank at the end of it was simply mind-boggling to them. People with full scholarships all the way through told me they had forty grand in debt after school.

I also detected less regard for their formal education among the group I talked to The pretty much all had college degrees, but they regarded their life preserver as their skills at seeing what was needed and building something to meet that need. Several told me that their college education was only good for getting a crappy job for a big corporation, and they had no interest in that.

One point of similarity I noticed is the sense of impending decay. One young man told me that he thought we would see a thousand bridges fail in the US in the next ten years, and that no one would step forward to maintain them. He said he saw no inkling of the common sense of purpose that must have existed when the roads were built. He further pointed out that the infrastructure needs were far greater today because there are now so many more people, but China and Dubai seem to be the only places where they are actively working to build a modern infrastructure. He said we have a 1900 model railroad system and a 1950 highway system (I didn't point out that the interstate highways weren't built until the late fifties and early sixties).

There was a sense that they would never have the life their grandparents had. This same young man said that his grandfather went to work for a company right out of college, worked for them for thirty five years without a layoff, and had been retired and playing golf on a generous pension for thirty years. His grandfather had bought his house for less than ten thousand dollars, and three years ago he could have sold the lot the house was on for nearly a million dollars (not any more).

Another thing I noticed was that almost everyone they idolized in business was a boomer. As you might expect with a group that was more iPhone app developers than anything else, Steve Jobs was far and away the person most admired. Eric Schmidt of Google was another favorite, but ranking way behind Jobs.

Marlowe Cassetti writes:

Wouldn't it be great if they were to make a new reality program based upon the Turtle Traders experiment. All the intrigues of students from diverse backgrounds competing. Ah, the high drama. I bet some of us Specs might be so inclined to view a few episodes. Am I right?

Lars van Dort comments:

Actually the BBC had a program called 'Million Dollar Traders' last year:

"Eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund. Can they make a killing?

The experiment reveals the inner workings of a City trading floor. The money is supplied by hedge fund manager Lex van Dam: he wants to see if ordinary people can beat the professionals, and he expects a return on his investment too. Yet no-one foresees the financial crisis that lies ahead.

The traders were selected in spring 2008, before the US credit crisis gathered pace. The successful candidates were chosen, trained and dispatched to their specially created trading room in the heart of the Square Mile. Among them are an environmentalist, a soldier, a boxing promoter, an entrepreneur, a retired IT consultant, a vet, a student and a shopkeeper.

The eight novice city traders struggle to ride the storm as stock markets around the world go haywire. Some of them take big risks, and others lose their nerve in spectacular fashion."
Episode 1:
Episode 2:
Episode 3:

I quite enjoyed it.




sales of iphone 4Of all the canards, snares, delusions, and misinformation about markets designed to put the investor on the wrong foot, to increase the flow and likelihood of resources from those at the bottom of the web to the top, surely one of the most destructive is the idea that sales are more important than earnings, an idea that seems to have the market in its grip. The reaction of IBM to an increase in earnings above estimate of 8% and sales below estimate by 6%, with the stock dropping 5% is just one horse from that dump heap.

Same thing happened to General Silo when it announced great earnings but sales declined. Must make all these proud CEO's shake their heads in disbelief when they tell their boards that they can't believe that the stock is down when they're doing so well, and their every sale is at a profit and they are only selling profitable products rather than just selling anything they can to get cash.

Indeed, the first item reported now from the traditional income statement announcement is the sales number versus the corresponding quarter, and the surprise factor of sales. Compilations of companies that beat the bogey for sales are now almost as numerous and useless as those for earnings.

Sales are the easiest thing in the world to manipulate. From economics, the buyers have a demand curve for a product, with alternate uses and utilities for it. The marginal utility of each additional unit decreases. At a low price, they will use it and buy it for many uses. For example, the traditional explanation in Heyne where water is used for plants and baths at low prices but only for drinking at a high price.

From a practical standpoint, every business person knows a million ways to increase sales at the expense of profits. you can sell to bad credit risks. You can dump inventory at close to cost. You can offer discounts for bulk orders or pre orders. You can reduce the price and ask your customers to store it for a rainy day or some other use. You can sell to a wholesaler or distributer instead of the ultimate customer, especially for a price. You can justs turn over your product to your customers with a "I'll take 5% on this. Just enough to keep me going". Or you can produce a higher quality product with better terms and tell the customers what a bargain they're getting by taking it out of your hide. Or you can buy a division or company to expand sales, or work off your inventory to change the number.

Indeed there's no item in the expense or revenue side of the income statement that can't be manipulated to increase sales. From a value standpoint, the stockholders desire an increase in wealth, not an increase in sales. What gives them wealth is earnings, not sales.

Okay, where do all these crazy reactions to sales come from? There must be some academic study, doubtless done with retrospective data that shows that sales provides information. And some earnings aggregator sellers must have shown that sales is a important signal with data from one of the retrospective data files that are so misleading and cause so much havoc. Or perhaps there was one period with a turning point where style investing based on sales had some information value.

Of course, companies are very smart, and it's so much easier to manipulate sales than earnings because you don't have to have the complicity of the accountants or move one item on the balance sheet to never never land to change sales. So even if sales were once of reasonable signaling value, now they will be changed in cycles in the typical Baconian way, and of course the public will be behind the form even more than usual.

But in the interim, what a fantastic opportunity to take advantage of this ridiculous malarkey and the reactions of stocks thereto.

The funny thing is what must go on before the release of the income statements these days. The insider and the outside flexions for the big companies must keep the earnings in the hip for a few weeks on a need to know basis only with smug satisfaction that they have beat the guidances they gave out to the analysts and the favored institutions and that they have pulled the wool over the eyes of the accountants to a reasonable degree to pull the earnings into the right territory. Then the horrible realization must come that they forgot to run a sale of buy that division before the quarter occurred and the sales numbers actually show something below the bogey must arise, and their smug satisfaction turns to the agonizing thought that even though business is great, they're going to have to do a lot of explaining to the board as to why the stock is down. 

Paolo Pezzutti comments:

There are also other ways to try and increase sales and earnings at all costs. Apple is in my view the last example of a company which is struggling to keep up growth prospects at all costs. And the bigger the company becomes the more difficult it is. The problem of the antenna of the iPhone indicates that they did not give enough time to their engineers to test and make sure technically it was all fine…because of the hurry to come out with something new as soon as possible. Eventually, however, this approach to customers might painful. Hopefully they understood. 

Ken Drees asks:

Do consumers get conditioned over time that products need fixes and patches and it's just the way it works in tech– so no problem–send me a carrying case and a patch and we love Apple just the same?

Plus, Apple prices their new stuff way high on debut and people can't get enough of it and then they lower prices to get sales goosed–which pisses off the early buyers yet they seem to forgive next time around.

Also, what is your general opinion on dividends? In my market lifetime, dividends were always poo-poohed and shunned as a way to lose capital. Friends in business always reinforced that concept the putting money back into the company was more prudent. However in my father's lifetime dividends were an important investment consideration and if the dividend was solid or not, or if it grew each year and thereby showed business health. High dividend taxation rates affect investor sentiment about holding div paying stocks. The repeal of tax cuts in Jan will hike div tax rates. I wonder how retired people structure their investments to throw off income these days–bonds don't pay much, energy patch only real div sector that comes to mind.

You can't fake a dividend. 

Rocky Humbert comments:

Ken: You are correct in all of your statements about dividends. However, while you cannot "fake" a dividend, you can "cut" a dividend.
The interaction between dividends and taxes, dividends and management stock options, dividends and corporate cash balances/reinvestment are well understood. Also understood is that fact that a substantial portion of total market returns can be attributed to REINVESTED dividends.

Notwithstanding this, whether you cut a pizza into 8 slices or 7 slices doesn't change the size of the pizza. However, if you have eight friends over for dinner, serving 8 slices makes you look like a good host. Whereas serving 7 slices makes you look like a miser. This illustrates nicely the investor preference for dividends from time-to-time. If you don't ever have friends over for dinner, it shouldn't matter….

One thing that is poorly appreciated– and which I encourage you to consider– is the relationship between dividends and the "duration" (to use bond parlance) of an investors' stock portfolio. Here's an example: If you buy the 7-1/4% treasury bond of May 2016 at a price of 129, the duration is 4.9 and the convexity is 0.29. Whereas if you buy the 2.625% of April 2016 at a price of 103, the duration is 5.32 and the convexity is 0.32. So, the lower coupon bond has more duration and convexity even though it's a slightly shorter maturity date and has essentially the same Yield-to-Maturity. I'm sure the quants out there will find fault with this analogy, but I believe there's a similar effect in stock portfolios.

Jim Lackey comments:

No they are not Mr. Vic.. mid quarter updates– TXN or IBM or any of them– say all good, and why stocks gap so much is insider selling and we all know it. It's not all that bad as they raise the full year outlooks and TXN book TI bill ratios fall as a certain handset maker is on the ropes. But the joke is now vs 99 they can contract out manufacturing and ramp up and down production so fast all the old school book to bills or updates are well, perhaps useless. But a few still have their own factories, and if they buy new fabs from Klac LRCX or Nvls… I don't know how it's bearish in the time frame your looking at, but AMAT is all in Solar and that reminds me of used car sales, and one guy on the internet who went to a solar show and he said it reminded him of used car salesman and I thought good! Perhaps some sales will get done.  

Stefan Jovanovich comments:

Samuel Butler scandalized his readers by suggesting that the banking system of Britain had replaced the C of E as the national church. I think he would have been bemused to find that the language of finance has now become completely theological, that wisdom takes expression in the form of discussions about "decent" returns on capital, etc. I know Butler would have laughed out loud at the discovery that in the 3rd millennium mankind had reached the point where money itself could only be discussed in terms of its moral meanings and the words "sinister" and "deflation" could seem perfectly compatible usage in a single sentence.

From Mr. Butler's pen:

"MANKIND has ever been ready to discuss matters in the inverse ratio of their importance, so that the more closely a question is felt to touch the hearts of all of us, the more incumbent it is considered upon prudent people to profess that it does not exist, to frown it down, to tell it to hold its tongue, to maintain that it has long been finally settled, so that there is now no question concerning it."

" I do not mind lying, but I hate inaccuracy."

"Life is the art of drawing sufficient conclusions from insufficient premises."

Those of us who do own companies - not just as thought experiments but as our accursed fate - truly envy Rocky his ability to find answers in the current MBA Book of Common Prayer; what we see on the street in California right now is that the only current action is being handled by the Lackeys and the few other over-traders who have never had the luxury of being able to ignore the current bid. Everything else is talk combined with (1) belief that the "cycle" will somehow continue as the Emperor peddles along on his imported energy-saving machine and (2) a desperate eagerness to get to the next meeting with the representatives of the official church.



The LoBagola in the dollar appears to have run its course. Dollar Index Chart . T'was a doozy. From 82 to 88, back to 82. All of this to me means a bounce is due.



 Is it me, or is it easier to bluff and steal a pot when the pot is small and less is at stake? It seems like players are not quick to defend or contest when the stakes are "not worth it".

Can this be seen in markets? Do sellers dump near lows or not care to squeeze you when you are trying to trade through their midst when action has lost its edge? What are some examples where the markets let you steal a little–out of nothing more than fatigue or lack of interest?

George Coyle writes:

I think about this often but in a different way. Looking at the concept of the bluff from another perspective, the amount of capital a player has certainly influences play and outcomes in both poker and markets. The person at the table with the most chips can often “lean” on the other players without much risk. As an example, if the pot was say $25 then the person with $250 in risk capital will be exponentially more averse to attempting the bluff (or holding on to a questionable hand) than the person with $2500. In instances where you hold the majority of the chips the cost to see how things play out and/or wait for a potential reversal of fortune or increased probability of success with new cards coming out (or information/prices in markets) is worth it more often than not so long as the stakes don't get too high relative to your risk capital (unless you truly have a terrible hand then discipline is prudent). The blinds (commissions/spreads in markets) will eat away at the little guys in the meantime to the tune of a much greater % of holdings. Leads me to wonder if there are any studies to this effect showing the tipping point wherein an uneven distribution of holdings presents an inevitable conclusion in outcome (i.e. the big fish wins/the rich get richer) should the majority holder choose to play conservatively and never risk too much going “all-in” (and barring social revolution)? I would imagine Warren Buffett rarely gets margin calls and his “genius” at this point could just be by virtue of having the most chips and ultimate staying power (mindful that he did manage to get himself to his current position).

Similarly, I would imagine the player with the most chips wins hands s/he probably shouldn't (statistically speaking) by the same virtue. The film director Oliver Stone said, "Luck comes from persistence and talent. If you're talented your luck will eventually come." Perhaps this is the root cause of lots of modern success, a little well timed luck leading to a "lean" advantage which serves as a self-reinforcing phenomenon. In horse racing they use "claiming" races to account for this effect. These races have a fixed cost where the horse can be bought should anyone want to pay the cost. This keeps the $20k horses from consistently stomping the $4k horses (the owner of the $20k horse entering the $4k race would run the risk of having to lose $16k selling his horse at $4k). It would be interesting to see how markets would play out if a similarly tiered structure existed.

Scott Brooks adds:

Ken is right. When I played poker in the 80's (I played strictly 7 card stud back in the day), the size of the pot mattered. But at the same time, it also had to do with the pain associated with the final raise. Of course, the final raise wasn't the end all be all. It was the build up to the final raise……i.e. slowly suckering the guy in with a series of raises that were painful, but not so painful that he wouldn't make call the raise, or even raise the raise.

It was also helpful if earlier in the night you had the nut hand and suckered him into a sure loser hand (loser hand for him). It was key that when you suckered him into the sure loser that you not make the loss too painful. Save the pain for the big bluff to come later that night (or on another night….it might be weeks before you get cash on this set up).

One of the keys with this set up (I'm sure professional poker plays have a name for this set up, but I don't know what it's called) is that after you sucker him into calling your last raise, you show him your cards and tell him, "Fred, I'm sorry man, I stole it from you" (or some similar phrase). But it's very important that you show the cards in a humble manner, with a contrite look on your face, and say the words "Fred, I'm sorry man, I stole it from you", in the kindest most humble manner possible, looking almost ashamed. You are conveying to empathy to him.

But if you did all that right, later in the evening or even weeks later, you could sucker him into a big bluff. But you have to use this bluff wisely. You have to make sure that he's got a decent, but not great hand. You have to use your best judgment to determine that he has, at least a high straight but no more than a low full house. And you have to make sure that your hand is mystery to him, but that it doesn't appear to have the potential to be too big of a hand.

You have to slowly sucker him into matching raises or raising raises and suckering him in without him noticing the financial commitment he's made and how painful losing at this point would be. He needs to think that your bluffing again. You then hit him with a big raise, a raise large as to be painful……so painful that you can almost always see the fear on his face.

You can see the fear in his eyes as he realizes, "I've got a lot of money in this pot and losing this pot now would hurt, but I'd survive. But if I call his raise and lose, I'm gonna lose my house payment for this month".

At that point, you have them. The fear of losing this months house payment is too much and they usually fold out of fear.

You can then decide whether or not to show him your cards (since he didn't "pay to see them….i.e. he folded), either way, be gentle.

Later in the evening, make sure you're compassionate to him. For instance. If later on you have the "nut hand" and he wants to keep raising you (i.e. he thinks he can beat you), tell him, "Fred, I've got the nut hand". If you've done things right, Fred will know that you're being honest with him and fold. Show him your cards and let him know that you really did have the nut hand.

That way, Fred will have a good feeling about you (and feel less bad about his earlier losses) and will want to come back to the table, night after night after night so you can slowly bleed him of more and more capital.

That is how poker players bleed gamblers dry.

And that is why I quick playing poker. I couldn't stomach what I was doing. I loved the money, but not how I was making it. I couldn't look myself in the mirror.

If I win a trade or beat out a competing businessman I can feel good about that win. But I felt like a hustler win I took money from the "Freds" of the world.

Gains without integrity are hollow and empty….and if they're not, then you are a hollow and empty person. I was not that person. So I quit.




Don CoryellRIP Don Coryell, innovator and aerial conductor. 

Scott Brooks comments:

St. Louisan's suffered for years with the Big Red (the football Cardinals). But under Coryell, we had several years of great excitement! If only we'd had a better owner (Bill Bidwell) and a better draft department (George Boone), we might have done something.

Don Coryell, should be in the Hall of Fame for no other reason that he took a pathetic franchise, with a pathetic owner and a pathetic draftnik, and turned them into a team that contented.

Stefan Jovanovich adds:

More about DC:

He played quarterback and running back at Washington but was never good enough to start because his classmates happened to include Don Heinrich and Hugh McIlhenny. He was the university champion in the light heavyweight division; people who saw him fight said he was a copy of Jack Dempsey as a teenager, pure aggression for 3 minutes of every round.

Dan Fouts: "He was an atypical coach. A lot of football coaches believe it's my way or get on the highway-thing. But Don gave us as players a feeling of ownership of the offense, the plays. He took our ideas and tried them. He wasn't afraid to try things."

John Madden: ""It was the way he treated players. I think that was something that was missed. We tend to jump right to the coaching part, the offensive part, and the passing game. But his No. 1 thing was his handling of the team. He was a master of it. As an assistant, he treated you as an equal. Players were always the most important thing to him. I think he had more respect for his players and coaches than anyone I've ever known."

Like Pete Newell and John Wooden the man put literally everything he had into coaching. When someone asked him in 1992 if he was sorry he had retired, his answer was: " I don't miss coaching one bit. Not a lick. I miss the people, the coaches and those great players. Those great guys. But I gave it everything I had. I didn't want to die on the football field, and I might have if I had stayed around much longer. I was tired. No question, I was physically and mentally shot."

No one who knew him can remember his having ever been cruel or even petty.

Scott will get his wish; they will get round to voting him into the Hall of Fame now that he is safely dead. When they voted him down earlier this year, he told his daughter not to worry because they would get round to it some day. Committees always have an impeccable sense of timing.



 I'd like to thank whoever it was that first recommended David Aronson's wonderful book Evidence Based Technical Analysis. We are finding it so useful that we are buying a copy for every employee (only three of us so no windfall, David). This book is so solid and well-written that it should be a must-read for everyone doing anything with statistical inference. It has already led to some changes in our research process that should make our results more robust.By the way, reading this site is certainly increasing my bill at Amazon. Henry Clews' book is the first thing that I read after joining the list (wonderful!), and I just received Tufte's "Visual Display of Quantitative Evidence".

Russ Herrold writes:

You're welcome! I received a 'review copy' through David, courtesy from Wiley. The book is thought provoking, educational without being obnoxous or intrusive as it instructs, and well worth the read.

Ken Drees writes:

There was a book thread posted a few weeks or so back that will maybe be archived in a different place on the website for quick review of spec's best book recommendations. I too have picked up some great reads from here.



 The 30 year fixed rate is a multi decade low 4.57 percent. Yet no action has been spurred. I was told that the best time to buy a home is when interest rates are high (a relative notion) and sales are slow (recession = slow RE market). The idea is that since rates are high home prices are then at a low ebb since buyers must figure in stringent mortgage servicing costs into the home price purchase equation and the sellers have to price low in order to sell. The "how much home can you afford number" that a RE agent and the loan officer puts together would thus have the higher interest rate chunk limiting the price that seller could try for.

So if one can buy at low prices and near the top end of the interest rate cycle with a fixed rate 30yr, you could ride the refi train all the way down the line. Realistically its hard to do all of this since buying a home usually happens at certain times in your life –this notion of buying when rates are high and prices low is not one that is bandied about all that much. Probably because we have had steadily falling rates and creative RE finance for years on end.



 A million events coalesced this week to put the market in a highly precipitous state with the expected standard deviation for Tuesday, based on pre holiday lows of 32 being a good twice the normal 15 for any day. Without minimizing the seriousness of a loss of 50 points in a week, perhaps 3 trillion or more in wealth, perhaps one can find some order beneath the random happenings.

First , some quantitative things. Big minima before holidays occurred only 6 times in last 15 years, one on Labor Day 2001, and one 10 calendar days later, two on July 3, 2002 and 2008, and two on Martin Luther King day 2005, and 2009. Changes to the close of -60, -60, 35, 14, -13, and -46 followed those days with a stand deviation of 32.The situation a week later was even more dour, although in an interesting anomaly so typical of markets, the standard deviation of the 5 day change is 28 versus the naive expectation of 70 from the one day change.

On the other hand after big declines in a week, of 5% or so, a event that regrettably has visited us on 1 in 20 weeks that last 10 years, the market is quite bullish with a standard deviation of 35 the next day and a more expected but gargantuan standard deviation of 60 for the following week.

One also notes a string of exactly 5 consecutive losses in the S & P, an event which has occurred on about 1 in 25 days, as compared to its expectation of 1 in 64 days. Fortuitously, the standard deviation the next day is a mere 18, and the expectation is zero.

The situation with the Nasdaq is similar on a weekly basis. With its 120 point decline for the week, the expectations are not much different from random. However, with 11 consecutive days without a rise, that's never happened before. The highest run of consecutive declines was 10 on October 12, 2000, when the adjusted Nasdaq was about twice the current level.

More interesting is the failure of the market to rise a reasonable level in 13 consecutive days, an event that is a true rarity only having transpired on 4 occasions before. That event has again led to an expectation of 0 to negative in the next following days.

Turning to the always fascinating changing web between stocks and bonds, one notes that while the stocks declined 5% this week, the bonds went up about 4 1/2 points from 123 1/2 to 128 1/2, with 5 consecutive rises to Thursday, July 1, close… One would expect contrary to the upside-down sponsor's constant refrain that would lead to some reallocation to the stocks. And indeed to a reasonable extent that is true, albeit the expectation is only 1/10 of its standard deviation going out 1 week in future.

The variability of all these things is so great relative to its expectation that even if the future moves were drawn from the same distributions as the past, nothing here would be of any great regularity.

Thus, we turn to the qualitative. Everyone from the President to the upside down sponsor was on TV talking about the significance of the employment number, all from their own corner of self interest. I like the emphasis now that is placed on private sector jobs, the 63000 increase, a number that is becoming so much less relevant as government jobs gradually become more numerous, more attractive, and crowd out the jobs in the private sector. Along those lines, everything came together with Barton Biggs reporting that he sold his technology holdings. The news came out rite at the close, putting it in the pitching in the pinch category. It was the one thing that determined the market move for the day as just before the market had been up a 1/2 % on the day and the news caused it to decline 1% in the last 10 minutes.

It was the perfect thing as Zeus sat there at 350 deciding which of the Goddeses to favor with his kind attentions over the weekend, with the balance of the market on his scale. And then came the perfect announcement. Biggs is bearish because the intervention and the stimuluses mite stop. And it's particularly newsworthy because he made money in 2009 by being bullish on the stimuluses as if being rite one year has anything to do with being rite the next year. But it's the idea that has the world in its grip. And it provided the perfect backdrop for more interventions coming in the future. And of course the reason that the market is down so much is exactly that the interventions have caused all incentives and all desires to make investments with the increase in service rates of 100 % coming up , totally vanish. Thus, the news followed the price, and led to what is guaranteed to happen, a call for more jobs, more jobs especially for those organized in special groups that can provide votes and funding — but most important of all, a clarion call for taking from the common man to provide a greater need for intervention by those of superior knowledge and tastes.

I believe one gets the picture.

Paolo Pezzutti comments:

I already see those who will benefit for a second round of stimulus counting the big money they will make when borrowing at 0%… A nice and unfair advantage is about to come again for those on the right side. Especially for those whose risk in this "trade" is practically zero! Few, damned and now (!) seems to be logic (although for some it will be another windfall of earnings and bonuses). Politically this is very much convenient and powerful lobbies may already be at work to support similar moves. Someone else will take care of the next generations. We will not be here anyway, so why worry. However, the greedy ones who think that the game will unfold the same way, at least for equities and currencies, this time might be wrong. Mainly because few governments will afford this kind of move. The US could still do it and China. Europe not for sure…Different variables are at play. I was not clever enough last year to understand the magnitude of the implications related to the huge injection of money in the system made by governments. However, my skepticism that this is the right way to solve a problem that is structural in nature increases.

Ken Drees writes:

One item left out of the soup, the China market had a big drop that was partially erased–this drop happened after the recent won float plus labor issues arising. Also hundred year floods are still raging in the southern provinces as well as growth estimates being revised downward. There are some big possible trend changes in place in China right now that are not being looked at for the most part by the west.

I spied some interesting fin tv that was a little bit different from the norm–a la the new paradigm–China catches a sniffle and USA catches a cold. This concept ignored by most financial media and blogs all week. China chart looks likes SPY only a bit tighter.

I think we should look east short term for possible dislocation in the west.



arsonAll those benighted idiots who took out adjustable rate mortgages a couple of years ago with 1% initial teaser rates are looking pretty good these days. They probably paid 4% interest over the last year, and are looking at adjustment to something like 3% for the year to come.

Ken Drees adds:

Pennywise, pound foolish. So what if you save some bucks on interest. You invested in housing at still questionably high prices, and interest rates can only now surprise on the upside. Selling your home (getting out) is not a button push. Housing can stay low and will for years–much longer than short term holders will be able to stand.

Now they should lock 30's. Lots of arson these days….



I re-read the Sun-Tzu on the weekend. I know it is one of the most hackneyed books out there, but I wonder how many have actually read it. It is an extraordinary text, and one with which I feel a great affinity. I singled out a few verses from within which i'll send to you. I love the ideas of formlessness, of having the enemy come to you and making them spend all their force in doing so; that the attacker is vincible, while the defender / passive is invincible. That numbers count for nothing, but strategy with sound tactics is everything and can defeat the largest force. The power that comes from knowing the enemy - and the even greater power that comes from knowing oneself. All very strong stuff.

Ken Drees comments:

I especially like the secret agent dealings that are laced throughout. See "secret agents" in the index for page numbers.



Among the things a father has to do with his son is make him a hero at amusement parks, play catch with him, teach him how to deal with old, young, girls, boys, teach him to survive, teach him how to use tools, play games that will provide lifelong benefits, and take him to the track. I took Aubrey to the track tonight and he told the bus riders that daddy's horse lost, but it was winning at the beginning but the number 9 came from behind to beat him". I was very impressed and he said when I asked him whether he wanted to go back to the baseball game or track more, he said " i want to go back to both". I was impressed with the whole thing, and yet Artie's wisdom that " all gamblers die broke was running through  the mind. The spectacle at The Meadowlands is rather pathetic. They're losing 30 million a year or more, and each year attendance declines, and the purses decline.

About 1500 people came to the track on this beautiful day and in the comparable days when Derosa and I used to go it was 20000. The quality of the 1500 that were left was very high, and they knew more about the game than almost all market speculators that I knew. One of them was telling me that the trainers cant make money with these 8000 purses, so every now and then, all the favorites lose on a coalition and the trainers make out big with the exacta and pick 4. My goodness, this was rite out of Bacon, and shall we say, the squeezes and inflexionic trading that goes on in our field. The tracks have given up on selling handicappers picks, as the 1000 attendance isn't enough to support it, but the post and sports eye have at least 8 handicappers each who rate each race. Considering the average handle on a race of 10000, that would seem like a concentration of forces in a field with a low return to scale and effort. The erudite analysis of Dave Brower on each horse in each race in the program is very reminiscent of the experts I hear on TV when I am in a hotel and need prices.

I like this typical sentence one of 110 for the day. "Machs tenor. Makes third start off the bench here, and this is the spot to take a shot, draws the pole and trust me, he's better than he shows." Amazingly pithy and deep for each race. When Brower's horse wins, the announcer congratulates him. There are helpful operatives all around the track showing us how to use all the machines. But I opt for the old fashioned teller and he has a belly laugh when Aubrey says to him "x on the 4 hours to place". It's one of about 5 tellers left there with hundreds of computers taking all the meager remaining bets. The sports eye has 20 tells for each race, ranging from average winning dollars, percentage, in the money, beaten favorite, strong stretch, good trip, favorable post position, hot trainer, first or second recent race after layoff, favorable driver change, won last race and stays in same company, second recent race in same class after dropping, superior mudder, blocked in last race.

If only the level of analysis in markets was half as good or half as tested. There were dozens of patrons following simulcasts that were being screened and they screamed as the race progressed and the emotions were so much the same as the thing that Jeff and I and so many others on this list saw in the pits, and no prisoners and life and death passed so fleetingly through the rings.

Thomas Miller comments:

I was in Atlantic City a few years ago and was walking through the large public bus waiting area that serves the casinos. 99% of everyone there waiting for the lonely long ride home and looked dejected and sad staring blankly into space, It was eerily quiet, with almost no conversations taking place. They had obviously lost what little money they had for the week. If you ever fear for Aubrey becoming a gambler, take him for a stroll through this area (it's probably still there). Your father's wisdom is played out in real life on a daily basis. These people play an important role for the casinos like many market players that slowly churn through their accounts paying for the upkeep of the mistress.

Ken Drees writes:

NYT: Reasons for the Decline of Horse Racing

I am up too late tonight posting this–going to pay tomorrow.

I am in the lost generation that never knew horse racing. The only touch I got was from my grandmother who would call us on derby day morning and read us the odds and the names over the phone. We would tell her to bet the horse for two dollars and she would—how I don't know, and it didn't matter because we never won.

At least we watched CBS wide world of sports who showed the major horse races with some built up punchiness since we had skin in the game.

Ralph Vince comments: 

I don't know HOW anyone can approach ANY risk-opportunity in life WITHOUT having been steeped in "The Track," and all it's (now-evident-to-me-market-relevant) b.s., the list of such which would take the better part of today to catalog.

I was fortunate that my father and uncle's were so swarming-crazy about such things. Railbirds at the top of the lane, where the roar of thoroughbreds coming out of the last turn induced an unforgettable euphoria with each race….

"If you go near that window I'll break your g.d. arm," I remember my uncle reminding me at least a hundred times. (I shouldda listened).

As a little boy, there were three, really BIG days, Christmas, "The Opener," (where the Indians, playing their first at-home game mandated you cut school) and the first Saturday in May — the latter, being the biggest. To go to Churchill Downs for that was nothing less than a pilgrimage to the high temple of life itself.

To go there, on any other day and see firsthand the contrast of the high temple, transformed into Podunk Downs on a Wednesday afternoon, in the middle of dumpy L'ville, taunts a boys imagination and makes him realize that the entire episode, the magnanimity of it, is all in people's heads –as with everything.

Jeff Watson Comments:

I grew up at the track from the age 8 or so. I learned everything the hard way paying a very steep vig. I quickly learned to only bet 1 or 2 races on a card trying to find that elusive overlay and still usually lost. Luckily I discovered Bacon, Cohail, and a few others that made my daily deposit shrink just a little. The smells, cigar smoke, the body odor, the spilled beer, torn up tickets, the touts, the losers, the winners, lost dreams, every human emotion is amplified 200% at the track. As a kid, I learned that if I had a good afternoon at the flats, I could make it to Maywood Park by the 3rd race to bet the sulkies at night. We always found accommodating adults to get down our action. I usually went home a little poorer, but much wiser learning many things. There were so many indicators at the track, and I learned at a very early age when to throw out the chalk, which was perfect training for the pit. In fact, learning when to throw out the chalk was probably the best lesson I ever learned that I could use throughout my life. Electronics has done to the track what it has done to the trading pits and I feel very bad about the disappearance of a way of life. There's nothing like hearing the roar of the crowd of 25,000 people while the thoroughbreds are thundering towards the finish line, neck and neck. OTB and screen trading just don't cut it for sheer excitement.



Its all so clear in retrospect that the market went down viciously. It had to be telling the subcommittees that unless they took out the restrictions on derivative trading by the banks that we were in free fall. The final decline to 1063 and dow 10080 today at 1030 was the warning. The scepter of death unless they changed things. The last thing we all want is a cratering economy and stock market before November elections. That's the one thing we can all agree on from Brussels to the Potomac. Let us hope that those very limber people mentioned many times in these posts were able to bring this impending debacle to the members of the subcommittees before they announced the eased restrictions, and that their good deeds were not performed with the just prospect of rewards.

Ken Drees comments:

Right as rain !



McChrystal Relieved of Duty; Petraeus Tapped - News Item

Old soldiers never die — they just fade away.

When politics trumps winning a war only the troops in harms way suffer.

David Hillman comments:

By exhibiting extremely poor judgment in allowing those things reserved for locker room utterance to be spoken in public and on the record by both himself and his staff, he busted the chain of command. Any professional military man/woman will tell you that simply is not to be tolerated. Period. If one questions one's superior's capabilities, orders, strategies, etc., do so in private and ask for a transfer. His transgression was egregious, especially for one of his rank and experience. This sort of behavior may play well to self-entitled Gen Y'er's, but as Boomer with 34 years of service in, he should have known better. Btw, imho and in that of many ranking generals asked to comment today, David Petraeus, the 'replacement', is not a downgrade. Consider him 'the ace of trump'. Now, can we, once and for all, adhere to the Chair's well known and oft ignored wishes and refrain from the political?

Ken Drees writes:

[Did you] ever think that he used this opportunity to get out–consciously or sub-consciously? I love how people automatically assume that it was a lapse in judgement. I love how the media plays up their own –how Rolling Stone snuck into the general's camp ala' the spy capturing the marshall in stratego–

He is a general. I am sure he ruminated day and night upon his situation the way a general would. I mean this isn't Gunnie from Heartbreak Ridge after a 12 pack of Michelob shooting his mouth off about his CO. I will give the general credit for getting himself relieved of command. Who knows what timing and or circumstances were behind the scenes to influence how this went down or why. If it was subconscious–then he got what he wanted afterall.



with all this talk about T–what is the population out there of female traders?

I never really thought about this until now–knowing that there must be some certain population out there–whenever I talk about trading to the intelligent female population that i know–they roll eyes quickly, change subject, etc. Of course they find my ideas engaging–but only to a certain extent–like how much money did you make.



 A trade is like the flight of a boomerang.

One must aim and grip the boomerang with purpose and correct resolve. Similarly in trading, you need to aim your capital tool and set parameters for its release. The boomerang slices through the wind using the force from the throw and release as its starting power and at its farthest point from home begins its return trip using that same wind that was once resistance as an impetus to make it back to the thrower. The trader throws out his rang and at some point of apex or apogee collects his win and then collects his tool as it comes back to him. The winds of resistance. As in trading, sellers and shorts against you if you are long are needed in order to get your trade executed in your favor and throw back your tool after you have made good.

If you throw the rang too flat, it goes swooping up and dives to the ground. This reminds me of getting into a stock that's going up fast or parabolic only to end up crashed, a rookie mistake of throwing the rang like a frisbee. Yet, many like to trade the super hot parabolas. Throwing it correctly means going out towards the horizon with an almost 90 degree angle of release or with a small amount of tilt to the right for a right handed thrower. Going with the trend is almost your best bet to get a good trade started. Aim the rang too low to the ground and it never catches real flight, aim too high and the tool will fly high and go farther back behind you on the return. Why trade for a tiny objective-aiming too low? Why trade for a sky high result which makes you wait and hope for it to come back to you.

Adjusting for the winds. As in market conditions you must know what the prevailing winds are before you throw out a trade or your rang. You must have the winds hitting you directly in the face. You must then throw 45 degrees right of this line and then the rang will use the force of wind correctly and mesh its aerodynamic motion of spin, forward motion and eventual twist to cut through and then ride out the winds back to the thrower. Sometimes you need to use a heavier rang for different wind conditions. Sometimes you cannot throw at all based on wind speed, or if the winds are swirling and coming and going from different directions.

Sometime trades get cut short. Sometimes they hang up or drift away and get lost. Throwing the boomerang wrong and or into the winds incorrectly leads to less than optimal results.

Catching the rang is done with two hands clapping flat together with palms catching the apex of the rang, not the edges which are spinning like blades and can nip, cut, or bruise your fingers or hand. Sometimes you may want to show off with a one handed catch only to get clipped-a trading bravado and its all too real result.

Gyroscopic precession is the term used for the flight dynamics of a rang-the spin, the design of the wing and the wind shear that makes it lay over horizontal and then hover home is something to behold, a wonder when it works. Somehow when a trade goes correctly and according to plan it is a sheer marvel. You throw out your best attempt when the winds are there and then convert at that peak point of risk/objective. With patience you let the market come back to you. Don't run after it since its designed to come right back to your hand. Then you reset your trade for another throw.

A boomerang is a sporting article and not a toy like its says on the box. Trading is the same in that it's real and can cause pain if not done correctly.



 The games between the playoff teams in basketball resemble nothing more than a battle between the bulls and bears with the individual star and goat players resembling the best and worst performing stocks. What can we learn from the games that will help up in markets?

1. Returns from deficits are often probable. The Lakers were behind by 13 points.

2. Multiple comparisons make ephemeral seasonal and set up patterns completely non-predictive. Boston C's had won 4 of its last 4 games out of 7 in the playoffs. C's had won all 11 finals. They had led 3/2 of 25 finals. The team that had led 3/2 won in 21 of the series. The team that was ahead the first quarter won each of the 6 previous contests. C's were 12/2 in games they held their opponents below 90. All these in C's favor, but they lost. Many more. Similarly for setups for markets.

3. An individual good player or bad player is the difference between success and failure. The placement of Robinson in the game when Rondo got tired was enough to insure loss for Boston as was the loss of their center. An individual stock like Proctor and Gamble, or Apple or GS can be the difference between a good or bad day.

4. The home court advantage is very great. The Lakers were well rested and they know the spins of the balls. The angles of the chess board are key in a blitz game. A market that has not used up all its bullish or bearish juices with a recent spate of victories on the road, i.e. a big up trend is much more ready to perform.

5. A strident approach never beats the thoughtful one. Doc Rivers was yelling at his team to perform and not be heroes while Jackson was patiently telling Kobe not to be so animated.

6. Rebounding is key. The C's shot 7 percentage higher than the the L's. But they were out-rebounded by 10. The markets that have the ability to swing back from deficits throughout the day get more chances to win.

7. The ability to score from the paint was key to the victory. If you take care of the draws, the easy shots, the wins will take care of themselves. A market that goes up or down in an uninterrupted way throughout the day is much more likely to show subsequent superior performance than one that's constantly backing and filling.

8. Good health is the key to victory. The injury to K. Perkins of Boston led to the 53-40 rebounding advantage of Boston that was the key to victory. It also had a ripple effect on the smaller Boston players making them try harder to get rebounds after their shot, and paved the way for the loose cannon Robinson to get in the game to spell Rondo thereby cementing the loss.

9. The tortoise beats the hare. The C's were ahead for 90% of the game, but they managed to lose. It's the team that has not lost all its energy for the final part of the day that is going to win. The C's were all enervated after all the fast breaks and helter skelter shooting so uncharacteristic of them, and reminiscent of the Knicks with no rhyme or reason to their play in the fourth quarter.

10. Never give up. The L's missed more than half their foul shots, made only 30% from the floor, got only 20% shooting from Kobe, and were behind the whole game, including an insurmountable 13 in third quarter but managed to win. They refused to give up. Neither should the market player when behind and he's tempted to stop himself out.

Pitt T. Maner III writes:

Game 7 was not a pretty game. The refs very early decided not to call fouls. The 2 teams recognized that immediately. Defense, boxing out, rebounding and positioning became critical. San Antonio Spurs played that hard defense during some of their title runs.

Boston to some extent overleveraged on defending Kobe. Ray Allen played him tough but the rotation to Kobe left other players open and it was only a matter of time before experienced players like Artest and Derek Fisher hit key shots or picked up rebounds. Lamar Odom began dribbling the ball up the court in Game 6 that changed play setups.

Calm coaching (emotional instructions vs. critical assessments) , adjustments and situational awareness were important. Pacing was key. If you go out too fast in a series or game you can "blow up" in the end. Developing a rhythm is important to success. Very small things like having Vujacic in for free throws made a difference.

The Lakers played hard towards the end of several games they lost. There was a constant pressure that was palpable and it let the Celtics know that if they missed free throws or shots or turned the ball over they could lose. So instead of playing to win the subconscious note was to not lose. Avoidance of choking replaced winning thoughts.

Noise, trash talk , crowd hostility, and assortments of distractions had to be worth 2 to 3 points for the Lakers.

The overall theme seemed to be that hard work, rebounding and experience (the 10 and 13 year veterans) and suffocating defense won out over shooting % and a deep bench. Past history was not predictive—younger players weren't born and had no sense of history in most cases. Bill Russell who?

Ken Drees writes:

The psychology of not losing is more aptly described as the art of losing on schedule.

This has been mentioned before I believe–teams that win game 5 and go into game 6 with a mentality of only having to win 1 of 2 are setting themselves up for failure. Like the Indians against Boston being up so many games in the alcs and only having to win one—just one game and their pitching aces choke. Once you lose the first game, then the subsequent game is a must win and then the pressure is all on you and not on your opponent.

In trading, after a good run–one may think that one only has to trade even or slightly better to keep a winning scorecard. Or in golf, with a lead playing for pars instead of continuing after birdie golf. When you are hot you have to play or trade even better. Its time to focus and excel, not coast to the finish. When you are in a slump, then its hit the practice courts/cages/charts/post-mortems.

Lars van Dort adds:

In the same spirit is something I remember from a book on chess by Max Euwe (world champion 1935-1937). He wrote that after gaining a material advantage, one may have the tendency to play more cautiously. Instead, one should strive to put the extra material to maximum use, keep the pressure on and not shy away from complications. I have often found this thought to be very useful during games of chess and indeed other activities.



 69 stocks in the S&P 500 are 15 dollars or below. I have an unread copy of Ben Graham's bible with a forward from the sage on the table– there is some dust on the jacket. I was planning on reading it whenever deep values were to someday appear in the market. I am excited by some of these stocks due to yield, book value/price, and PE's. Banks, real estate, news, tech, telecom, industrial are low priced sectors here. There are some nuggets possibly to be found for a value player. It's probably too early for a reading of the Graham, but it is time to consider it.

Here is the list:

AMD- 8.10
AMAT - 12.56
AKS - 13.34
AES - 9.60
AA - 10.84
BSX - 5.74
CPWR - 7.85
CNP - 13.20
CMS - 14.26
CBS - 13.93
CBG - 14.88
C- 3.79
DHI - 11.34
DFS - 12.86
DF - 10.61
DELL - 13.24
EL - 11.11
EK - 5.10
FTR - 8.34
FITB - 12.5
FHN - 11.82
F - 11.5
GT - 11.49
GNW- 14.68
GCI - 13.73
HST - 13.65
HCBK - 12.59
HBAN - 5.83
IPG - 7.84
JNS - 9.95
JDSU - 10.62
JBL- 12.66
KIM - 13.31
KG - 8.05
KEY - 7.77
LUV - 12.02
MWW - 13.35
MU - 8.86
MOT - 6.70
MI - 7.38
MAS - 12.4
NYT - 8.50
NWSA- 12.65
NVDA - 12.10
NSM - 13.70
NOVL - 5.90
NI - 14.35
ODP - 5.32
PHM - 9.82
PFE - 14.76
PCS - 8.63
PBCT - 13.94
Q- 5.21
RE - 7.13
SYMC - 13.92
SVU - 12.68
SLM - 11.00
SLE - 14.24
S - 4.78
TSS - 14.28
TSO - 11.56
TLAB - 6.98
THC- 4.92
TER - 10.51
TE- 14.97
WIN - 10.79
WFR- 10.69
XRX- 8.88
YHOO - 15.00



 This image should match up well with the post that outlined all the money types.

Interesting how everything eventually falls back to gold, which is money (JP morgan said so) and which was outlined as the only form of money sanctioned by the constitution (specie).

And I understand that money = work done. So that money should hold the value of my work for some period of time–the longer that timeframe, the better the money in terms of purchasing power at the time of the trade of my labor for money.

The amounts of money that we talk of now–quadrillions anyone, is seemingly entropic and obscene. If the 1 trillion euro package wasn't enough, maybe the market was looking for 5 trillion to satisfy and upon hearing that number maybe that would have been the "no clothes" obscene moment when everyone would realize that debt has exceeded all expectations.

Lastly, interest can take the form of money or in goods or services as was illustrated in the book by Clausen. Loan to the camel trader secured by a ruby worth more than the loan in case of default. If loan returned on time loan is repaid with interest in coin or whatever agreed upon sum/item. Its interesting to think on these issues with base examples and then the very detailed and complicated ways that modern finance is composed. At somepoint though, every transaction has an end. Every transaction is paid back or defaulted. Every monetary vehicle either works or it doesn't. Money of any type, seashells to cents always has value (0 -?).



 Regarding the Will o' the Wisp post from the Chair some weeks back, I stumbled upon a nice passage in a book that I am reading–The Works of Guy De Maupassant. 1903 first edition.

He is a french short story writer from the early 20th century. Most of these stories so far are interesting in the way of a twist, with backdrops of war relations, sexual tension in terms of class distinction–i.e., lady of high standing or prostitute, stories regarding status– outlander or soldier– commoner and his standing in his small social circle, pregnant milkmaid, etc. These stories are interesting and entertaining in terms of language and settings/social settings and endings–a good short story diversion type read.

I just read a Prussian military story that was really well done. A small band of occupying soldiers couped up in a manor house under rainy weather with a French priest who will not ring bells due to the occupation and the soldiers getting restless. And then they send out for some French women to entertain them for an evening. Then the drama builds.

The particular story with a passage about a marsh was very moving, a descriptive and interesting scene. Two men are going out into a 3:00 am morning blind with very cold temperatures to hopefully hunt exotic wildfowl. It is a setting near an old growth forest where the best and most diverse fowl can be taken. It is a marsh that they are walking into.

Here is the writing from the story entitled "Love":

I am passionately fond of water and above all the marshes, where the whole unknown existence of aquatic animals palpitates. The marsh is an entire world in itself on the world of the earth-a different world, which has its own life, its settled inhabitants and its passing travelers, its voice, its noises, and above all its mystery. Nothing is more impressive, nothing more disquieting, more terrifyingly occasional, than a fen. Why should a vague terror hang over these low plains covered with water? Is it the low rustling of the rushes, the strange will o' the wisp lights, the silence which prevails on calm nights, the still mists which hang over the surface like a shroud; or is it the almost inaudible splashing so slight and so gentle, yet sometimes more terrifying then the cannons of men or the thunders of the skies, which make these marshes resemble countries one has dreamed of, terrible countries holding an unknown and dangerous secret?

No, something else belongs to it–another mystery, perhaps the mystery of creation itself! For was it not in stagnant and muddy water, amid the heavy humidity of moist land under the heat of the sun, that the first germ of life pulsated and expanded to the day?

The story continues into a hunt for fowl where the two men share an ice block blind in the marsh with a hole at the top so they can light a fire. They hold out as long as possible in the cold until a fire is warranted for basic survival. They light a fire in the ice block and then they hear cries of fowl overhead -maybe the fire spooked them or the upcoming dawn was coincident–either way they step out of the blind and see the fire inside the icy ball. The description of light and dark, fire and ice, dawn and dark, wet and cold is simply excellent. On top of this is the rush of energy for the hunt.

The time in the icy house waiting for dawn with no fire reminds me of waiting for an entry in a position-you get colder and colder, bored and ready to do something stupid, play your hand out of boredom-or simply going to sleep. I am right now in a strung out trade due to my making (waiting for an exit) and find solace in waiting. I can always light a fire and declare it over, or can I hold out some more and make it work. Either way it's a long walk back to the cabin and the cognac is gone.



-oil spill greater than first estimated

-Euro zone bailout underestimated

-USD rise underestimated

-oil's fall underestimated

-tarp underestimated

-unemployment understated

-recession length underestimated

-volcano impact underestimated

-gold's persistence understated

-housing slump underestimated

Reality seems to be generally understated and always underestimated.

Easan Katir comments:

 With the theory that to solve a problem one first needs to define it accurately, a small point for accurate terms:

In the Gulf, there is not an oil "spill". A spill is what happens when a VLCC or Panamex double hull ruptures and leaks, or when Ms. Napolitano jiggles her teacup after reading her poll numbers. A spill is measurable and contained.

In the Gulf is a giant oil gusher from a super-high pressure reservoir, which has been spewing heavy crude oil and methane 24/7 for over a month with no end in sight, with the potential to become the worst eco-disaster in the history of civilization.

David Aronsen comments:

 It's rational and in keeping with Bayes Theorem that estimates be updated slowly in response to new information. The related cognitive errors of anchoring and conservatism bias can account for the initial low estimates cited. Then as new information comes in they should be nudged in the direction of the deviation between the prior belief and the new evidence. 

Rocky Humbert writes:

Pravda reports that the Soviets used nuclear explosions five times (from 1966 to 1972) to stop underwater well blow-outs. Here's the Pravda story.

One of the reasons that it's critical to assess to true flow rate is it's a first step towards calculating the comparative environmental damage from a nuclear explosion viz a viz a continuing leak for another two months. It's interesting that this is not being discussed in the mainstream media.

Stefan Jovanovich writes:

In 2005 petroleum engineering researchers from Texas A&M University suggested that drilling in the "dangerous and unknown" ultra-deep environment required new blowout control measures: "While drilling as a whole may be advancing to keep up with these environments, some parts lag behind. An area that has seen this stagnation and resulting call for change has been blowout control."

A redundant system might have avoided this because the Cameron Blow-out-Preventer is partially working: The incoming pressure from below the BOP has been measured at between 8,000 and 9,000 psi, while the outflow pressure into the Gulf is 2650 psi. 2 BOPs in series might have done the trick.



during the 1987 crash1987 rhymes with flash crash?

1. market extended multi months correction overdue

2. correction was swift and violent making one day records

3. something new and unique was blamed for the crash

4. new regulations followed 87, talk is similar to new rules today

5. bears thought that the crash was the first down leg of a bear market; now bulls believe correction over

6. prior crash uncertainty in forex in 87 -Baker -dollar; now euro uncertainty -bailouts

7. fear after crash in 87 lingered long, no fear now really.

8. Volume was very high after 87-volume much weaker today

There is a whiff of similarity to my mind.

How come when there is talk about a "healthy" retest of the lows that would be needed to solidify a bottom like there was in March of 09, that retest never came and now after a ripper of a drop there is no talk at all about a retest. It's like that possibility doesn't exist, just like last week when the possibility of the Cavs losing to Boston wasn't even considered. 

I'm not arguing either, and I listen to sound bites only here and there, but I listen for the theme or the buzz that the media is playing, which is usually aimed at the little guy and which is usually wrong. So like the healthy test that was bandied about never happened in 09 March, so now you hear that the correction is over and it's blue sky ahead, which tells me that I should suspect 1. a healthy retest or 2. a breech of the flash crash lows–to follow my buzz inverse indicator.

Craig Mee comments:

Considering the onset of floor closures and computerized algo trading and the changes that has created, it seems comparing one crash to another opens more questions than answers. I'm not sure if in the history of markets has there been such a period of change. 



granite countertopThere may be quite a lag from these lower lumber market prices to the lumber yard. I would suspect that building materials and lumber may soften somewhat in the mid to late summer as inventory builds from lack of construction. Plus or minus inflationary expectations this summer of course. Home trends now favor small additions and living upgrades since more and more people are now stuck where there are and are resolved to that fact and may now start adding smaller upgrades like saunas, attic renovations (for the move back in with mom and dad grad), hot tub decks and so forth. If you can't move then improve!

The over the top granite counter tops and stainless steel appliance kitchen home equity loan draw days are over. People are paying cash moreso than adding debt to fund home improvements.



 A while back the NYSE had a glitch where trades got held up in a bottleneck due to software malfunctioning — I am sure someone knows the exact date. I was watching the screen and saw the amazing drop when the software was rebooted and the trades that were hung up all executed. It was like a wall of water. The explanation for that event made sense because it seemed to happen that way. Yesterday was different, it was just wave after wave coming through. Nothing seemed unnatural except the overall size of the drop and that it seemed to be happening much faster in terms or recent drops. We have computers just doing what they do and flashing faster and faster orders than ever before. Were program buys at the 50 week MA (Chart -  S&P Futures) the lucky ticket to turn it around? The NYSE should check out those collars and revamp for today's technology.

Fat finger? No way. Colonel Mustard in the dining room with a candlestick seems more believable.



sniperWhen discussing today's market action with a friend, the following chat conversation took place:

me: Market's crazy again.

friend: Yep i noticed…herd mentality causing kids to run from one side of the playground to the other.

me: Fine by me. Opportunity to play sniper in the market again and take advantage of people being dumb.

friend: one of the hardest things about being a sniper is not neccearily the distance from which you shoot, or the accuracy required when you shoot, or finding that perfect location, it's probably being too focused through the sights of your scope to not notice the private that snuck away went arround you and is now standing behind you with a gun to your head.

Wise words indeed…

Ken Drees writes:

That's why snipers work in teams–to watch prey and to cover rear guard.

Bruno Ombreux comments:

I was told that the spotter is not technically needed. He is only there to share the psychological burden arising from killing too many people.

For the same reason, some Investment Banks praise teamwork, notably in their structured finance department.

Peter Grieve writes:

Not sure this is relevant, but I heard that snipers never ever make it to prisoner of war camps. When an identifiable someone has been deliberately targeting your friends as individuals, accidents always seem to happen in the prisoner-taking process.




 I am writing a letter to Aubrey on his fourth birthday and as part of my introduction where I emphasize the importance of a proper foundation, something that will take account of the load and settling, and the variations when the temperature and water changes, and taking into considerations Galton's method of starting the day with shaving and brushing the teeth as a proper way to start, and all good scientists who keep a lab book with their previous days' effort, and where they left off, and every trader's proper foundation of writing down what happened over night since he left off writing down what happened the previous day, I want to emphasize to Aubrey the importance of taking good care of your teeth. I believe that very much of life expectancy and health depends on good teeth as germs start there and migrate. But I don't have any evidence. What is the best way to make this point?

Scott Brooks comments:

Be a good example and do it with him every morning, noon, and night. Kids watch what we do far more than they listen to what we say.

Make it fun for him. Don't just make it about brushing his teeth, make it your time with him. Talk about things that are important to him, and make it fun by talking with your mouth full of tooth paste and a tooth brush….i.e. so your speech sounds funny (kind of like when you try to talk to a dentist with a mouth full of cotton swabs).

And be consistent. Give him 'marker phrases', things that will stick with him his entire life (I don't know that "marker phrase" is the technical term, it's just the term that I use).

For instance, a marker phrase I say to my kids constantly is, "What happens when you listen to Dad? Good things! What happens when you don't listen to Dad? Bad things!" And then every single time they do what you tell them to do, reward them somehow and say (with a smile), "what happens when you listen to Dad?" (and they will say "Good things!"). BTW, the reward doesn't have to be anything other than a smile or acknowledgment that you know they did something good. And when they do something wrong, say to them, "What happens when you don't listen to Dad?" Much of the time they won't say "bad things" but they'll understand.

Here's another "marker phrase" that I use with my kids. Every night before I put them to bed (or if I'm out of town I call them and do this over the phone), I say this to them (we call it the Brooks Success Creed):

Remember, in order to be successful in life, you have to be:

A man of good character

A student to the best of your ability with ambitious purposes

of congenial disposition

Possessed of good morals

Having a high sense of honor and a deep sense of personal responsibility

You must always do unto others as you would have them do unto you

And above and beyond all else never get up (they usually say that phrase)

And remember, if you ever need me or mom for any reason, we'll always be there for you, we'll always take care of you, we'll always love you forever and ever unconditionally, no matter what. You can always count on us, you can come to us with anything, we'll always help you, we'll always take care of you. And remember, I'm your protector, I'm your Knight in Shining Armour! I Love You!

There are, I believe, many meals for a lifetime in that creed. But the key to it is that, embedded within it, are many key marker phrases that you can reference for the child. For instance, lets say that I'm having a tender one on one moment with one of my kids, I will say something like, "you are really becoming a 'man of good character' and I'm so proud of you". Or if they are struggling with something and eventually fight their way through it (i.e. a math problem), I always praise them and say something like, "You did so good figuring that out. And do you know how you did it? You 'never gave up'! You can even do this when they do something wrong. For instance. "When you behave like that you're not having "a congenial disposition".

Back to brushing one's teeth. If you want Aubrey to develop the good habit of brushing his teeth, tie brushing his teeth back to one the many "marker phrases" that you share with him multiple times a day and every night before he goes to bed. When he brushes his teeth, especially when he does it on his own, make a point to say something like this: "Aubrey, you are such a 'man of good character' for brushing your teeth? Brushing your teeth and taking good care of yourself really shows me that you have a 'deep sense of personal responsibility'! I'm proud of you, son!" Ingrain the marker phrases into his mind by consistently saying the phrases over and over and over again. Bed time is critical as are other tender one on one, moments. Tie activities to the marker phrases by pointing them out to him in real life/real time situations so he will attach the activity to the "ideal" of the marker phrase.

I'm no child rearing expert or anything, but I do know that this is what my wife and I have done with our kids and they seem to be turning out ok…although we do have to remind the younger one's to still brush their teeth from time to time! 

Ken Drees writes:

This reminds me of billboards I saw in Jamaica: "Remember to Brush your Teeth", next to a picture of a toothbrush and a smiling child. It also reminds me of the site's traveling hobo who said that if he could have a suitcase full of toothbrushes when he was in the Amazon, he would be rich. 

Pitt T. Maner III writes:

Based on the amounts of money spent the diamond analogy is not too far off. Sealants may be worth investigating…

Oral Health Facts:

* Tooth decay (dental caries) is the most common chronic disease of childhood.
* Only 1 in 3 of all U.S. schoolchildren and only 1 in 5 of children in families with low incomes have received dental sealants.
* In the United States, 53 million children and adults have untreated tooth decay in their permanent teeth. Much of this problem could have been prevented by greater use of fluoride and timely application of dental sealants on chewing surfaces of back teeth.
* African American and Mexican American adults have twice the amount of untreated decay as non-Hispanic whites.
Oral Health Problems are Costly
* Each year, Americans make about 500 million visits to dentists.
* In 2009, an estimated $102 billion was spent on dental services in the United States.

Marion Dreyfus comments:

Buy a poster of the body's blood system, capillaries, veins, and show by tracing down from the rich supply in and to the mouth how germs make their way from the mouth's cavities and capillaries down to the heart and elsewhere. The same poster will also serve to show how drug addiction and the use of tainted needles carries the poisons from injection site to the far reaches of the brain and everywhere else. 



will-o-the-wsipAside from all the games named after the frigid weather in Scotland where the only thing to do in the winter was drink and play checkers — the Ayrshire Lassie et. al. — there is a game named after another common situation: the Will of the Wisp. How often do we see a market move which is beautiful but can't be acted upon? A move in Japan where the bid and ask is one or two minis a side, or a move on a holiday in Europe when the US isn't open. Or a move in one market that — had your own market been open — you could have aced. What other will of the wisps are there in markets and life besides the checker game where it looks like you have a win, but it's really a loss, forgetting about the romantic situations for a moment.

Ken Drees elaborates:

From Wikipedia:

The will-o'-the-wisp can be found in numerous folk tales around the United Kingdom, and is often a malicious character in the stories. In Welsh folklore, it is said that the light is 'fairy fire' held in the hand of a pwca (compare Puck), a small goblin-like fairy that mischievously leads lone travelers off the beaten path at night. As the traveller follows the pwca through the marsh or bog, the fire is extinguished, leaving the man lost. The pwca is said to be one of the Tylwyth Teg, or fairy family. In Wales the light predicts a funeral that will take place soon in the locality.

Wirt Sikes in his book British Goblins mentions a Welsh tale about pwca. A peasant traveling home at dusk spots a bright light traveling along ahead of him. Looking closer, he sees that the light is a lantern held by a "dusky little figure", which he follows for several miles. All of a sudden he finds himself standing on the edge of a vast chasm with a roaring torrent of water rushing below him. At that precise moment the lantern-carrier leaps across the gap, lifts the light high over its head, lets out a malicious laugh and blows out the light, leaving the poor peasant a long way from home, standing in pitch darkness at the edge of a precipice. This is a fairly common cautionary tale concerning the phenomenon; however, the Ignis Fatuus was not always considered dangerous.

There are some tales told about the will-o'-the-wisp being guardians of treasure, much like the Irish leprechaun leading those brave enough to follow them to sure riches. Other stories tell of travelers getting lost in the woodland and coming upon a will-o'-the-wisp, and depending on how they treated the will-o'-the-wisp, the spirit would either get them lost further in the woods or guide them out. Also related, the Pixy-light from Devon and Cornwall is most often associated with the Pixie who often has "pixie-led" travelers away from the safe and reliable route, and into the bogs with glowing lights. "Like Poltergeist they can generate uncanny sounds. They were less serious than their German Weisse Frauen kin, frequently blowing out candles on unsuspecting courting couples or producing obscene kissing sounds, which were always misinterpreted by parents." Pixy-Light was also associated with "lambent light" which the "Old Norse" might have seen guarding their tombs.

In Cornish folklore, Pixy-Light also has associations with the Colt Pixy. "A colt pixie is a pixie that has taken the shape of a horse and enjoys playing tricks such as neighing at the other horses to lead them astray". It may well be said that the wild colt pixy would sometimes bedevil regular horses on a ride and cause them to lead their human masters into a predicament or hazard, and might have yielded the pixy - horse name variation.

In Guernsey, the light is known as the faeu boulanger (rolling fire), and is believed to be a lost soul. On being confronted with the spectre, tradition prescribes two remedies. The first is to turn one's cap or coat inside out. This has the effect of stopping the faeu boulanger in its tracks. The other solution is to stick a knife into the ground, blade up. The faeu, in an attempt to kill itself, will attack the blade.

Easan Katir comments:

Similarly, the Tibetan Book of the Dead warns against following the dully-glowing lessers lights beguiling the in-transit soul to fall to the lower bardos. Rather, seek the clear white light to the heavenly lokas and beyond.

Coincidentally, Darby O'Gill and the Little People aired on the movie channel yesterday, featuring a very young Sean Connery, thematically followed, as one would almost predict, by The Gnome Mobile, featuring a perennially-old Walter Brennan, and the usual Disney stable of supporting roles. One observed a striking resemblance of the GS CEO with a gnome, that same sly impish grin.



 Last summer I had to take down a large Birch tree that had died from infestation of Bronze Birch Borers. The tree overhung the site where I was preparing to build a shed and I decided to remove it first to prevent damaging my new creation.

Upon climbing the tree in preparation for its removal I found myself reflecting on trading metaphors. There are tremendous risks in being high in a tree with a powerful chainsaw.

When one gets very high in the branches of a tree one finds it is critical to take the effects of the prevailing wind into account before doing anything. The wind can determine which part of the tree to remove first and where to drop the debris.

I think about safety first and at all times during the operation. I wear a climbing harness and attach myself to the trunk of the tree in two places with two separate lines. I pay close attention to where I place my feet and hands.

Familiarize yourself with the tree. Is it recently dead or has it been for some time? Can it be climbed safely or should it be taken down from below or from a cherry picker? A recently green tree will support large weights on a one inch diameter branch, a dry or rotten tree will do no such thing. Can you drop branches safely or are you too close to the house? Sometimes each piece has to be secured prior to cutting and lowered carefully with a line.

Use a ladder to get into the tree. Tie the ladder off to the tree in a way that prevents it from wobbling or rotating. In markets, sometimes one must stand on others shoulders to get oneself in place.

Have the necessary tools with you before you climb. It is time and energy consuming to have to go back for them. And not having the proper tool can induce you to use the wrong one rather than go all the way down and back to do it right.

Be familiar with your tools and know how to use them and care for them. Powerful tools, like leverage, allow you to do big jobs quickly but they bring powerful risks. It is amazing the number of ways a chainsaw can ruin your day. Chainsaws can bounce back out of the cut right at you so it is important to keep your face and body off to one side when cutting. Chains can break and fly back as well and fly or wrap in entirely unexpected directions. Be aware of the damage that your tools can do to you, not just the tree. Pay attention to them and treat them with the respect they deserve. Try to make allowances for the unpredicted. I've seen a chain fly off the saw and become entangled around the large branch it just removed and very nearly pull the user out of the tree.

Secure heavy tools to you or to the tree with a line strong enough to hoist them but light enough to part if the tool becomes ensnared in falling debris.

Never start using a heavy power tool until you have secure footing. I usually rest my weight into the harness and let my lifelines support me, using my feet to keep me stable.

Take your time. Being rushed will get you hurt.

Never bite off more than you can chew. When removing large portions of the tree with a single cut, they can behave in unpredictable ways, such as twisting or bouncing the tree or grabbing your lifeline and pulling it down with them. Once a very heavy piece begins to fall, there is absolutely nothing you can do to stop it.

Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denegrated by reaching too far or by using only one hand.

Several years ago a friend was cutting off a tremendous horizontal limb from a large oak. He was on a ladder extended to its maximum height and leaned up against the limb. The ladder was resting on the limb between the trunk and the cut and as the limb came off, this stub end jumped up and the ladder fell away beneath it. My friend tossed the saw and grabbed the three foot thick trunk and tried to hold on but slid down and finally fell off, shattering his femur and tearing up his chest and the insides of his arms. Had he and the ladder been secured to the tree he probably would not have fallen.

What have I missed?

Scott Brooks adds:

Hunting is considered by many to be a dangerous activity, what with a bunch of guys running around with shotguns or rifles. However, there are very few actual injuries from shooting accidents. The main cause of accidents are not the inanimate objects that send forth projectiles, but another inanimate object…tree stands.

Every year, people who feel that they are immune from the laws of gravity climb into stands and sit or stand waiting for their prey to wander by. And every year there are people who are stunned to find out that the laws of gravity are much more brutal and punishing than they thought.

There are only two types of tree stand hunters: Those that have fallen and those that haven't fallen yet. No matter how much you think you'll be able to hang on, or how adept your dexterity, you simply can't react fast enough to ward off an accident or mechanical failure.

I can personally attest to the feeling of bile rising in my throat from the fear of lost balance while perched 15 up in the air…and that was when I was wearing a safety strap.

I have a standing rule on my land. If you climb up into a tree stand, you must not only wear a safety strap, but it must be the first thing you put on when you get into the stand, and the last thing you take off when you climb down. I have asked (told) people to leave my farm because I caught them up in a tree without a safety strap.

So why even climb a tree stand if it has that much risk? It's about risk vs. return. I love the return I get from arrowing a nice buck. Same is true with trading. I love it when I get a great return for my clients. But the reality is that it's important to wear a safety strap when trading. Just as I profited in my poker playing days by taking a slow grind it out approach (never going all in), I do the same with trading. I'm satisfied with the inferior returns of a non-leveraged portfolio. My theory is that the more you leverage, the higher you're climbing and the thinner your safety strap gets.

All of my bad losses and sleepless nights have come from leveraging or taking too much risk.

That's why I'm a pretty boring guy these days.

Jim Sogi comments:

Professional tree trimmers all use a belay.  Mountain climbers also belay themselves for protection or to 'hedge' their position in case of a fall.

Ken Drees writes:

Never lend your chainsaw to someone who doesn't use them much. As in don't give stock advice to people or just give them advice that is general in nature–this saves on friends. Always remember torque and twist. If you don't read and predict how the cut will behave, rethink it. I have seen trees twist and pull the wrong direction, seen limbs bind back on the saw and have trees fall off course because of hidden dead spots. Be ready for the twist of the market as it takes your trade and bends it slightly the wrong way. Once I saw a dead tree being taken down by a friend. This large straight tree as it was falling broke apart into 3 huge sections. The trunk part closest to the ground went the right way and the other two in tangents like a V. Market wise–don't mess around with a junk-trade–its just not worth it and you can get hurt. And lastly don't drink beer before operating a chainsaw, nor chop wood with only shorts on, or put your hot saw down in a pile of dead leaves.

Pitt T. Maner III adds:

 Ok, this is a little bit like what I have been doing the past 2 years–namely Health and Safety oversight for pipeline and tank construction workers… guess who the least favorite person on the jobsite is?

There are probably better business analogies than below but here it goes (this is the short list! and not complete by any means, OSHA website would be a good resource):

1. I would have a health and safety plan in place with contact numbers and how to get to the hospital. Is there a written plan of action for each step of the process with the risks involved and the ways to mitigate the risk. (Investment plan)

2. Use a "buddy system". Have a friend nearby that can help you in case of an emergency. Have a 1st Aid Kit and someone Red Cross trained in 1st Aid and CPR. (Mentors and advice of others)

3. Survey the tree to make sure there are no hazards you have missed. Electrical lines. Red ants. Poisonous plants. etc. Ask yourself what is the worse thing that could happen (What could go wrong with your investment? What could come back to bite you?)

4. Inspect your equipment. Is your climbing harness worn anywhere? Are the lanyards of the proper length? (Guys have died or hurt themselves badly by not having the proper length on the lanyard, yeah they had their fall protection on it just didn't stop them in time from hitting the ground). Is the ladder rated for your weight? Do you have a GFCI if you are using an electric chan saw? Do you have cut resistant gloves? Do you have on hearing and eye protection? Level D OSHA clothes?

5. If it is hot or cold you need to take a break. Drink water. If you get tired you are more likely to make a mistake. (Take regular breaks from the computer screen)

6. Do you have enough light? Night time operations are doubly dangerous for workers. You need visibility. (Transparency in your investments)

7. Have you set up for disposing of the branches and such. You don't want the city to fine you unnecessarily for yard trash. (Tax consequences)

8. Wouldn't it be cheaper given the risks to have a professional service do it? (ETFs/mutual funds vs. individual management)

9. Are you sure the tree won't fall on someone else's property or their fence? (What are the liability issues?)

10. If I do get hurt what will the effects be to my family and others? Do I have the skills, knowledge, and physical abilities necessary to do the job right and do I understand the risks? Am I in a good state of mind and able to stay calm and not get angry if something doesn't work out right? Do I have a fear of heights?

We always carry a card around in the wallet for safety reference and it sort of boils down to 3 steps: 1) Assess; 2) Analyze; and then 3) Act.

It sounds like overkill but an effective safety "culture" within companies has been shown to dramatically reduce injuries, deaths and all sorts of economic and emotional costs. And it is a good idea to teach everyone at home how to stay safe too. If you do not have a sense of vulnerability then you are susceptible to hurting yourself or others around you.

Russ Sears comments:

In the last four years I took down three cedar trees that were dying. Here are a few things I did that were missing from the lists above.

1. Limit the access to the area. Shut down the drive-way, no extra people or kids allowed etc. Tree cutting is not a spectator sport. The trading room is sacred. No extra people or kids. Never show off.

2. Notify the neighbors when near their property. Likewise no kids. They let me know if they would be outside etc. I worked around their schedule. When working with others money, its all about them, not you.

3. Call the buried cable hot-line to have it marked before. Know the hidden risks and try to avoid them.

4. Have lots of rope. Extra rope tied to the tree and other trees can help prevent the tree from going the wrong way onto the house. Controlled slack on a large trade is a must.

5. Keep the area clean, limbs dragged away as they are cut. You never know when you may need that exit.

6. Rent what you do not have, but get the right size saw above all. It may cost more, but do it right.

7. Have patience. Take it in small pieces. It is only impressive in the vast woods when it all comes down at once. In your yard it will only be damage. Know your size. And do not try to meet a schedule. Pay that extra day's rent, Leave the stump up till next weekend. Do not try to swing for the fences to meet some arbitrary goal. 

Vincent Andres writes:

All valuable advice in this tree thread! Not to say it's missing, but I often add an iron chain as a line (with mountain climbing equipment).

Among dangerous things a falling tree is able to do, having the foliage act like a spring is a rather vicious one. The tree falls nicely with its big round green foliage, everything seems OK, but the green foliage is slowly compressed/crushed (for 2 or 3 seconds) and then the compressed unbroken foliage uncompresses and moves the 3 ton trunk in whichever direction. If you're in the way you're killed without even noticing it. (Certainly a market analogy here!)Folded branches are also a very classic cause of injures.

Many things can happen when cutting trees– unexpected things, so as a general rule, better be largely too cautious then slightly too incautious. Even if other people do not understand, you are in the tree with the chainsaw, not them.



Martha StewartOne of my daughters is not very experienced at handling money, so my wife suggested that she buy some stocks to put her foot in the water. She chose company names she knew and liked like Netflix and Martha Stewart and American Apparel. "A young person's portfolio," her broker said. On average they are up 25% in the last two months.

In looking at her portfolio, I made a Baconian mistake. I said Martha Stewart is losing money on every sale and the sales are down. Don't buy it. It couldn't be good. My wife said, "She has to learn. Let her do it it." That one's up 40% or so. I am reminded of the time Collab and I were in our first six months of writing. Five of my daughters or siblings came to me over a weekend with requests to start or fund an Internet company. As I said at the time, "if so many people are coming to me, down on my luck and fortune, why imagine what the supply and backlog must be among the real players. It's about to burst." One has similar thoughts about my daughter's good fortune.

Sushil Kedia adds his two cents:

netflixMy two cents:

1) In the beginning we always call them lucky only. Too little data to conclude yet. Commonsense becomes more and more uncommon as each of us goes onto accumulate experience and other tools. Let her have her way. Let her find her own victories and lessons.

2) When my daughter would begin trading in some years, I would go short or long against her positions on a paper trading system I will maintain quietly and separately. Once her positions are closed by her, I would share my paper-trading risk management system with her to see where the deviations are. I would let her learn from my mistakes and wins against her rhythm, without pulling her away from her own. 

Michael Cohn shares:

american apparel"The Junk Rally & Quants: guru Matt Rothman says both quant and fundamental metrics continue to struggle in the 'junk' rally as Valuation remains 'largely irrelevant'. His models continue to show that stocks with variables such as the high short interest, weak b/s, highest beta, continue to significantly outperform. So how long can the junk rally go? The current low quality rally started March '09 is among the longest such rally on record, but, the underperformance of 'Quality' stocks is still only now a 'moderate' (9%) versus (10-18%) u/p of similar periods since the 1950s."

This seems to be a widespread issue according to Barclays.

Ken Drees adds:

Always jump on beginner's luck if you can.



Cormorant fishing1. An important point from Galton's The Art of Travel:

Cormorants in China fish during the winter from October to May, working from 10am to 5pm, at which hour their dinner is given to them. A straw tie is put around their necks to keep them from swallowing. When a fish is captured, an oar is held out for the fish to step upon. (However, it requires caution to train a cormorant because the bird has a habit when angry of striking with the beak at the instructor's eye, with an astonishing rapid and sure strike.

Moving back to the concept of the selfish price, might the same be said of very direct day trading systems systems for capturing market prey with the price acting as the cormorant?

2. What is the miner's canary for the market? Might one suggest that one forgo looking at silver, the scholarly market, the Parisian trends, the emerging performance, the moves in the ted spread and the Fed model, but turn to the cormorants. Note that they worked from 9 to 5 in 1861 a good 70 years before the 8 hour work week became standard, and their prediction record for the stock market might be as good as the woebegone reveler that Nock found in the Wigwam the day of the election never getting through the end of Marching Through Georgia.

Ken Drees writes:

 One of my favorite books read to me as a child was about a Chinese duck trained to fish for an Asian man/boy who was a little free with his stick if the duck was tardy on his way to the fishing grounds, The pictures were very interesting and delightful, showing the entire fishing scenes from olden days. I would recommend this book for Aubrey.

It's amazing how the post about cormorants triggered this memory. I remember seeing the metal rings around the necks of the birds in my mind. 



It always interesting observing price action between instruments and then weighing up the need to trade on these observations.

Watching for example $/¥ get smoked the other other day as the share markets got hosed, with the argument being there will be unwind of the carry on any sustained selloff. As the world equities bounced back, two days of rallying in $/¥ followed, though what was interesting was as the U.S equity futures suffered in Asia Thursday, were we going to see any significant selling? It appeared not, with the market holding up relatively well.

What happened to the correlation? And is this a sign that there would be further follow through buying? Should we gear up when we notice these medium term broken relationships across markets? What it does show is traders suffering, the market still caught short, and that there will be a need to unwind these positions, should there be any reason to do do. The squeeze just keeps squeezing. After this the market could be just as prone to establish contraction as further expansion, unless fundamentals provide a new catalyst for a move.



the coolerWhy is it that when I get a strong feeling that the market should do x, and if not then it will then do an strong inverse of x — the market throws a card called a "cooler"?

A "cooler" in poker is a card that cools off the drawing action of the bettors — for example a deuce that matches no suit after a flop of high cards with multiple drawing chances.

I should really fade every strong feeling I have, or at least temper my emotion and realize that I will most likely be wrong in some new way. Is it right therefore to be robotic and to turn off internals as much as possible?



 I was in Oslo when they started to close the northern Europe air space on Thursday. I decided to take a lift by car from friends to Gothenburg, Sweden at least to get 300 km closer to Milan, Italy. Then I was faced with a dilemma. What is best the best strategy in such an uncertain environment? Wait for flights to go back to normality? Sounds good but how long could it be? Or take a train and travel 24 hours or more? Sounds good as well, but all trains are full now, so the only option is to book a train in some days from now. And what if in the meantime they reopen the airports? Why face a long journey when a plane would be much faster? Or rent a car, provided that they are available, and drive home? That's a long trip, and expensive as well.

It's like being caught in a losing position with limited capital available and having to decide if it is better to close it and accept the loss or hope for the market to go up soon. You cannot wait too long, as you risk losing all your money, but on the other hand it's difficult to sell when you lose.

I have put a stop loss on Tuesday, when I will stop to wait for improvements. Then I will sell and accept the long trip home, provided that it will be feasible. But new (reliable?) forecasts will be provided, and I will change my mind again, as I always do, being unable to fully implement the strategy I decided when I started the trade.

Ken Drees comments:

My father said to me so many times, "he who hesitates is lost". The trading relation lesson is that you first want to doubt the severity of the position going against you. Hoping for the best leads you right into crowd think–things will improve, etc. So here it seems like you at least acted by moving away, but then realized that you are still losing and that losing trades take up capital that can be deployed elsewhere, and losing trades take up time and mental focus and lead to less than perfect mental acuteness. Best to get your arms around the loss and remove it at any cost. 

All these stranded people are like people who have just received pink slips. They just lost their jobs (flights). So should they not take this opportunity to hike the back country, visit that winery, or linger in the cities that they always wished to see, but never had the time to? Some may do so who can afford it, others may not be able to afford to or are not skilled enough to be "re-trained". 

Paolo Pezzutti replies:

I have spent so many days traveling during the past 3 years in so many countries. Most of the times what I have seen is airports, hotels, and conference rooms. Very seldom have I had the opportunity to visit places and understand the culture of the places I have visited. It is like a standardized and artificial reality. For stranded travelers, I think the issue is the lack of choices. You can analyze the options what you want, but practically speaking, in most cases you cannot do anything but wait.

Victor Niederhoffer comments:

Many of us own individual stocks that are stranded, doing nothing while the world spins on its axis. What is appropriate to do in such situations? I would hypothesize that counting would help. Louis L'amour always said that the first moment of a life threatening situation is the best time to act.

Ken Drees replies:

I read once about an older trader, a simple man who simply said that at the end of the day if any one of his trades was "a loser" he would simply "kick it out" of the barn. At first take that seems extreme– or is it? The first time I read that I thought it was too black and white, now it's more of an essential idea for me–the taking of the first loss. Do you like the stock at that price today? Is the stock in a losing position? Would you buy that same stock today–double your position? If the answer is no then its a loser and a candidate for deletion. If every trader on Monday morning got rid of every losing deletion candidate, the force of the positive relief exhaled into the atomsphere would shift the winds over Europe and free the skies for all to get back to work, play, and normalcy. Sell your losers for the tired, the untrainable, the funflighted. 



The fool tarot cardWhat are the many types of people who disseminate their views about the market?

There's the tout, the man who has a position and wants you to get into it so that it will move in his favor. There's the sponsor, the man who advertises or sponsors a program who is always treated well by that program. There's the would be manager, the personage without funds who wishes to impress you with his knowledge and ideas so that you will put money up with him. There's the old lion, the man who no longer is virile and is fighting back any young men who might take his place in the world of power or romance. There's the curmudgeon, the old man who hates everything modern, doesn't own a CD or computer and sees no reason for it, and wants to bring everyone back to the old days without technology. There's the spankist, the woman who's beautiful and always looks like she is so aggrieved with the pubic or her guest that she would have to give him a good spanking unless he puts his things in order. There's the iconoclast, the person who's always contrary and never reads the papers or travels to New York, and always feels the market is wrong.

There's the man with a hole in his shoes who's so down home that he only drinks coke and eats hamburgers and never pays a fee more than 10% of the going rate to the brokers. There's the sanctimonious, the one who pretends to be the most honest person in the world– who won't under any conditions tolerate a blemish in the reputation of his firm even if it costs him a good stake. He's the one who never hears or is briefed about the dishonesty in his troops and finds that any allegations of misdoing in his firm that are brought to his attention never pointed directly in writing to the crime. There's the academic, the man looking for a consultancy who can manipulate numbers especially retrospective files that are very suggestive of alluring profits that a wealthy investor might wish to participate in with him. There's the mystic, the person who looks at the stars and the bent keys. There's the old timer, the person that looks at the iron castings reports and freight car loadings and newsprint figures for guidance as to where the economy is going. There is the fund manager, the man who will always be quoted on a given stock that he owns which he feels is a good buy still but which he sold the bulk of his holdings of in the quarter before the recall.

There's the jack of all trades, the personage who will explain the market going up as due to a good economic report or falling interest rates or who will explain the decline as due to uncertainty about earnings or fears of interest rate rises. There's the chronic bear, the person who never since 1966 has written a column that did not find the weight of evidence highly bearish with signs of excess in many quarters and regrettably some signs of optimism still persisting. There's the humanitarian, the person who believes that the world is very selfish and that the solution is to force everyone into doing good by redistribution or service. This personage also believes that the only good people are the poor and that the purpose of life is to make sure that any pockets of poor are stamped out regardless of how it's taken or from whom. Of course, many of these personages fall into more than one of these categories and they are mobile as their age and wealth changes. What are the major categories that I am missing or what is a better way to classify and make this useful?

John Lamberg comments:

And the mark, who in a hushed tone, glazed eyes, and a glance around the room as if someone was eavesdropping, reveals the privileged information that will make him a rich man. And the friend who, seeing the tells, suggests to deaf ears to exit before his pocket book is emptied… 

Ken Drees writes:

Permabull type–always likes the market anywhere, anytime. Wears high fashion suits, well coiffed–male or female. Strong BUY! spouse/lover/significant other–why didn't you buy that, hun? Why won't you get back into this one, dear. I read about that in the paper–are we in that? Foreign fund guy–always likes an exotic market somewhere over there in that far off place. Always a better value there. Always more room for catch-up to other valuations. 

Nick White writes:

With precious few exceptions, doubtless one can point to many of the most eminent bank of Sweden prize laureates…they most often get trotted out as permission to allow others to do the thinking. 

Kim Zussman adds:

Don't forget the Walter Mittyist.

Market hobbyist with secret hopes to surprise to the upside. Knows a little about a lot, but nothing in depth. He dangerously equipped with the same software and data filtered hourly by everyone in the 100 million Mitty-march.

Known to recognize causal patterns everywhere, convinced they are invisible to others. A market philanderer, he migrates wounded from one instrument to the next, and from one seductive strategy to another. Momentum - reversion - correlation - divergence.

Mitty envies his brother, Admitty, who worked for the city and retired at 50 with 90% pay.



I am wondering if anyone out there is familiar with a trading opportunity called by some, the Goldman Roll. As it has been explained to me, there is a large numbers of long-only commodity funds. As a given contract that they hold long, say oil is coming due to expire they need to sell that one and then roll into a long position in a further out contract. This creates a very definite trend in the spread that can be exploited. Sell the near one short and buy the next one out. As the roll transactions are executed the Far minus the Near spread has a very predictable and smooth rise. It is claimed that this phenomenon has not be widely recognized and thus remains in existence thus far. Any comments out there on this claim would be appreciated.

Dr. Aronson is author of Evidence-Based Technical Analysis, Wiley, 2006

Nick White comments:

Goldman Roll? More like market roll!

This has been around as long as futures have existed and is nothing sinister. However, as some here were actually around when modern exch. traded futures began, I shall defer to them.

You can maybe get some clue as to roll direction by looking at open interest depending on the contract, but it's not always a good guide. Worth bearing in mind that people hold offsetting positions and much also depends on commercials vs specs etc.Also, if it were that easy to make money, it wouldn't exist…

Michael Cohn writes:

There is index money invested in commodity Indices and a plethora of ETFs. For example, USO or UNG. These commodity ETFs hold futures and there is a need to roll the contracts in a somewhat predictable way although there is now more flexibility as to day. This long exposure always has to sell the near and buy the far contracts. It is fairly easy to see the amounts involved…

David Aronson replies:

Goldman Sachs

Yes, I am on the lookout for all of these creatures. But kidding aside for the moment, are you saying that the claim that such an opportunity exists is on par with sightings of Big Foot? i.e., it's nonsense?

Russ Herrold writes:

It is a safe statement that there are and will always be 'unknowable unknowns' out there in the woods, and that the 'Absence of evidence is not evidence of absence' (but rather sometimes, just a statement that we cannot prove a hypothesis with our current tests and tools)

If I had a Bigfoot in my basement that laid gold bars, I would never reveal that secret, and take great pains to keep that 'trade secret'.

If I had engineered a winning strategy, I would certainly consider sowing disinformation and negative results and disinformation, to lead people seeking to reverse engineer my results, down into blind allies.

I think as a careful investigator, all we can say is: We do not know of a public proof that such exist.

By co-incidence, I am wearing a tee shirt today of a Unicorn, feasting on roast leprechaun, and as she takes knife and fork to her meal, the magic rainbows are let out.

Ken Drees adds:

The idea of taking advantage of a robotic function (mindless ETF doing its monthly maintenance) makes sense; once you notice the ripoff, wouldn't a hunter now wait for the fox?

Tom Printon writes:

I used to fill the GS roll in the coffee pit. Locals typically positioned themselves one to two days ahead of GS. When and if profitable was usually good for few tics, but one had to have size on to be worth while. Off the floor trader's vig would be difficult to overcome.

Paolo Pezzutti adds:

This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.



Johnny DeppI shaved a goatee today out of boredom and the increasing gray hairs. I must have had that facial hair for a few years. Plus, I am going to get new passport photos and wanted to be true to the look.

My 3 kids and wife never noticed. I was just going about the daily business–must have had numerous face to face interactions with the kids. I made a point of kissing my wife 3 times–and never did she notice!! I even told her that I was going to lose the facial hair since Saturday was coming and I was set to take pics. She even said go ahead, she likes my mug either way–(this conversation was a few days ago, not today.)I finally asked her how I looked sans whiskers and she lost it–she said for me to write in to the site because it must translate into markets! She said "I saw what I knew, not what was true".



 The market has moved up impressively like a race horse running a fine long course (narrow volume though). Only the aging Colonel Bob Dixon (the unseen market driver) can jockey the still robust and beautiful steed, Ol Rebel Commander. The shiny black bridal straps mirror the deep beautiful eyes of the well kept race horse. The crowd loves to watch their favorite at the holiday race as the Colonel takes the prize despite his age and the danger associated with racing an older horse who doesn't run regularly.

Wouldn't it be wise for Colonel Dixon to finally sell the horse (market) to this young man (Ben–the public)? Yes, it would be prudent on all accounts for the deal to get done and through the urgings of caring matron and unwitting lass to arrainge a fair market price for the deal. They even throw in the custom bridal as a courtesy since the horse is accustomed to it.

When the public hitches Ol Rebel Commander up to a buggy and drives on home (buys into the recovery story and long the market) its odd how the horse runs right up on the boardwalk instead of stopping in front where the hitching posts are. And isn't it odd how the horse has to be guided through turns in the road, as if it would just run straight into the high grass if left to its own ways?

After the horse is home and properly taken care of, watered and fed, bedded and inspected–the truth of those deep beautiful eyes becomes clear. The eyes are blind, the high buff black leather bridal reflected a shine to them at point of sale and the Colonel was the only one who could jockey the Rebel Commander through a local race track that the horse had run many times before he went blind.

And you can't return the horse now, you are too far away now and it would hurt the girl's feelings and the Colonel's reputation. Somehow you like this horse anyway, so you put the bridal on and walk out of the barn.

The market seems to be guided by a very skilled jockey. This very low volume and technically narrow (local race track with local bettors) year long run has won a first prize (best 12 month move) The trusted and widely loved steed (that ol bull market dow of yesteryear) is loved by all. Now would be a good time, after taking a prize to offload the market onto whomever is left of the public that sold at the lows of March 09. The constant bullish chattering of financial tv (the young lass) and the seemingly "ok" numbers that indicate a recovery to occur(wife's deep concern for the Colonel's welfare) combine to lure the public into the deal. The market looks great, runs great, but there is something about its eyes I am not sure of (M3 heading down).



Suddenly my "buy" list has a large number of companies which have never graced the list before. They are property and casualty insurers. Although they have sufficient capitalization, their volumes are too small for me to get involved. Does anyone know why they would be in favor?

Dan Grossman writes:

B RVolumes too small for you to get involved… You must be quite a heavy hitter, trading millions of shares.

I don't know what you mean by in favor, but because the insurance companies held mostly bonds, including mortgage bonds no one knew the value of, they were beaten down to very low levels, below book value, PE multiples of four or five. Now bond valuations are normalizing, and I guess the insurance stocks are returning to reasonable levels.

Scott Brooks writes:

I deal a bit in the insurance world and I have to say that this baffles me. Insurance brokerage firms that I deal with are hurting big time. Premiums are down as small businesses (which insurance brokerage firms have as clients) continue to layoff, not hire, and generally decrease payroll.

Maybe their revenues are down, but their margins are looking better, but I find that hard to believe since every P&C guy I know is busting his butt to bring on as many new clients as possible and bidding as low as possible to "buy" the business. The problem is that their competitors are doing the same to them.

Vince Fulco comments:

A few I follow remain at a healthy discount to book value (WTM, CNA) and I've been wondering when the rising tide would lift these ships–  since other industries are being given the benefit of the doubt that conditions are normalizing — and when would some of them get credit for adequate portfolio management and improving pricing and underwriting activity. Loosely speaking, a properly running P&C company can trade from .9-1.3x book and when the punch bowl really overflows, multiples of 1.5-1.8x are possible. Still plenty of room vs. normalized valuations. Why it has taken the crowd until now to really start bidding them up, I remain puzzled particularly vs. underlying corporate performance. It would seem the investors wanted to wait the half life of the bond portfolios to ensure no more problems as most run short duration portfolios.

Secondarily, there had been concerns within the industry about six months back that the Obama administration would go after the Bermuda-domiciled ones doing biz in the US for a bigger tax bite. That seems to have fallen by the wayside for now. Talking my book as I've owned WTM off and on for the last seven years.

Ken Drees adds:

The big question is since these insurance companies were screwed by their debt holdings, took writeoffs and have muddled through — some with Tarp but most P&C did not get Tarp — where do these companies park their cash now? They used to make money in the derivative leverage through the bond kingdom — outside of normal operational gains through underwriting. What is the risk of their holdings now? I don't see many stock buy backs from these guys and I don't see dividend rates that have gone up — both factors here would show that companies would rather pay out earnings or reinvest in themselves. Will they be able to ring the registers as normal through the bond markets? 

Kim Zussman replies:

At a recent lecture by a business law attorney, the take-away message was "everyone needs business practices liability insurance." He went through a litany of litigations; violations of overtime laws, rest-breaks, bonuses not being factored into overtime calculations, performance reviews, extensive paper-trailing, s_xual harassment (including a married doctor who had relations with a woman six times before hiring her, then continuing to pursue her on the job).

In an environment of increasing regulation/litigation, empowerment of little old ladies in lieu of rich guys, and increasing taxes, the deductible expense of increasing insurance coverage could make sense — even though lining pockets of bureaucrats and their legal co-conspirators.

Phil McDonnell asks:

Vince, I have a question. For CNA the ratio of receivables to revenue is about 100%, for wtm it is about 75% (by eye). That would correspond to 12 and 9 months worth of receivables they are owed by their customers. Are their customers really the slowest payers in the world or am I missing something? 

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

Vince Fulco responds:

Not sure where you are looking but the largest receivables on the balance sheet from the last few years relates to business they've reinsured with others. WTM management is generally more risk averse than their peers and is inclined to cede segments of their business to better define their upside/downside. These arrangements have truing up terms, conditions and times which make the receivables ratio more lumpy than an ordinary industrial concern. The mix of biz between them and CNA is probably another factor.

If you are speaking specifically to 'insurance and reinsurance premiums receivable', they've been 21-22ish% of revenues for the last few years. I have no specific answer for that but it doesn't seem out of line if we think of the balance sheet as a point in time.



 Our daughter Eddy who is in medical school thinks the predictions of ever increasing medical costs — like David Dodge's – fail to take into account two likely changes:

(1) the breaking down of the medical cartel's current structure of required licenses and

(2) further advances in medical micro technology, both in drugs and in physical surgeries.

A nurse-practitioner with access to computer tools can now do as good a job of diagnosing patients as any Internist; and, just as many patients who once would have been candidates for open-heart surgery are now treated by angioplasty, so will other now expensive surgeries give way to cheaper, less invasive procedures. The medical future may not be as expensive as is feared.

If Christie's catalogs are any indicator, the really good stuff among collectibles seems destined to continue its century-long ascent to the financial heavens. Assuming that the non-profitistas and the life insurers keep the envy-the-dead tax in place, that trend seems destined to continue. However, other, less genuinely precious objects may find themselves becoming less pricy even as currencies become rivals to replace the Yugo (fiat joke!).

That seems to be happening now in our the niche of the economic environment with equipment rentals. In this part of the pond even the biggest fish are finding it hard to eat. Volvo Rents, which is at the top of the food chain, is now offering a $15,000 fee to "the referrers of franchise candidates who become Volvo Rents franchisees and open a store". Coke and ore contract prices out of Australia have certainly proven George right about the worth of tangible vs. paper assets, but there are few, if any, new takers for backhoes and the other stuff actually made out of iron and steel.

George Parkanyi writes:

I don't know what the answers are either– it doesn't look very promising given the social, political, and economic status quo– none of which can be easily changed from the inside, if at all. If you want to play the decline both here and elsewhere, I think you have to look at the eventual effect of these unsolvable problems. Governments are not only bankrupt financially, but also for ideas and simply just in the ability to execute. The knee-jerk response to each crisis du-jour is and will be to borrow and spend out of it. When they can no longer borrow, they'll just print. This can only mean continuous and accelerating currency debasement around the world, so I think tangible (vs paper) assets will remain a very persistent investment theme. Governments are going to default, and currencies are going to fail with new ones issued in their place. It's just a question of which ones and when. In that environment tangible assets (the more liquid the better) would have to do well I would think– precious metals, commodities, real estate, perhaps some collectibles, and equities that represent these things. It's not going to happen overnight, and no given trade will be a slam-dunk, but that's where I think the heart of the drift will remain. 

Ken Drees comments:

5 years ago the highways were choked with landscaper trucks and their stuffed trailers with ubiquitous mowers, weed whippers and gas cans. Getting gasoline in the morning on the way to work, one would always see a few landscapers fueling up the tanks and the cans for the day.

I am lucky to see one landscaper a day now. There are many pieces of equipment for sale now–if things don't pick up this summer, you should see these items go for 20 cents on the dollar (used of course) in the fall.

Justa Guy respectfully disagrees:

Many of you do not know me, but I am a physician who has practiced in both Canada as well as in the US. In my opinion there are two issues that are a threat to health care in both the US, as well as in Canada, as follows:

(i) Increasing technology. Over the two decades that I have been practicing medicine there have been innumerable new gadgets which have allowed physicians to more precisely define where problems exist ( we used to diagnose stroke with CT scans, then it was MRI, then it was supersensitive 3 Tessla MRI, now there are some unbelievably sensitive 15 Tessla MRI machines being produced). These incremental advances in technology of course come with increasing costs. Unfortunately these advances rarely improve either clinical outcome, or survival. For reasons of medicolegal protectionism, and customer expectation, we are in a culture in which the biggest, best and latest technology is the norm in our healthcare, however the use of these technologies does nothing to affect the outcome of patients.

(ii) Unreasonable expectations. There are two facts in healthcare which are undenyable: Every one of us will die, and we spend >60% of total healthcare expenditure on people within the last month of their lives. In order to curb healthcare expenditure, we must begin to recognise futile situations, and limit the resources spent in these situations. Do not beleive that is the same as Palins "death panels", rather it is a first step in healthcare fiscal responsibility.

(iii) There is a need to transition to more mid level providers as a means of primary health care delivery. Those midlevel providers will be equipped with algorithms for how to treat certain conditions in a medically proven and fiscally responsible manner. Only if those initial steps are unsuccessful will patients be seen by internists and then specialists.

(iv) About 30% of health care spending occurs under catastrophic circumstances. These include bone marrow or solid organ transplants, trauma and accidents. In many of these circumstances, the chances of survival are minimal at best. In the US ( and to a lesser extent) in the Canadian systems, there is no good mechanism by which to limit care in such catastrophic circumstances. A poignant personal example: Several years ago, my aunt (age 70) who lived in the UK was diagnosed with an incurable ultimately fatal lung disease; her physicians told her ( with out presenting options) that her care would be designed to minimize symptoms and discomfort. She died about 2 years later. Around the same time, I was involved in the care of a wealthy businessman age 75 with the same diagnosis in the US. He was offered and ultimately received a lung transplant (even though outcomes are poor for lung transplants in patients with that condition). He died within the year. We need to learn that no matter what insurance company is paying for such cases, it is financially irresponsible to offer such extraordinary care in hopeless situations

(v) The way physicians are compensated needs to change. In most health care settings, Physicians are paid in the same way that lawyers are: the more they do, the more money they make. Example, a cardiac surgeon who does five bypass surgeries in a week makes more that the cardiac surgeon who does three bypasses, and puts two patients on aspirin rather than operating. That system of having a disincentive for choosing cheaper care is dangerous and expensive. Example: many obstetricians believe that the optimum C section rate is between 5-10% of births. In the 60's in the US it approached that number. By 2007 the rate was >30% of live births, although it remains unclear why the rates have grown so remarkably. If physicians were paid by salary, any potential for conflict of interest is removed.

In my humble opinion, without addressing these issues health care costs will continue to rise, and as David Dodge succinctly puts it, heath care will bankrupt which ever countries fail to tackle the issues.

Kim Zussman responds to Dr. Guy:

Dr Guy:

As markets amply demonstrate, there are many discontinuities and irresolvable problems inherent to the human condition. eg, be kind to animals while eating them, love thy neighbor while profiting at other's expense, woman should be faithful but with men its optional, government for the people and for the government, ration health care to others but not your loved ones.

I would likely pay for a lung transplant for one of my daughters, if there was some hope the operation could save her. And if the insurance company making billions will pay some of this, I'll take it.

Outcome, "evidence based treatment", should always be the driver but ultimately humans are driving. Doctors may earn more (earn) by doing more, Kaiser and other HMO's get to keep more by doing less. Both systems have moral hazard problems, as do all the in-between solutions brokered by governments. 

Stefan Jovanovich replies:

Eddy has the fortune/misfortune to have Dr. Zussman's head for statistics. It is a blessing to have that knowledge, but it can be a curse once people in research labs discover that they have someone can actually make sense of the data Pearl Diver spits up AND, if she can't do it herself, she knows some really bright people from Cal who work at JPL who can make sense of the outputs. As a result, in her fledgling career, she has already done a full year and more of full-time lab work collating price and outcomes data for both an ophthalmology and an orthopedics lab. From that limited and completely skewed base of knowledge, she has come to these tentative conclusions about medical costs:

(1) price competition works - in those areas of care that are open to active price competition (Lasik, elective plastic surgeries), where the patients pay for at least half the ultimate bill, prices have gone DOWN each year, not UP,

(2) universal insurance is absolutely the worst possible financial model to use for financing general health care- "imagine an energy/transportation system where people were issued monthly, fixed-price gasoline insurance cards; even the most responsible, self-reliant people would find themselves thinking why not take a Sunday drive, it's free and the energy producers do everything they could to abandon market pricing and go to a cost-plus, government contracting model just as the hospitals have",

(3) the Big Lie in medicine is that there is no scarcity of skills, that, if we can only get the costs down, there are enough skilled people like Dr. Guy available to treat all the patients who need care. The rationing that the medical education system imposes does not help; but, even if the libertarian dream of open, unlicensed competition arrived tomorrow, there would still be a shortage of first-rate care. That is a truth that no one can profit from telling. On the issue of lung transplants, Eddy and her Dad are hopelessly biased; her uncle, my brother, had both lungs switched out 6 years ago so our family interest would outweigh our principles even if we believed in rationing by medico-political authority rather than price.



I had a certain successful 20 day holding period trade last month. I had two targets for the move in the stock. My plan was to take the trade off at the first target, redeploy funds on a pullback or buy back if the stock moved up and through the target–since I have another higher ultimate target price in mind.

On the day last week when the stock kissed the first target price to the penny (also happened to be a round number) I was sitting with my hand on the sell button–the stock churned and loitered around acting odd, some flash bids came in and for an instant I thought that the stock could blow right through the target and up towards the ultimate goal–a whiff of greed entered in. As soon as I felt that greedy impulse to not follow my plan –I sold.

20 minutes later the sellers came in and down it went.

Know those triggers of destruction and use them to your advantage.



aberdeen bullThe bull move by many measures is the greatest in history. Birinyi looks for big 10% turning points in markets and found that by some measures this one is the greatest in history going up 1/5 of a % a day versus 1/6 % a day in the 10 others of comparable rise to this. And we're right in the midst of another such surge with exactly 20 days of consecutive 4% or more moves, an event that's only occured 6 times in last 15 years, with previous dates 5/28/1997, 4/06/1998, 11/24/1998, 4/12/2000, 5/15/2001, and 1/27/2004.

One notes also that we haven't had a a month minimum since Feb 8th, 2010. Since Feb 8, 2010, the median S&P 500 stocks is up 13%, and the top 10 are each up more than 40%. An opposite scenario is working itself out in the world of fixed income. How can we make sense of what is happening?

To what should we turn in conjunction with the bearish feedbak that counting gives. I have been considering the fields of economics, martial arts or romance. What fields would you suggest?

Vince Fulco comments:

The thought of a pendulum with too much transitory force being applied to one side comes to mind. 

Russ Sears writes:

In my opinion to understand the crisis and the resulting recovery, you must understand that most of the crash stemmed from "model risks". People had bought these wonderfully complex AAA structured products that suddenly you had to be able to model the expected losses. In the past this was considered only a remote possibility with no need to model. Once it became clear that much of this "structure" was mush, it was equally clear that these things really could not be modeled well. A slight change of the breeze from the butterfly caused wild swings in the heavens.

Models with even a slight downward trend in the housing markets quickly turned into a death spiral in housing. AAA suddenly were worth pennies. And those that bought them were those least able to absorb the losses or downgrades, further cascading the price due to illiquidity.

One must wonder if this recent reversal similarly has the "all clear" signal being given, and people are coming out of their bunkers to see some rays of sun. In other words which came first for the pendulum, the crash or the recovery?

Ken Drees writes:

Some recent puffy white contrary clouds that have passed my eyes:

advertising aimed at gold straddles

advertising oil calls and bull spreads

themes of money market money needing to go to stock market to earn advertising mailers about apple type clone micro caps–a ground floor opportunity advertising for homeowners to lock in natural gas now–don't wait for summer since rates NG rates can't go lower best 12 months in recent stock market history and the recovery isn't even rolling yet at full steam.

Bond bears are simply frothy–they can't wait to feed! The fed is in a box and its locked and its under water.

Lots of interesting hooks in the water in many markets. I am not surprised since trends have been running themselves quite far without pause, and thats the action that creates the hooks–the unarguable facts of self reinforcing trend. Voila!

Kim Zussman suggests we look at the big picture:

The attached plots log [base 10] (SP500 close) every March from 1871-2010, using data from Prof. Shiller's website.

In the context of history, the recent decline and bounce don't really stand out. However stock returns of the recent decade are noticeably different than the prior two, and rather resemble the pre-WWII period.

Next, Kim Zussman looks through a magnifying glass:

Using Shiller's SP500 monthly data, here is comparison of mean monthly returns by decade 1900-2000


Note that the 2000 decade was one of only 3 (1910, 1930) with negative mean monthly returns. The two prior decades, 1980's and 1990's, both had the largest mean monthly return since the 1950's, and the 50's, 80's, and 90's - the top 3 - all occurred in the last half of the century.

I also plotted log(sp500) within each decade. Drift is noticeable in some of the decades, and noticeably absent in others.



Painting by Rubens

The yogis say our true nature is joy.  When we're laughing and truly having fun, perhaps that's when we're most being ourselves - and not the product of something else. G.P.

It is easy to be jocular and personable when things are going well, but you get to see who you really are when things are going badly. The energy required to maintain interpersonal facade is redirected toward survival. The market is a very good mirror. And a very bad one.

Bill Rafter adds:

Who you really are is very much like a stock in Portfolio Theory. The good side is the rate of return, but most compare that with the additional information of the standard deviation of the returns.

Similarly a person should be measured along the same lines. The person who is happy go lucky most of the time but occasionally has bouts of violent anger is not as desirable a friend as one who is relatively constant but with lesser high points.

Each person responds differently to stimulus. And as with stocks it is the bad side that is most important. Someone who is in a funk for a long time has the risk of getting clinically depressed, with physiological damage to the synapses.

Ken Drees comments:

I always liked the saying that "not all great companies are great stocks". Forgot who coined that one–maybe from the Livermore books that I have read. Meaning that the stock of the good company may not act or behave well for speculation. In general, it is interesting how stocks are given human qualities by specs.

Alex Castaldo replies:

Forget about Livermore. The first to warn about confusing good companies and good stocks was the late Peter Bernstein in the Harvard Business Review in 1956.  The idea was followed up by many people, including Solt and Statman (1989) and most recently Richard Bernstein .  

Kim Zussman generalizes and extends:

Galton weighed in on this, with five big personality traits: Openness, Conscientiousness, Extroversion, Agreeableness, and Neuroticism (OCEAN) In modern times, add Yeswecannyness, Islamocapitalist, and Amelanotaxophile.



 My nine year old son and I have been working through an electronics kit. He is catching on and taking an interest. Two weeks ago I went into the garage and flipped the main bank of lights for the workbench and nothing. The switch died. I decided to replace the switch and stopped — let's turn this into a lesson.

A day later I called my son into the garage and asked him to turn on the bench lights — "Dad, they don't work!" "Son, I want you to replace that switch, it's broken." At first his mouth opened to say something, then he started looking at the switch and the conduit coming down to the switch box. I gave him a screwdriver and the lesson started — off comes the plate and then — Stop! We now must turn off the power — you know from the electronics kit — the battery. I had him turn off the breakers to the entire garage. I asked him to plug in a tool near the switch and then to turn it on — "no power," he said. "Good, the power is off, it's safe to work on the switch."

It was fun to watch him struggle with the screws and the wires, helping him here and there. He replaced the switch with a new one, and then I had him use some electrical tape on one of the wires since it was too close to the metal box side. I tightened all the connections and showed him how to final tighten things without overdoing it; and then he put the switch plate back on."Crawl up there and put each breaker over now." He did each one properly and then jumped down. "Now try the switch." "It works!" A big smile!

I reiterated lessons from the electronics kit: the circuit, the battery (power source), the switch, etc. The big learning was that electricians need dependable and heavy duty flash lights because they are always working without power! He goes into the garage now and flips "his" switch. Sometimes he asks me how "his switch" is holding up. Moving from the lab to the real world — like trading, testing an idea with real money versus theory.

I am amazed at what kids can do! I opened the fireplace door the other day to put in a log — my son said "Dad, don't turn your back on a fire like that — keep one eye on it while you get the log." My jaw dropped — did I teach him that? if I did I couldn't remember! I was always leary of electricity as a child because my parents told me to stay away from it — it's dangerous. I decided to teach my son to respect and understand things like fire and electricity. I want my son and my daughters to understand not only higher education but also real life skills and challenges.

I can't tell you the number of times I should have included one of my kids in a chore or a lesson and didn't because of time or just being too tired. I employed some of Vic's smarts this year with my son. No TV, videos, or video games Monday through Friday, only on weekends (and that is limited — just to the point where I am not hated). Not only did he excel in reading, he is number one or tied for first in accelerated reading. Now he wants to own and collect books. This week he begged me for a book collection to buy scholastic book club through his school — I gave him the money and he wrote me a thank you note. I gave him a chore list today for payback, "no problem" he said.

TV and I would include any video/computer screen outside of school related is toxic to children (in general) and too many kids rot in front of these screens. My son asked me today what I thought about the future regarding books. I told him something I read here on the DailySpec — that bookstores may be out of business in the future and that books will be on hand held electronic devices. He said "Dad, that's bad — what happens if you drop the electronic reader and it breaks — you lose all the books. If you drop a book you can just pick it up and continue reading." "That's right," I said and we continued driving to his last basketball game for this season not saying much else as the rain backed up the depressing thought of books' going dinosaur. 



oarfishOarfish Omen Spells Earthquake Disaster for Japan

This rash of tectonic movements around the Pacific "Rim of Fire" is heightening concern that Japan - the most earthquake-prone country in the world - is next in line for a major earthquake.

Those concerns have been stoked by the unexplained appearance of a fish that is known traditionally as the Messenger from the Sea God's Palace.

The giant oarfish can grow up to five metres in length and is usually to be found at depths of 1,000 metres and very rarely above 200 metres from the surface. Long and slender with a dorsal fin the length of its body, the oarfish resembles a snake.

In recent weeks, 10 specimens have been found either washed ashore or in fishing nets off Ishikawa Prefecture, half-a-dozen have been caught in nets off Toyama Prefecture and others have been reported in Kyoto, Shimane and Nagasaki prefectures, all on the northern coast.

According to traditional Japanese lore, the fish rise to the surface and beach themselves to warn of an impending earthquake - and there are scientific theories that bottom-dwelling fish may very well be susceptible to movements in seismic fault lines and act in uncharacteristic ways in advance of an earthquake - but experts here are placing more faith in their constant high-tech monitoring of the tectonic plates beneath the surface.

Market wise — maybe the appearance of strange stocks at high levels indicating impending reversal to the mean.

Pitt Maner III adds:

This following is an interesting abstract of a paper that is suggestive of the potential triggering of additional earthquakes after a strong earthquake thousands of miles away. The time scale is in years and the number of variables involved for any particular area and/or fault regimes would be quite large. The Cal Berkeley Seismology site mentions a statistic for the Heyward Fault nearby of a 60% chance of a 6.7 mag. event in the next 35 years — so you have to wonder if the odds are slightly changed by large global seismic events. California, however, appears to be one of the most prepared places for the inevitable temblor. Analogies to financial "stress tests" and regional crisis? With cracks appearing in structures after "torture testing"…

From an article on

Fault strength is a fundamental property of seismogenic zones, and its temporal changes can increase or decrease the likelihood of failure and the ultimate triggering of seismic events. Although changes in fault strength have been suggested to explain various phenomena, such as the remote triggering of seismicity1, there has been no means of actually monitoring this important property in situ. Here we argue that 20 years of observation (1987–2008) of the Parkfield area at the San Andreas fault have revealed a means of monitoring fault strength. We have identified two occasions where long-term changes in fault strength have been most probably induced remotely by large seismic events, namely the 2004 magnitude (M) 9.1 Sumatra–Andaman earthquake and the earlier 1992 M = 7.3 Landers earthquake. In both cases, the change possessed two manifestations: temporal variations in the properties of seismic scatterers—probably reflecting the stress-induced migration of fluids—and systematic temporal variations in the characteristics of repeating-earthquake sequences that are most consistent with changes in fault strength. In the case of the 1992 Landers earthquake, a period of reduced strength probably triggered the 1993 Parkfield aseismic transient2, 3, 4, 5 as well as the accompanying cluster of four M > 4 earthquakes at Parkfield. The fault-strength changes produced by the distant 2004 Sumatra–Andaman earthquake are especially important, as they suggest that the very largest earthquakes may have a global influence on the strength of the Earth's fault systems. As such a perturbation would bring many fault zones closer to failure, it should lead to temporal clustering of global seismicity. This hypothesis seems to be supported by the unusually high number of M 8 earthquakes occurring in the few years following the 2004 Sumatra–Andaman earthquake.

This Berkeley website document gives a good overview of the seismology field and future "grand challenges." Some really nice graphics.



The STock Market and Finance from a Physicist's Viewpoint by MFM OSborneThe Earl's post on epigenetics brings back the memory of the great M.F.M. Osborne from 50 years, by far the most creative force in the efficient markets field with the possible exception of some readers of this site. Osborne liked to say that you should count the number of highs at 7/8 and lows at 1/8 and compute the ratio each day for individual stocks and then you'd get an index of specialist preference that was highly predictive. Like Babbage, he developed the first automated exchange algorithm some 40 years ahead of its first instantiation.

Ken Drees writes:

As with retail sales signs in grocery stores for example, 9.99 seems smaller or cheaper than $10. When trading was done in 1/8ths or teenies to me a number and 7/8ths always seemed greater than the next whole number. Why? I don't know. I felt that the next whole number was then a lock and that gave me the feeling that I had something better than what its listed price indicates. Now everything is pennies — my mind locks into price zones now down to other penny — something was lost.

Everchanging cycles in store price strategies. Instead of 2 for a dollar, now its 3 for 5, 4 for 5, 2 for 7. Its must be targeted that an average person has trouble making the division to do the odd calc. Is this strategy employed in markets now with the signposts of that nice fat 5/8th, a kosher 1/16th above the low, or good old "half" now gone missing? — it's all now just forgettable "digies".

I miss those fractions quotations. I could always visualize them.



For what it's worth, here are representations of the velocity of money, which is defined as the nominal gross national product divided by the money stock.Velocity tends to tank in a recession and recover thereafter.

Ken Drees replies:

Since arrow mzm = s&p, money base is non confirmation? Should not all three walk together?



a voltage dividerPassing an asymmetric jagged rock in the middle of a stream today, one was struck with the forces that determine the speed and amount of the water that passes by each fork. The theory of least effort means that the force of the water through each fork will be the same as in a parallel circuit where the voltage in each fork will be the same as opposed to a series circuit where all the water must pass through each point.

I started to think about how to best model this with markets. The flow of money starts by taking many markets together as a stream takes a twig down it until it meets an obstacle. The obstacle might be an announcement or a sponsor touting a position on the media. Then the theory of least effort comes in, and the speed stops as the different markets go their separate ways.

Perhaps a better model would be a circuit with two different voltage sources at opposite ends both starting at different rates and then hitting that asymmetric rock at some point chosen by the higher feeders in the web. It would be interesting to quantify some of these dividers in real life that seem to occur so frequently at the middle of the day. What are readers' thoughts on likely approaches or models?

Ken Drees writes:

In a series circuit the voltage flows through each area of resistance (R) and the resistance is added together to form a total resistance. In a parallel circuit, as described perfectly like a stream hitting a rock and then now flowing down two channels, each channel contains some resistance. Unlike in series R parallel = R1 * R2 / R1 + R2, so the more resistors, the lower the total resistance and more water or current will flow.

So with the stream analogy, in normal markets funds flow in and travel through under this resistance force. In the spring its water level is high and forceful–much market volume — the banks of the stream mark the high point where total funds hopefully are contained — this high volume pressure digs the bottom of the streambed out and over time the banks do or will contain the highest capacity. The 100 year flood will always cause the stream to overflow. Is this idea of maximum flow worth anything market related? Maybe dealing with some form of trading limits or curbs or closures or halts. But, as the funds flow normally and are diverted down one path or the other and into the circuit — think of a leaf floating through–one side generally has less resistance than the other — some leaves go the faster way and some get crowded out and move down the slower path. Total resistance describes the net effect, not the individual effect on one's own water molecule. It seems like a randomness applies to which molecule travels in which channel. Yet in total all can be measured as a force and how this total force is affected by the constraints of the system.

In thinking about each channel, after the diverting point, the stream bed may be dug out deeper in one channel so more initial volume will first go there, then the amount of rocks, debris and resistance in this channel is endured causing a slowing. This series like resistance force pushes back towards the divergence point back up stream and thus moves some of the water into the other channel-which is then endured like a series circuit in itself.

Maybe the crowded and popular trades actually cause their own diminishment in that they can only entice so many molecules into their channel, eventually pushing back on themselves causing other traders who want to get into that channel to be drawn down another less crowded copycat trade. If Apple is getting all the big early action, trades then start to migrate to the apple-like companies assuming the same great things will happen there too. So a water molecule / electrical current with an emotional urge to start with, and then once you are in you get moved along for some piece of time and distance until the circuit is exited. 

Rocky Humbert adds:

There are only smooth rocks in a stable riverbed. The sharp-edged rocks quickly get worn down, leaving behind only smooth, Zen and polished ones. One can find market analogies that fit one's temperament if one wants to flow with the current and not against it.

Rocky Humbert, quantitative analyst, speculator and master chef, blogs as OneHonestMan.

Pitt T. Maner comments:

Going against the flow also occurs in nature even when the odds don't look very good.

Juveniles of three species of stream-dwelling Hawaiian gobiid fishes are flushed to the ocean after hatching and must climb massive waterfalls (up to 10,000x body length) to return to adult habitats.

Henry Gifford replies:

There is a non-linear relationship between energy and speed of water in this sort of situation. A simplified explanation follows:

For an object such as a bicycle and rider moving through air, similar to the rock "moving" through the water, for a given size and shape (aerodynamic coefficient) the friction increases as the square of the speed, and the energy used increases as the cube (third power) of the speed. This assumes turbulent conditions in the air or water, which is the case in most practical situations such as the rock, a bicycle, normal water pipes, etc. No, no energy is made to disappear– it almost all ends up as heat in the fluid downstream, heating due to friction of turbulent mixing.

A better but simple explanation is available in Bicycling Science, by Witt and Wilson, MIT Press, first published in 1974, still on the shelves at B & N, very good book for understanding a nice mix of practical and theoretical. My father special ordering me a copy when I was 14 much influenced the way I think today.

Analogies between electricity and water flow are common, but with electricity things are much simplified by many resistances being fixed, while in the real world they are often variable. In water flow, practically sized pipes have turbulent flow in them, which means doubling flow increases resistance by four– squared relationship.

This means that solving flows in parallel piping networks requires solving simultaneous equations.

I invented a mathematical method for simplfying pipe flow problems to where they can be solved on the back of an envelope. Explanation downloadable here. Scroll down to "Energy Used by Pumps". Basically, one coefficient is substituted for a whole range of possible flow and friction values, which can be translated to pipe sizes and legnths, which perhaps has some use in markets.

Jim Wynne corrects:

As for "force", if you double the force you double the force. There is no "extra" multiplication factor. Newton's first law of motion says F=ma, or Force equals mass times acceleration. For a given mass, if you double the applied force, you double the acceleration. This is linear. There is no nonlinearity.

If one is referring to a rock lodged in a river bed, or stuck between other rocks, there are lots of factors besides the rock's mass that determine how much force is needed to dislodge the rock. A bigger rock presents a larger surface to the flowing water and will experience a larger force for the same flow rate. If you double the flow rate, to the first approximation your double the force. The nonlinearity comes in when you understand that with too little force, one cannot dislodge the rock. Once the force is large enough, the rock will be dislodged and move down the river until it becomes lodged in another collection of rocks or crevices. This process is very nonlinear. With the force being less than that "dislodging force", the rock stays in place. When the force exceeds the threshold for "dislodging", the rock will move and maybe travel quite a distance before it stops. It might even create an "avalanche" effect, which is a highly nonlinear event.

I don't see what you can learn from this example to apply to markets, which are anything but linear and very much moved by psychological "forces". You can try to use physics as a metaphor for the movement of markets, but I don't think that market behavior is ever linear like Newton's first law of motion.

Anton Johnson comments:

Financial markets and fluid dynamics share a chaotic nature. For example, the Venturi effect is a concept describing the velocity and pressure changes that occur as a fluid flows across a constriction. Engineers often exploit these pressure differentials to facilitate the movement of fluids, such as drawing fluids into the low pressure side of the constriction, without the need for a supplemental pump.There are numerous similarities between Venturi effect and certain market movements. Conspicuous are the connections between volume and price change magnitude before and after a news driven constriction. 

Pitt T. Maner III adds:

Geologists are always trying to figure out what the forces/environments were by the arrangement of sediments. Depositional environments and the spatial arrangement of sediment sizes are very important for determining the ideal places to drill for oil. It is interesting to note that the form most often seen is dendritic or tree-like in nature.

(Prigogine, 1997; Chaisson, 2001).

Global rules govern evolution toward increasing complexity in open systems:

1) Open systems attempt to return to equilibrium, a state in which gradients are minimized.

2) Open systems create dissipative structures to dissipate energy in an effort to minimize gradients.

3) Energy dissipation must be optimized.

4) Energy dissipation transforms energy from one form to another, generally from kinetic energy to heat. In the process of dissipation, entropy is created. Entropy must be transferred from the open system into the surrounding environment in order for the system to grow in complexity and continue to optimized. By optimally transferring entropy to the global environment the system can increase in complexity, the entropy of the global environment increases, and the Second Law is honored.

The dissipative structure must do two things: optimally dissipate energy and transfer the entropy created by dissipation to the surrounding environment. In the world, a single shape optimizes these constraints: the shape of a tree or leaf (Bejan, 2000). Tree structures are all around us: brains, circulatory systems, trees, root systems, clouds, heat sinks, deltas, channel drainage systems, and turbulence (Bejan, 2000) to name a few. All tree structures share common characteristics:

1) they have lowresistance pathways to optimally transport energy to dissipation sites.

2) Dissipation sites are located at the periphery of the structure because that is the optimal location to transfer entropy into the surrounding environment.

3) Low-resistance pathways branch so that the optimal area or volume is utilized for dissipation and the optimally maximum number of dissipation sites at the periphery of the system can be connected to the orifice or energy input site.

Many small dissipation sites are more optimal than a single, large site. We believe that these constraints are the global dynamics that govern the formation and evolution of most clastic sedimentary systems from bedforms to complex bodies such as submarine fans and deltas. It is for this reason that clastic sedimentary bodies have similar shapes: they organize into the shape of a tree or leaf at all scales, and in all environments of deposition, to optimally dissipate energy and transfer entropy.

Gary Rogan writes:

In a series circuit you add up the resistors. In a parallel circuit you add up the inverse of the resistors. What’s also interesting, that in a series circuit the total power dissipated is proportional to the total resistance for a given current, which is what all the resistors have in common. In a parallel circuit the power is proportional to the inverse of the total resistance for a given voltage (which is what the resistors have in common here). The trick in the market analogy is to identify the “force” equivalent to either voltage or current, or for that matter the multiple of the two, the total power, and figuring out how it distributes itself between the obstacles.



Once or twice each winter–during the boredom days, I bring up a puzzle from the basement game/storage locker. This season's is Claude Monet's "The Red Kerchief: Portrait of Mrs. Monet". I forgot where or when we got it. It was still in a wrapper with an art history store price tag. What great fun/interaction! I poured it out during a snowstorm day–enlarging the dining table with a few leaves. 500 pieces. And each piece seems to bring gladness. Time spent at the puzzle goes superfast. Kids walk past and then circle back and sit down to "work it"; wife loves to relax after dinner with the 'puz'. We are now 2/3rds done–each piece is a little victory–the shades of colors are illuminated by a task lamp on the table–"Monet can really blend"is what is heard by the casual commenter. I forget the market when I work the puzzle –thats a good thing sometimes, yes its a good thing indeed. I feel refreshed afterward—like a part of my mind has just been worked out.

James Sogi comments:

Speaking of winter pastimes, I recently tried a relatively new sport calledalpine touring. In Europe and Scandinavia they have done randonee andnordic touring for years, but recent advances in equipment have developedinto a whole new sport. The skis are semi wide skis. The special bindingsallow the heel to rise so a regular walking stride can be used while walkingover snow. Skins are attached to the skis to allow walking up steepmountains on skis on the surface of the snow. New advanced boots allowflexing cuffs that allow walking and climbing easily, but also lock down forcontroled skiing downhill through deep powder on steep couloirs at highspeed. This allows access to back country mountainous terrain in midwinter to enjoyfresh air, pristine uncrowded mountain landscapes. Alpine touring givesaccess to undeveloped terrain such as the Rockies, Alaska, Nepal, theHimalayas, Antarctica, Greenland. There are some amazing trips possible. The climb up is pleasant though hard work. The exertion puts the heart rateand breath right up against the cardio vascular wall and is a great workoutand a great endorphine high. The calories burn rate is close to 900calories per hour. The biggest thrill is the descent through deep power onsteep hills. Avalanches are a constant threat and can injure or kill. Three people werekilled last week in the Wasatch. The snow just healed two days ago fromprior storms when the snow crystals layers anneal. This healing processseems similar in many ways to current market consolidation.

Newton P. Linchen comments:

"I forget the market when I work the puzzle –thats a good thing sometimes, yes its a good thing indeed. I feel refreshed afterward—like a part of my mind has just been worked out."That's even most true about surfing. Your mind becomes "empty".Surfing, and many other sports/hobbies can put you into a meditative state - the one focused only in the task at hand - and that's indeed a relief for our minds.



The Hotel CaliforniaThe Greece and Portugal saga reminds one of the lyrics in the song, Hotel California:

"You can checkout any time you like, But you can never leave…"

For time immortal, countries in Greece's condition fight the inevitable outcome for some months. They defend their currencies. Their domestic interest rates skyrocket. And then they cry "Uncle!" They devalue their currency and restructure their external debt. (And of course, the IMF shows up with an "austerity plan" too.)

The question is can Greece go down the well-worn path of devaluation and exit from the EMU?

There's a new legal analysis from the European Central Bank which says, in the well-turned phrase of international legal scholars: "Umm. We didn't put it in writing." The document clearly states the mechanism for expulsion. But it also says that they intentionally didn't establish a mechanism for voluntary withdrawl… but is it possible over the weekend?

For anyone short Euros based on this situation, the analysis in the ECB legal working paper of Dec. 2009, "Withdrawal and Expulsion from the EU and EMU: Some Reflections", is worth a read.

Ken Drees writes:

The PIGS could be put in a pen — two-tiered Euro currency — till they all get better and rejoin. Salute!



The partnership between Ostrich and ZebraThe reaction to recent events where something devoutly to be wished actually happened and sadness and disappointment and revulsion occurs is part of a general syndrome related to the dissipation of the sex cells. Time and time again, a company reports good earnings above expectations and a terrible decline ensues. Time and time, an important link in the totality is confirmed a la Bernanke today, and the market drops an immediate 1%. Time and time, a bill that everbody wants, like the stimulus bill, or the Massachusetts election results, occurs, and the market drops an immediate 1% the way it did last Tuesday. What is the reason for this? Is it a variant of 'buy the rumor, sell the news', or is it insiders selling on the news? Or is it related to the general apathy that results when the discharge has occurred? Can it be predicted, and acted upon?

A friend writes in that the ensenble of comovements between bonds and stocks posted on our web site always reminds him of Leo Goodman's classic article "Movements and Comovements between M Dependent Time Series" that Doc Castaldo has kindly sent hundreds of copies out to far sighted researchers in previous glory days. It is good to honor and create a visual model and real life exampe of such important dependcies. And perhaps this will be a prelude to providing statistics on this site that will be at least as informative by half as the average sports statistics contained in such fine publications as The Post or Sporting News under "Stat City". The desire to provide a league standings tabulation is keen.

I am reading several books on animal partnerships and the partnership between the ostrich, which has good eyes, and the zebra, which has good hearing, reminds me of the partnership between many markets. One or the other, whether it's silver or the omniscient one, are there to alert to possible danger. One feels the pain of the CEOs who were at a dinner at the Oval last Wednesday, and learned about the Volcker plan only at 9 pm that night an hour after the dinner and just 12 hours before the 6% decline started. "That's not squash," as my friend from New Zealand used to say when I mixed in a volley or two. Heard at the Olympic Club at 10 pm: "You might want to play an all court game tomorrow, mate."

Of course there is a higher purpose to the recent decline of 6%. First the move must shake out all the weak longs who were buying it based on their hopes for the January baromoter. Next, it has to set all the public behind the form so that they will sell out in disgust at the three-month lows. Finally, it must engender a Dow below 10000 to create the kind of newspaper headlines and fear that will shake out the remaining weak longs before a rally occurs.

Paolo Pezzutti comments:

After you have finished your succulent second plate of spaghetti "all'amatriciana" and you are offered one more, can you eat it? After a long uptrend when earnings have beaten repeatedly expectations for a year, can you really expect more surprises? Some take profits, others go short. It seems that the news release is the trigger to execute actions that were long planned.

I found on CXOAG this post that addresses the issues raised: Earnings Surprises and Future Stock Market Returns. The post reports about the study Aggregate Market Reaction to Earnings Announcements.

The authors investigate the relationship between earnings announcement surprises and market returns on the days surrounding earnings news. The analysis identifies a negative relation between earnings news and market return that persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news. There may be a considerable degree of inefficiency in the market’s processing of aggregate earnings information. Consistent with this interpretation they find that Treasury bond rates and implied future inflation expectations respond directly to earnings news.

George Parkanyi writes:

Definitely, the same type of news after a few months loses its power to move the market (true for both the down side and the up). At a certain point you stop listening, you’re on auto-pilot. Markets respond to surprises –- the something new, the something different, or the something possible. This is very much a human characteristic.

A related example was the Internet bubble. Everyone was buying the companies that had no earnings – because while they had no earnings the potential for earnings was unlimited. As soon as companies started to report any kind of a profit, they were crushed. For now someone had put a limitation on all that “potential”. I was highly amused at the time how earnings for an Internet company was the kiss of death.

Kim Zussman writes:

If it were as simple as "up on good news", Galleon and others trading on inside information would immediately overtake the solar system –like a hadron-collider black hole. This evidences supernatural laws which prevent even cheating determinists from commandeering supreme mating rights.

Years ago at a Stephen Hawking lecture on time travel, he "discussed" (the lecture spun from his laptop) various paradoxes produced if one could go back in time. For example, if you killed your parents in the past how could you have been born in the future to go back to kill them? One theory was that when you pulled the trigger, the bullet would "diffract"; somehow splitting before hitting it's target — in compliance with rules keeping the universe in logical order. (whose logic?)

Another theory was parallel universes — one in which your parents died, another they lived and you were allowed to develop.

The questioners were kind to Stephen, because of his illness, but after the show he sat helpless in his wheel-chair in a van outside with the dome light shining on his contorted face like an involuntary spot light. A crowd hovered outside to see the great man, like at the zoo.

On a different note, Pfizer's run-up to the Massachusetts Miracle is typical. Removal of near-certain health care reform and promised payoff by pharma met with big decline. Would you have sold knowing the election results before hand? The upside is that if you can be at peace with the way market treats your logic, you will understand how to be a ladies man.

Duncan Coker writes:

 I would like to pick up on Messr Parkanyi's comment regarding "the markets respond to surprises, something new, somthing different or the something possible…this is a human characteristic." I agree. Related to this, I attended a showing of the film Poliwood last night where the director Barry Levinson was there for a Q and A session. It is a documentary about the triangle of media, celebrity and politics and how the lines between reality and theater, entertainment and substance, are becoming more and more blurred. Politicians become celebrities and celebrities become politicians. Media fosters celebrity and celebrity feeds the media. Politicians need the media for promotion and the media needs them for content. One of the ways to get high ratings in news television is to present conflict in a dialogue. That is why guests are always at the extremes of a position. It allows for more yelling, arguing and better entertainment for the viewers. Polarization is more interesting television. Informed and moderate discussions is just boring to watch.

I wonder if this carries over into the market. Stagnant markets are boring, wild swings make for better entertainment. Also, who benefits from wilder markets, financial media has something to write about, brokers and exchanges have more commissions and fees, money managers can justify their services. It allows politicians something to regulate, gives floor trades movement to scalp, hedge funds can fire up the algorithms. The causality works in both directions as well. Last week the politicians spiced up the boring upward move of the past 2 weeks. When a fund is rumored to be weak or going under another spike. The media does all it can to create excitement and volatility around the market. When traders over-trade and the line between entertainment and substance can get blurred. Also, like the television example, conflict is more interesting. In the case of the bulls and bears it is most interesting at the extremes, so the market follow this type of cycle.

Ken Drees adds:

This fits here with financial television as of late. The big question or overall theme being is this just another dip for the market or something more? Hopefully capturing viewers by keeping this nail biting question front and center–having two view points and the ensuing debates roll on out.

Off the bottom it was "is this a sucker's rally or a setup for another drop?"; now its "is this just a little dip and the start of a sideways consolidation, or the start of a substantial 5 -10 % correction?"

It seems like these times of opposing question of market direction after extreme linear moves should be watched closely for reversal. I find it interesting that the choice not talked about much off the march low was this: Or is this the start of a nice 50% multi month rally from oversold conditions not witnessed since 2001?

Today the choice missing would be this: Or is this the start of a 50 to 70% drop, retracing most of the gains of 2009?

TV — usually it's what they don't say or its the opposite of what they scream into your face — making great TV but bad advice.



 Because the market sells down on a positive result in my mind doesn't equate to frustration or a negative emotion. I feel that it's only direction — emotionless. With that said, we watch fin tv, talk to people, read whatever and there is a mood to the market inwhich we are connected to. So the GNP number tomorrow is going to be good and above expectations. So the market should go up feeling that the worst is over for the recession, but wait — that means rates may go up now, or that O needs to quit the jobs bill now or that this is the news so it gets sold and thats what everyone is doing so its time to buy — an insanity of circular knots — like marveling at how big the creature's teeth are as he bites you across the torso.

Justin Mamis said it was called the "price news drug effect" where everyone fits the market into the news and news into the market — and if it didn't fit to a logic then your mind worried and got stuck in some dumbstruck sidecar being pulled along. His point was get off the need to equate the market with news.

What I think is interesting is who does (a collective group) the initial buying or selling? Is it some squad of dark minds, or is it a flock of birds moving as a single unit, or a school of fish turning at once under the connected forces of group travel — direction? I think more the latter.

Victor Niederhoffer adds:

Perhaps this musical will give insight into the relief of frustration hypothesis.



"Sucker's rally" — I heard this term on financial TV and in print all the time in March, April, and May of '09. Then the term disappeared until this latest selloff last week. Now it's popping up in bear print — not so much TV yet.



 I keep wanting to write a piece about politics, but then I sit back in my chair and sit on my hands, looking to write something better.

My early chess friend/teacher told me to sit on my hands and that would slow everything down, stop impulse moves–and yield better overall chess.

In markets, using chart points–waiting to enter or exit, sticking with the plan is usually best. However, in fast conditions if you are waiting for xyz to hit a round number, sometimes I just let it go at 991 for example–I mean why wait for those extra ticks like every other bloke? I could reload and shoot by the time they are still massing.

Which yields another idea–is it good to learn how to use tools/skills with both hands (ambi)? I was thinking of say archery or shooting for starters? In some sports its almost a given that you have to be equal with both sides.



It's an absolute stew of variables now. Safe harbour time — or more see/saw. Nine months of bull complacency have given birth to what?

I am watching GS stock price for direction of Obama bank bite. GS cutting back bonuses is like Grandma giving you the eye when she watches you grab three cookies. You give back one to be polite and take the other two, knowing you will be back for more later anyway.

Somehow the money must flow. We all must be allowed to take water from the well.



cherry blossomsThe new year is like a new meeting that begins with many fine horses coming in from all areas, and the public is at sea with their picks.

SPY came into the new year in sure and steady rally mode and at 3/2 odds, stumbled early in the new year's races, recovered to win a few and is now coming in last. Setting itself up for a future win? Public always loves SPY and can't seem to not say nice things at all times. Odds are still not long.

TLT came in on a losing streak one a race off the bat and continued losing ramping the odds to win, now at middle odds TLT is winning. The puiblic ignores TLT even though it's been making steady money lately.

GLD came in at mid odds one some short odds races, then one a big purse, came in dead last the next time out and is now at mid odds. The public doesn't trust GLD, much less know when to bet it.

USO came in the favorite, won a few at lows odds thanks to the heavy betting, and is now consistently losing. Definately out of favor and now at long odds.

EWJ came in at long odds and has been winning consistently, now at shorter odds and still winning there hasn't been a cover story yet and no one seems to care much. Look for that horse to wear the Japanese cherry blossoms this spring in a full cover garish victory circle photo shoot.



 Checklists have been shown to reduce errors, improve accuracy, and increase profits in many fields. Most recently, a study in the New England Journal by Atul Gawande shows that use of a 19 point check by surgeons could reduce deaths by 30% and save billions. Such simple things as knowing all the names of your colleagues and being sure that an adequate supply of blood and respiratory equipment is available are useful.

When it was suggested to me that a checklist for my own trading might be useful, I originally had the same reaction as the doctors. "I've flown with the eagles, climbed the highest mountain, captured the mountain lion, been a member of all the exchanges, played 12,000 refereed matches, went to Harvard." But then I read the reaction of the Drs. "I'm from Harvard. I don't need such a list. But if I was operated on, I'd like such a list."

Here's a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you'll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn't enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker?

11. If a trade is based on information, was the information known to others before you?

12. Was there enough time for the market to adjust to that information?

13. What's your entry and exit point?

14. Are you going to use market, limit or stop orders?

15. If you don't get a fill how far will you go? And what is your quantity if you get filled on all your limits?

16. How much vig will you be paying if you use market or limit orders and how does that affect the workouts you did knowing that if you use stops you are likely to get the worst price of the day and all your workouts will be worthless because they didn't take into account the changing price action when you use stops, to say nothing of everchanging cycles?

17. Are you sure your equipment is as good and as fast as the big firms that take out 100 million a day with equipment that takes into account the difference between being 100 yards away from an exchange and the time it takes the speed of light to reach you?

18. Are you going to exit at a time or based on a goal? And did you take into account what Jack Aubrey always did which is to have an escape route in case all else fails?

19. What important announcements are scheduled? and how does this affect when and what kind of order to use? For example, a limit before employment is likely to be down a percent or two in a second. Or else you won't get filled and you'll be chasing it all day.

20. Did you test how to change your size and types of orders based on announcements?

21. What's the money management on this trade?

22. Are you in over your head?

23. Did you consider the changing margin requirements when the market gets testy or the rules committee with a position against you increases the margins against you?

24. How will a decline in price affect your margin and did you take into account what will happen when you get stopped out because of margin?

25. What will happen if you need some money for living expense or family matters during the trade? Or if you have to buy a house or lend money to a friend?

During and After the Trade

1. What's your game plan if it goes against you and threatens your survival?

2. Will you be able to get out? Did you take that into account in your workout?

3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?

4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?

5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?

6. How will unexpected cardinal events affect you like the "regrettably," or the pre-annnouncement of something you expected for the next open? And what happens if you're trading an individual stock and the market goes up or down a few percent during the day, or what's the impact of a related move in oil or interest rates?

7. Are you sure that you have to monitor the trade during the day? If you're using stops, then you probably don't have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you're using 10% of your capital on a trade, they you'll have to monitor it for survival. But, but, but. Are you sure you won't be called away by phone calls, or the others?

8. Are you at equilibrium in your personal life? You're not as talented as Tiger Woods, and you probably won't be able to handle distressed calls for money or leaks on the home front. Are you sure that if you're losing you won't get hit on the head with a 7-iron, or berated until you have to give up at the worst possible time?

9. After the trade did you learn anything from the trade?

10. Are you organized sufficiently to have a record of all your trades for your accounting and learning?

11. Should you modify your existing systems based on it?

12. How does recency and frequency and value affect your future?

13. Did you fit your after activities to your mojo?

14. If you made a good profit, did you take some capital out of the fray for a rainy day?

15. Have you learned to say "fair" whenevever anyone asks you how you're doing and are you sure that you don't spend a fortune after a good trade, and dissipate your profits with non-economic activities?

16. Is there a better use for your time than monitoring the ticks or the market every minute of the day if you do, and if you don't, do those who do so and have much faster and better equipment than you have an insurmountable advantage against you?

Well, specs, that's what I come up with off the top. How would you improve or augment it?

Nick White comments:

If a position begins moving against beyond what was anticipated in the workout can one, through either contacts or acquired counting skills, figure out as fast as possible why the move against is occurring? With that information, can one then discern whether or not such a move needs to be heeded, faded, or left alone?

What legitimate information sources can one leverage to better understand a particular trade? A buddy who is a floor trader, a mentor, a high ranking friend of a friend in a central bank?

Are one's current skills commensurate with one's trading goals and ideas? Perhaps, more importantly, are one's trading skills of the same league and caliber as those one is competing gainst in a particular market? If not, surely best to wait and keep capital safe until one is sure of one's edge. This strongly accords with Chair's admonition to never get in over one's head, and to not spend inordinate amounts of time watching each tick when that time could be more profitably invested in training and developing new and existing skills — counting, programming, etc.

Make the strongest effort possible to find out whether the tail wags the dog in a particular instrument that you're trading. If it turns out that it does, does it happen with significance at a particular time, such as expiry? Or after a particular event? Can it be exploited after costs or is it better to fade it after the fact?

If one asks these questions and takes note of them in the essential lab notebook that ought to be at one's fingertips during all trading and researching activities, have those questions subsequently been answered by oneself? I have found this to be the most fertile soil for developing new insights and ideas. If you observe it, note it and question it — hypothesize about it and answer it.

Alston Mabry comments:

Here's one: Don't fool/confuse/tire yourself by making your execution more precise than your analysis. If your target is 2% within the next five trading days, then chasing two bps on the entry isn't going to make or break the trade.

Easan Katir adds:

  1. If you trade odd hours, get enough sleep and appropriate caffeine dosage.
  2. One well-known S&P pit trader advised two bowel movements in the morning before setting foot on the floor.
  3. Start the day with a centering routine — affirmations and goals. Remind oneself of one's larger purpose.
  4. List important times and dates on an online calendar with appropriate alerts: government numbers, earnings, ex-dividend dates.
  5. Rehearse successful behaviors and outcomes. And disaster recovery.
  6. Minimize other life stressors: long commutes, family arguments, risky vices, debt.
  7. Test backup equipment and systems regularly. I test my diesel backup power generator weekly.

Victor Niederhoffer responds:

I would add a small point. Trading foreign markets always seems much more difficult than domestic ones. For one, you never know what the important announcements are. For two, you get killed on the spread on your foreign exchange prices. For three, it seems to be 100 times more time-consuming to get into the queue than even the 1/100 of a second that's enough to give the domestic high frequency traders an insurmountable edge on you. For four, you have to go without sleep for at least one night, and then on the second night when you can't stay up the required 48 hours without sleep the move you expected and closed out is sure to happen.

Alan Millhone writes:

Checker master Tom Wiswell said to always keep the draw (escape) in sight.

Scott Brooks adds:

I have to disagree with Easan on the caffeine. I know there are many people that have to have their morning cup(s) of coffee to get their day going, and without it, don't feel/function right.

I do not want to go through life being so dependent on something that I have to have it to make myself feel right, let alone function right. I know this will be anathema to most (everyone?) that reads this, but I have to say it.

When I removed the caffeine addiction from my life (and don't fool yourself, it is an addiction…..if you have to have it everyday and then quit it, you will go through withdrawals……it is an addiction), my life changed so much for the better. I can think clearly. I can process information more quickly, and I can see solutions with greater clarity.

And your sleep will improve immensely. I suffered from severe insomnia for years. Kicking caffeine out of my life has lead to my being able to fall asleep, usually within minutes and being able to get up earlier and feel more refreshed!

You will find a level of "mental processing" that you never thought possible when you replace coffee and caffeine with purified water (I drink around a gallon a day) and a glass or two day of the organic juice of your choice.

But be prepared, you will likely have around two weeks of headaches when you go through caffeine withdrawals (you know, from the caffeine that you're not addicted too).

Nick White agrees:

Ditching caffeine is a good move. Best to save it for when may really need it on an overnight (or two) session. As mentioned in the past, Dr. Shinya is fervently anti-caffeine. Like many others, I found Dr. Shinya's principles promoted many positive health benefits for my wife and me.

On that note, i find that the Shinya nutritional principles — when moderated by the ideas behind the paleo diet — are a real winner; the increased "good" protein from the Paleo program does much to mitigate weight gain from increased carbohydrate consumption when kicking off on the Shinya program. There is a Paleo program for those involved in elite endurance sports.

George Parkanyi writes:

On any project or major activity, the first question I ask is how much time I have. That frames everything that is to come.

The very next thing is to build a contact list with names, phone numbers (backup phone numbers) and email addresses (and account numbers and passwords). This is also true in Scouts, where we need to have that information at our fingertips for safety reasons — in fact for every camp we have to draft an emergency plan — police, hospitals, parents, primary first aid responsibilities, etc. In a trading operation this is critical. If you have key support resources who have to act on your behalf at a moment's notice, then they need to be available, you need to able to access them, and if not, there must be a ready backup contact and plan B, even C. Chair's point about having a pen available can even be a critical detail — what if, in the heat of battle, you have to write down, say, a wire transfer number? In my case, reading glasses would be another.

Kim Zussman comments:

As a periodontal surgeon, I have found it much easier to stay composed and rational during difficult surgery than unruly trades. Chair's excellent list hints at why, in the form of the question "how do you know?".

Surgical complications follow rules of biology, and mistakes usually come when overlooking something or miscalculating the compounded risk of several factors. One can and should practice with a large margin of safety, which in almost every case is easy to determine. Biology is almost immutable, but markets morph wildly in real-time. It is very difficult to stick with a position if you are honest about your cluelessness and unwilling to go down with the ship. When the trade goes bad:

1. What was your hypothesis? How many others had your idea too? Or the opposite one? Are they right? What do they know that you don't? What is the source of your confidence that you can out-smart (or out-run) the million-mind-march?

2. Did you test properly beforehand? Did you miss something; a signal from another market, a subtle backdrop to your traded market? What is the chance this time is different, and should this doubt change your mental stop?

3. How heavily is your market being manipulated? By government? Big banks? Goldman's trading desk? Does persistent manipulation / insider trading change your hypothesis or render hypothesis formation useless?

4. How do you know whether the move is merely noise of your correct hypothesis, or part of a regime change you have not noticed?

5. Deep and abiding doubt is essential to science, but how do you incorporate doubt into market prediction when most of the movement is random?

6. Does the non-linear, mostly random reward system of trading corrupt your judgment (sleep, personal life, etc)? Do some people lead a happy, well-rested life with long periods of gut-wrenching loss alternating with gain, and are you one of them?

7. What unalterable beliefs are necessary to trade successfully? If you hold them, are you sure they are the right ones? Should some beliefs be discarded as a result of a changing world? Are there new ones you should know, and are you confident you will see them when they develop?

Steve Ellison adds:

Margin of safety is a key concept in many fields. While skiing, I put on the brakes a bit earlier than I absolutely must so that if I miss my footing or hit a patch of ice, I have another chance to avoid the hazard (e.g., other skier, tree, out of control speed). Graham and Dodd wrote about margin of safety in investing. Rather than buy a stock that is below book value, a value investor might wait for an opportunity to buy a stock below 80% of book value.

If I ski 10 times a year, even on the same mountain I am likely to encounter 10 different sets of conditions — temperature, wind, length of time since last snowfall, etc. One day last year, the fog was so thick I could not see the trees on either side of the trail. Some conditions dictate caution; others are more forgiving and allow me to be more aggressive. A warmup run is an excellent way to get a feel for conditions.

Nigel Davies proposes:

Checklists are very good whilst learning, but I believe that one should ultimately aspire to be able to do without them because everything has been internalised. In my own field I tend to believe that conscious thought of any kind can be a distraction, which is why I don't like the old Blumenfeld Rule (a checklist used before playing a move).

Ken Drees writes:

I just did an experiment with my son with one of his Christmas presents, an electronic learning kit. We have learned so far the basics of how electricity works. Resistors (series and parallel), Capacitors, etc. Each lesson has a page explaining the experiment, a schematic, a drawing of the circuit in relationship to how water moves through pipes — the water analogy for electrical flow resonates with my son. And each experiment has an electronic "wiring checklist'.

The checklist comes in handy since its easy to forget a connection, misrun a wire, or leave an extra connection from a previous experiment in the lab circuit.

I associate checklists with "must have"–high accuracy functions. Like programming, wiring, piloting, fixing a car, cooking –its all routine, but items can be omitted, done wrong and can be forgotten due to human error. The checklist is a tool, an aide that removes ego from the scenario. Used in trading it helps set the trade up, helps initiate or close the trade, and removes emotion from what needs to be done automatically. A checklist in the grey area of a trade like the middle game in chess, or an operation where the patient is being worked on really doesn't help much–you need to make gut-inferred decisions, unless your trade is so automated that you remove yourself from the trade entirely and rely upon a program.

Using trading checklists help bring focus and energy towards the trading exercise. Using checklists of some sort during the "live–life of its own phase of the trade" must be explored further. Maybe there are ways to check off your decisions, check your options, use your skills with the pressure of time taken into consideration–during this live phase.

But when your hand is on a hot stove, trade going wrong, does one need to look at a post-it-note do determine if one should remove hand from stovetop?

FYI: a 9 year old boy is understanding electricity –public school may teach a child these ideas in 7th grade. I am amazed at what can be taught to children that most think is way over their heads.

Alan Millhone adds his two cents:

I will add my two cents. Some years ago I bought an International dump truck and it has air brakes. My late father and myself drove it for use in our construction projects. Because it has air brakes you need your class B driver's license to be legal. We drove it several years without the proper license. Finally my father got the book and studied and took the written part for class B. After he took that part he gave me the book and I studied and took the test and passed. Quite a book to study.

Now the second part was an over the road test with the instructor in the truck with each of us. He said he had never given a back to back test to a father and son. Dad and myself had to back the truck then drive to the right close as we could to an orange cone– without touching the cone. Then each of us had to do a 50 point check list of our truck that we earned (I still remember the list ) and still check my truck before taking it onto the road. So checklists are valuable in many applications ranging from dump trucks to the Market.

On a side note, dad and I rode to the test center in our dump truck without the proper license. The instructor said he was not going to ask how we got there.

David Brooks comments:

All very good ideas. I wish there were some good way to test Atul's theory historically. Why? Because I am convinced that poorer outcomes in the last decade come from fragmentation of the system - shift work, decreased work-hours by house staff, the high volume being forced through the system and de-professionalation of nurses.

Alas, we can't measure the past, but I am convinced that the hospital I started in (The Peter Bent Brigham of the early to mid 70's) was a safer, more humane place with better (allowing for technological changes) outcomes.

All the same, the reason we have embraced checklists a la airlines has to do more with the aeronautical outcomes than medical outcomes. The amount of information that a pilot has to process is order of magnitudes more than what a surgeon has to process. Furthermore, when a pilot fails completely 300 lives are lost, and when a surgeon completely fails, 1 life is lost. The former is far more dramatic, of course.

It's nice to know the anesthesiologist's and scrub tech's name, but it's hard to believe that that is going to affect the outcome of a significant number of operations.

That said, I have the greatest admiration for Atul. He sits a short distance from me, and I am proud to have had even a small role in training him. He is a remarkable young man and we will being hearing from him for many years to come.

Newton Linchen comments:

Once I took an airplane pilot course, and I was amazed how everything was done with checklists. Actually, the first time I heard the word 'checklist' was there. (Even here in Brazil they keep all the terminology in English, for standard procedure). I realized how checklists can keep you out of trouble and save your life. In markets, perhaps a great deal of losses could be avoided if I followed my own trading checklists.

Russ Sears writes:

Checklists can be very useful in an emergency. I have found that a simple checklist was valuable in a race. When the going gets tough it is easy to panic. The list It went something like this 1. relax 2. pump the arms smoothly 3. breath in normal rhythm (One hard puff out, relax in). It is easy to panic on the edge of your limits. These 3 things are the first signs that you are starting to panicking, subconsciously without knowing it.

Runner, use checklist often as part of their diary. Each day you check your weight, evaluate your nights sleep and your overall mental state. You check your diet and fluid intake .

Before a race you follow your pre-race checklist from what to pack, to when and what to eat, and when and how you should be warming-up and stretching.

Then after the race you check how well you followed the plan, where the plan worked and where if failed.

Finally at the end of the year you check the philosophical underpinnings of your training. Your goals, why you are doing it all, what are the cost that you are willing pay and what is the best path to get there.

So checklist have there place, but you need to 1. put them in the right point of time in the process, 2. not let them lose their relevance and meaning . 3. keep them simple at critical points, simple enough that they are potent.

Easan Katir adds:

Thinking about checklists, and watching the Haiti disaster coverage, made me think about a checklist for emergencies. Then thought about a list of the various types of emergencies one might encounter, big and small. What came to mind:






home invasion


mistaken id

false accusation






missing person


currency replacement/devaluation

market crash

partner deceit


power outage




i suppose each needs its own checklist, though some may overlap. What did I miss?

Scott Brooks adds:

The best checklist you can have is to either be a great leader or be around a great leader.

It's been my experience that average and ordinary people need checklists (which they rarely if ever have or use…which is one of the reasons why they are average and ordinary), but smart people with leadership skills don't need a checklist when it comes time for a disaster.

Most disasters/problems rarely follow a fixed pattern. It takes a leader who is capable of thinking on his/her feet who can stand up, take charge and direct people as to what they need to do.

And this doesn't have to be right all the time, he just needs to make decisions and get people moving and be willing to take responsibility and shrug of criticism of the naysayers…..while listening to them to extract the wisdom that might be contained in their "naying" (I think I have just made up a word).

A leader has to have insight and the ability to see several moves ahead. A leader has to be able to see correlations and connections between seemingly disparate pieces of information.

A leader has to then take this data and formulate a solution and then direct people to execute the solution….and if possible, get people to see the vision of the completed project so that they can begin to work towards that goal with minimal supervision.

But most importantly, a leader has to be willing to make a decision when it comes time to make a decision even when the solution is not apparent. A course of action that fails is better than inaction that is guaranteed to fail.



 An article with highly defective statistical reasoning appears in the WSJ purporting to show there is a tremendous turnover in the top 25 companies from 10 years ago to today. It is best to consider this by noting how many of the top 25 baseball players by batting average in 1999 are still there today. That's the best way to get a handle on the regression bias implicit in such studies. The following correspondence between Vic and Steve Stigler puts it in perspective:

Dear Steve,

Hope you and family well. Merry Christmas. Here's an unusal aspect of the regresson bias. Wonder to what extent this consistent with properties of random numbers and to what extent it represents a change in the level of skill or in this case price change. It would be an interesting study. I was pleased that my daughter Kira got into Columbia Engineering School on early admission and another daughter had a grandson Wilder Niederhoffer named after a Libertarian. Best, Vic

Dear Vic,

This is the same as Horace Secrist "Triumph of Mediocrity in Business" 1933, in Chapter 8 of my book Statistics on the Table.

Congrats to all your successful avoidance of and tendency towards mediocrity in your descendents!

I attach my remarks from a memorial for Rose Friedman Dec 12.

Have a happy new year! Steve

Ken Drees adds:

Market cap 10 year free market survivors: old fashioned energy (big oil), food (Walmart), and technology (human invention) lead the list and boring consumer Gillette (razor blades for everyman). Things the human race needs for survival and to thrive will always be investments that will endure.

Big government wants to bleed big oil, keep food out of banking (probably best that Walmart was denied a key to the club after all), litigate tech for the halibut. And what can be done to Gillette? Maybe the healthcare bill can attach itself to some personal care products and bleed a little off. Also, energy, food, and the stuff everyone buys is what the government tries to melt out of the inflation indexes. So what we need is what they attack and thus make more expensive to us and then they tell us that its not more expensive and to just substitute chicken for meat.

GE? what do they do other than derivatives and green initiatives which are starting to turn a little brown.

Kim Zussman replies:

From the "getting little things right but big ones wrong" department:

What were dinosaurs long at KT boundary?

Prior decade's math/science PhDs lemming into finance.

New decade definition: "lemming": The process of best/brightest young people flowing en mass to the latest promising nascent bubble.



 Tiger Woods isn't the only one suffering financial as a result of his multiple affairs — shareholders of his sponsors are too. A study Monday revealed that shareholders of sponsors like Nike, AT&T and Gatorade may have lost billions of dollars in the wake of the scandal.

Study author Victor Stango, a professor at the University of California Davis, said:

"Total shareholder losses may exceed several decades' worth of Tiger Woods' personal endorsement income."

In the study, Stango compared the stock prices of nine of Woods' sponsors with competitors and the overal market after the scandal was revealed last month. Investors in three sports-related companies — Electronic Arts, Gatorade and Nike — actually fared the worst, experiencing a 4.3% drop in stock value.



 I was insistently begged into playing Monopoly with my nine-year-old son a few days ago. I was running on the treadmill watching him set up the board. No other siblings wanted to play with him, but he was still determined to get the table ready. He counted out the money for two players and set it in neat piles. My eagle eye audited him as he counted the correct amount of 20s, 10s and so on. He had the hotels and houses segregated and in reserve and ready to go. The banker's money cubbies were filled and in proper order and the Chance and Community Chest cards were face down in their respective piles. He got coasters for drinks, got the chairs just so and got the property cards out of the rubber bands and stacked them in the banker's box.

He looked at me as I was still jogging along on the mill and declared more then asked, "Dad when you are done running are you going to play me in Monopoly or what?" For a split-second I considered saying no, but this undaunted boy still wants to play against me, the unbeaten king of dice and the dream. And everything looked so nice and neat and the multicolored tiny indoor Christmas lights were casting a gaming glow so I said, "Of course I will play you." I hit stop on the mill, turned the machine off, and turned quickly to go up for a fast shower, saying to my son as I passed, "I will be back in a flash, prepare yourself to lose."

Game On

My son knows the ropes, can handle himself to a degree but we all know who is going to win. I sat down and started to accumulate. He did the same. The luck was equal for awhile then I finally got Ventor Ave. and had that yellow monopoly that isn't anybody's first choice. The railroads were split equally, I had Boardwalk but he had both Utilities. And so what I sniffed, I was the only one with a monopoly but I didn't put up a house yet. Loose ends needed to be tied. I needed Park Place which was still available and the green zone properties had Pacific open and my son needed that one for his monopoly.

Hard Lesson

Box cars! I danced my token, tiny Scotty dog, just around the go-to-jail finger pointing policeman and said "twelve" as I landed on Pacific Ave. "You aren't going to buy that are you Dad?" His eyes were looking deep into mine as I declared, "Of course I am buying Pacific". I paid quickly and took the deed, staring down at the transaction chore as I heard him mutter that his game was doomed since there were no other chances for him to get a monopoly. I said aloud and while still looking down counting my cash, "That's how the game goes, it's all about luck and not letting your opponent get those coveted monopolies". I had doubles so I rolled again. Park Place! Its all over now I thought to myself as I stripped off bills for the last remaining blue property.

Feeling a little Guilty

But that feeling passed quickly and the game got a bit dull. I put a house on each of the yellow properties, refusing at the moment to build on the high end lots since houses were pricey and my money was only slowly growing. My son had a good stack of money due to collecting regular puny rents and getting very favorable Community Chest and Chance cards and somehow staying quite upbeat. While I was getting horrible cards, "pay doctor's fee, pay each player, pay for improvements". My son seemed lucky. He was always missing "yellow-hell" as I called it, hitting at worst the Luxury Tax between the blues and declaring cheerfully, "Its better at Luxury and paying the bank $75, then hitting your big blues and paying you double rent. "Plus I will pass 'Go' next roll and get my money back". I looked down at my play money stack, looked at my watch and noticed that ninety minutes had rolled by like ten.

The High Priced Swindle

I knew that eventually I was going to simply grind this win out. I had mortgaged all my useless monopoly busting properties, the one's my son needed, back to the bank, took the proceeds and put up 3 more houses in yellow-hell. The game continued on with him being lucky and me just grinding along. I saw his cash pile keep rising and I actually needed to ask him to change in his 100's for 500's since the bank was getting low on "C" notes. I was getting tired of this and wanted to hasten the eventual ending. I then made him an offer he couldn't refuse. "Son, I will sell you Pacific Ave for $1100; you will then have a monopoly and can start building. I want to cover the mortgage I owe the bank, the 10% interest due and get triple my money on the sale since you desperately need it."

The Counter Offer

I said for him to think about the offer because it was only for a limited time and that I would be back shortly with soda refills. He came up to the kitchen as ice and soda were merging and said, "Dad, $1100 is way too high, it's only worth $320 and houses cost a lot to build there". I said, "Well you need it don't you? He then countered, "Dad how about selling me St. Charles Place instead? I can pay you for it and the houses cost less to build". I said "Hmm, St. Charles is going to cost you $800 and whatever I owe the bank to get it out of hock". In my mind's eye I wanted $800 clear to put up two houses each on the blues, building with Other People's Money. It would then be a race I would surely win; plus my son would feel better getting his own monopoly and seeing some action before his eventual loss. Ok, "Deal" we both declared as we shook hands. Then back downstairs to the game we went with our freshened drinks and minds.

Tables Turned

Seemingly in no time three red hotels stood garishly along the maroon properties, just past the jail. And since he owned the Electric Company too, the entire area was definitely a zone to be avoided. I had two houses each on Marvin Gardens and friends. My big blues had each two "free OPM" houses, but the "lucky hat" token always seemed to catch wind and blow right over my areas of doom, passing "Go" and merrily finding joy everywhere it landed. Then his dice went plop-thud. I finally got him, luck reversing back to my mean. "Ventor Ave. with two houses is going to cost you $900 my boy, I said with a head nod. You could see a lump in his throat as he counted out the money. "This is highway robbery he said loudly". "Too bad I retorted, pay up", knowing that this game would be over sooner than later.

Pay Back

I landed on a railroad I owned and had doubles, rolled again and landed on Boardwalk. "Just visiting one of my holdings" I puffed. He rolled and landed somewhere benign. I rolled an eleven, grabbed $200 for passing go and found myself stopped on St. Charles Place. My son was looking for the deed and whooping it up. "St. Charles with a hotel he blustered is $750." I paid it and looked at the board, my pulse was up. I just lost back most of what I just took from him, but that's fine. I will easily vault over his maroon area, just need to take it easy. He rolled and I didn't pay attention to his roll, must have landed on one of his own properties, whatever, I was staring at my side of the board. I needed to roll anything but a three. No problem, the dice plunked to the board from an unnaturally weak right hand and I rolled a dead looking three. "You are now on Virginia Ave. with a hotel it's $900, more than St. Charles", my son shouted!

Sometimes you Just Know

Now I was cash broke. Why the heck did I sell St. Charles place? Probably bad luck to deal a Saint in such a way. Why did I take that highway robbery money and put up houses on those blue properties? He never lands on them! I hate those yellow properties. How much for those houses if I need to sell them back? He was still on a roll, collecting money from "Go" again. A few turns later and my Scotty dog was on the low end rent side of the board staring ahead towards hotel row. The dice flew out with confidence this time but an eight signaled another huge payday and my undoing. "That's going to be another $900"! I heard this demand in slow motion blurry speech, my senses were melding into an emotional jelly. Mortgaging the blues and selling the houses wouldn't be enough, I would have to take a wrecking hammer into yellow-hell and go begging. My will to fight was broken. "Its over, I forfeit and good game," I said with hand outstretched. Family members appeared out of the woodwork checking out the board, the red hotels, overturned deeds. "I won! Everybody, I beat Dad at monopoly! This is the best Christmas ever!" "Next time, I get the lucky hat", was all I could say.



 Sitting in front of the fireplace yesterday with the family and two of my three children had their buds in. Did they even hear what I said about the busy weekend ending on a relaxing note? One said "yes, I heard you" the other said "what?".

This is not like the Walkman generations of the 80s — it wasn't as widespread and the indoor playing of Walkmans was considered rude. But what about the 50s and the crystal radios with their earpieces — can someone comment on the parallel? Are market players as plugged in to their own separate realities, as my kids seem to be?



 I used to do a lot of business in Japan and I think very highly of Japanese businessmen (unfortunately they rarely include women at high levels). They have an industrious, highly intelligent population, are very interested in business, and a good base as the second largest economy in the world.

It is a great mystery to me why they (and their stock market) have not done better in recent years and I have never seen any good explanation of it. Okay, they had a bubble that burst, government policies that were not great, and they have an aging population. But so what? They had plenty of opportunity to recover on their own in spite of whatever the government has been doing. (BTW their government policies could not be any worse than our current ones, so if government policies are the test, we're in big trouble.)

Has anyone seen or can anyone give a decent explanation of why Japan has lagged?

Ken Drees writes:

1. LDP party out of power after 55 years.

2. Exports and profits slumping via USA trade like others Asian exporters.

3. Big(gest) holder of USD denominated debt.

4. Aging populaton (nothing new), but 81 billion spending package just announced, more internal stimulus to follow?

5. Need to diversify their surplus holdings like others (China, Brazil, Russia, et. al.)?

6. New party administration playing a little differently with USA — recent Obama trip no real results, prior to that some grumblings about USA debt, etc.

7. Japan equities — bottoms in 1998, 2003, 2009 — skewed symetric reverse head & shoulders – or just bumping along the bottom?

8. Will need to strengthen export markets everywhere and keep USA markets open and profitable. Japan's growth lies with its neighbors if USA doesn't fix itself.

9. Yen carry trade over, yen rising — conflicts with strategic direction that exports and export profits need to be robust.

10. Zugszwang-lite Japan — any small move doesn't change game for the better. Are there any good moves available?

How will the new party lead? If they cannot rope in the yen to improve exports can they stimulate spending via QE and weaken yen at same time? Or is this approach too slow and meandering? There seems no real strong moves available unless global imbalances happen first and allow Japan countermove possibilties. Japan seems still to be unable to escape via its own power.

Is Japan getting tired of being tired?

Charles Pennington adds:

A broad-brush explanation is that the Nikkei got way out of line with other world markets and has spent the past 20 years returning to normalcy.

The Japanese price to earnings ratio was "well over 100" in the late 80s, and now it's 33 (reported by today's Financial Times), still higher than the US at 22. Earnings for the S&P are up about 2-3 times over their level in 1989, and perhaps the Nikkei's are as well, but if the P/E fell from, say, 200 down to more normal value of 33, a value much more in-line with other world markets, well, that explains a lot.

The Chair will rightly point out that this is retrospective, descriptive, and not predictive, that Japan's interest rates are (or at least were) lower, that the accounting may be different. Also, Mr. Grossman doubtless already knows all these figures, so he is looking for a better explanation, which I don't have.

Kim Zussman adds:

Country-stock could be like "best company" studies, showing admired firms under-performing the rest. Presumably established/successful companies/economies have less upside than currently dire situations. And more downside? 

Vince Fulco replies:

To the list I would add traditional factors such as:

1. Shareholders — very far down the societal list of all stakeholders in the corporate world. The stock market is generally considered more for gambling (no jokes Dr. Z!)

2. Much heavier reliance on debt financing (too much) due to roots in maibatsu/keiretsu structure whereby a conglomerate's banking branch handles all the financing needs

3. No Carl Icahn or Guy Wyser Pratte influence to shake up entrenched mgmts and unlock under-utilized assets. The quote is 'the nail which sticks up gets pounded down'. A few have tried over the years but are usually labeled degenerates or cowboys and run out of town one way or another.

4. Years of very low ROI, white elephant projects by the government, to keep happy important constituents of the LDP (the old group in power) such as construction and the mob — i.e. the bridge to an island with 50 people on it, which we almost got in Alaska a few years back.

5. Legacy obligations which haven't been addressed but simply kicked down the road as we've emulated so well in the last 12 months.

Ken Drees responds:

Mt FujiVince, Kevin, Kim and Charles have all provided excellent observations as to Japan's inbred entrenched-ness, inabilities to move, and relative over valuations. Also, the idea that is was the once high flyer status albatross, so all these past behaviors are in the rear view mirror, yet they continue to taint the view of Japan as an old has-been power country. But change agents may now be inside this yesterday/today paradigm. So far Palindrome's reflexive reinforcement of trend is still in force. The malaise continues. Will some new change agent surface? Will the reflexive reinforcement finally be breached.

The early elements for a change exist. To bet on a new bullish Japan is a long shot. But how much money can be made betting the field? Tax policy can be repealed, monopoly/hands in hands can be abolished, small investors can be made more ownership level. All the levers to lift the old dead stump and turn it over are at the ready. Or is this a dead end due to lack of will? Is Japan a stunted growth, never ever to leave off-broadway? If a global imbalance rises up, will Japan change tack and ride out on a new wind? I am watching Japan, if only since they since they are shackled to the USD. Maybe the impetus for change is at hand. This new administration in Japan — what do they owe the US? 

Stefan Jovanovich replies:

The Japanese are certainly not hidebound where their Navy is concerned. They are the dominant sea power in their part of the world. From the folks at

"Japan is currently the second largest naval power in the Pacific (after the United States), with a total of 32 destroyers, nine guided-missile destroyers, and nine frigates. The older Tachikaze-class guided-missile destroyers are being replaced by the new Atago-class destroyers. Japan also has 16 modern diesel-electric submarines. The Chinese navy is larger in terms of ships. They have 25 destroyers and 45 frigates. However, of these 25 destroyers, 16 are the much older (than Japanese equivalent) Luda class. Most of the frigates are the obsolete Jianghu class ships. China has 60 diesel-electric submarines, but most of them are elderly Romeo and Ming class boats. China's Han class SSNs (nuclear attack subs) are old and noisy. In terms of modern vessels, China is not only outnumbered, but the Japanese ships spend more time at sea and the crews are better trained. The Chinese are also at a disadvantage when it comes to naval air power. Most of China's naval fighters are old. They have a growing number of modern J-11s (a copy of the Russian Su-27) and the Su-30MKK. Japan is almost at parity in terms of numbers (187 F-15J/DJs and 140 F-2s to 400 Chinese J-11/Su-30MKKs). Japan has better trained pilots, although China is trying to close that gap as well."

Yishen Kuik adds:

 The attention to detail and sense of duty of their workforce is amazing, and the public infrastructure in Tokyo is of a very high quality — certainly better than Boston, DC, New York or the Bay Area. Tokyo is much bigger than all these four areas. It makes New York seem small.

It's not entirely clear to me why their equity markets haven't done better, but the "obvious" explanations of long term multiple contraction and shrinking internal aggregate demand seem to be correct.

I believe GDP per capita in Japan has been rising all along at the same pace as in the US since 1989, so it isn't as if quality of living in Japan has been frozen at 1989 levels. From what I can tell walking around the streets, they still enjoy a comparable standard of living to anywhere in the OECD, and have an unemployment rate (whatever that means in Japan) of 5.0%

Henrik Andersson replies:

Some investors are expressing great fear about the debt given the large amount maturing in the coming 12 months that is held by citizens, as Yishen writes, and given it has "no foreign demand, no domestic savings, structurally declining tax receipts and savings due to demographics, etc." Any views on this?

The top line numbers for the country are stagnant, but the per capita numbers don't look so bad. Japan might have a ton of public debt, but most of it is yen denominated and some 3/4 of it is held domestically by its own citizens.

Dan Grossman writes:

 Two thoughts perhaps follow from the helpful comments of Prof. Pennington and Mr. Kuik:

1. Based on the two-decade decline in average Japanese stock PEs from 200 to 33, why shouldn't average US stock PEs decline further from the current 22 if government policies following bursting of the bubble are equally ineffective in the US as they have been in Japan?

2. If since 1990 the U.S had avoided illegal and legal immigration anywhere near the extent to which Japan has, the US unemployment rate would probably also be 5%.

Vitaliy Katsenelson adds:

Please look at slide 14. Japanese valuations at the of 1989 were incredibly high, add to that a lengthy deleveraging process on the corporate side and leveraging (debt to GDP has tripled) on the government side and you also have anemic economic growth.

Vince Fulco writes:

Here is fascinating article in the WSJ re: a foreigner helping a small japanese village manage the downside of the demographic slowdown. One wonders how much more pervasive this sclerotic 'no change' attitude really is…

Charles Pennington adds:

There's a nice column by Lisa W. Hess in the Dec. 28 Forbes about investing in Japan.

She claims that small cap companies are even more undervalued than large cap, and recommends buying the Topix rather than the Nikkei.



 Buying the S&P today [2009/12/04] after the run up since March, throwing in the towel because this employment news means the economy is turning around, is akin to buying that stout, fat blood bay gelding team hitched to the most beautiful painted wagon ever seen. Arsenic fortified fiends, a la Ben Green. As soon as you buy them, they start losing weight, losing pep, losing beauty, losing power — powder on a knife, turn your back and walk away.

Kim Zussman questions:

How would you participate as a market Asperger if the market:

  1. Became a vehicle of change for the powers of evil
  2. Cheers only the flaws and mistakes of capitalism and human nature
  3. Makes you money only when your bets are cynical, or in the opposite direction of your beliefs
  4. Moves are 100% random, with an occasional bone thrown to keep you paying vig and (especially now) taxes
« go backkeep looking »


Resources & Links