Mar

20

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

Ken Drees writes: 

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

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

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

Anton Johnson writes: 

This is the best ever basketball interview.

Ralph Vince writes: 

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

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

Stefan Jovanovich writes: 

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

Jan

17

 What are the major 3 body markets that orbit around each other in our solar market system and how do their epicyclic orbits relate to each other (in the future)?

Bill Rafter writes: 

I think the most important word in the Chair's sentence is "epicyclic", specifically because it is non-linear. Stocks specifically exhibit non-linear behavior, and seeming have forever. Bonds used to behave very linearly, but now behave similarly to stocks, although contrarily so. We have yet to find the defining characteristics of currency markets, but keep trying, hoping to find useful information relating to other markets. Gold is also a tough one, making one think it is a rigged game. REITS behave like a hybrid equity-debt vehicle. We tend to think of REITS as a free market version of the variable annuity (but without the huge vig).

Shane James writes: 

Arguably, and addressing prediction, the big 3 change regularly.

Simple stuff like the listing the biggest moves in X time periods is a useful, elementary starting point for cross market prediction.

Anton Johnson writes: 

Sadly, our system is unstable with the sub-stellar central mass consisting of the collective Central Banks. Orbiting, and sometimes consumed by, the central mass are the various financial instruments periodically switching in relative predominance as they accrete/disperse assets due to the actions of the brown dwarf.

Jan

7

 It seems that the Monday Night Football (MNF) schedule and DJIA component company selection processes have much in common.

Since the MNF schedule is set in April, prior to the start of the season, the NFL league schedulers and television network personnel seek to predict both pertinent team pairings and those which will result in high viewership numbers. Early in the season, super-star players, team rivalry, prior playoff matching, team's home market size and fan fervency are paramount. It would seem that after the first several weeks, a transition in importance would occur towards the competing teams W/L records, playoff and division standings, and perhaps an added spoiler component during the last couple of weeks (there is no MNF the final week of the regular season).

Contemporaneously, prior to odds-makers incorporating the MNF schedule as a metric, does the selection committee pick better performing teams than the sports book rankings? Separately, perhaps there is a deleted team outperformance effect, or the rising to the occasion big-stage effect to consider.

Oct

23

 I see this as a sign of Apple's hubris. Note the demolition of existing space.

Selected text from Cupertino City Council:


Development Permit to allow the demolition of approximately 2.66 million square feet of existing office, research and development buildings and the construction of 3.42 million square feet of office, research, and development buildings; 120,000 square feet (1,000 seat) corporate auditorium, 100,000 square feet corporate fitness center, and 25,000 square feet Valet Parking Reception uses; 92,000 square feet of utility plants; and associated parking facilities and ancillary buildings (such as security reception areas and landscape maintenance buildings) (DP-2011-04); and…

Bud Conrad writes: 

The space is in my back yard. It was previously Hewlett Packard, I think for the hand held calculator. It is plain vanilla tilt up type single story.

The design from Apple was presented to Cupertino by Jobs in one of his last days. It is a multi floor circular structure. Yes Hubris, but that is Silicon valley. Look at Oracle's HQ that is often called OZ because of its color. Larry called Jobs his best friend.

Anton Johnson writes:

Maybe the locals will refer to it as "The Tire".

Steve Ellison writes: 

There has been something of an arms race in Silicon Valley office buildings. The company for which I work built a new office building with a gym and a health spa a few years ago. A comment I heard at the time was, "We bring new graduates in for interviews, and they've already been interviewed at Facebook and the Googleplex. Then they walk into one of our dumpy 30-year-old buildings."

Bill Rafter writes: 

I have conflicting opinions on this and I would love someone to have the definitive answer.

When I first did a management buyout I moved the business to a prestigious Mid-town location overlooking the ice rink. But I never looked out the window. However, clients and prospective clients would come and take in the view and then comment that they felt very comfortable dealing with us. I understood that to mean they felt very comfortable in the office, but it only mattered that we got the business. We did get the business, but the location was costly. Effectively the pricey location was our advertising, whereas actual advertising was prohibited.

Several years after I had to meet with a very wealthy person (Mr. Big), who was generally unknown to the investment community. Well this guy had the shabbiest office building on an obscure road in East Nowhere. But he had plenty of money. I took that as a lesson that the purpose of business is to make money, and Mr. Big had a better handle on that concept than I did. Subsequently I met two other Mr. Bigs with the same MO. When my lease was up, I moved from the pricey location.

I think that young people want to be rich and famous, and a fancy location supports the latter at the expense of the former. Older people (at least some of us) want to be rich and unknown, and inexpensive digs supports both those goals.

Craig Mee writes: 

I use to see something similar to that on the future floors. At the age of 25-30 years old the ferraris were in force with the expensive suits but by 40 many started being understated in their belongings, dressing more conservatively, etc, while many in other fields were still looking to show pony. Maybe due to the exposure of money and wealth coming and going at an early age, it had an effect of its own.

anonymous writes: 

Bill, I think that for both some sellers and some buyers, the fancy address is a signaling mechanism. It's exactly the same reason that in the early 20th century, banks built huge structures with granite walls and soaring ceilings. And it's not completely unrelated to the history of Roman Catholic cathedrals either. It's not the view out the window (unless one is planning to jump.) Rather, it's the sense of permanence and power and stability.

Putting aside whether you personally get pleasure from the view, it's more than advertising. It's signaling that "you must be a really successful investor if you can afford the rent." Same with the Armani Suit, the Rolex watch, the crocodile shoes. (But NOT the Ferrari — unless you race it.)

Sam Walton drove a pickup truck. Sid Weinberg (GS) drove a Ford sedan. Trophy Wife drives an 8 year old Honda minivan. Sam and Sid may be signaling too. They are signaling frugality and reverse snob appeal. My wife is signaling that she loves to schlep exotic plants from the local nursery and is always trashing the rear bumper.

I dare say that Craig is a young guy. One needs at least one proper mid-life crisis to appreciate the Porsche, Ferarri, Lamborghini, etc.

Oct

21

 There are nearly 100 current automotive based television series, with much of the recent growth seen in the restoration, flipping and auction arena. The situation seems similar to the rapid growth in the number of home improvement and house flipping television series coincident to the peak in residential estate, construction materials and contractor prices.

Secondarily, most systems on cars built since the 1990s, are not easily diagnosed or repaired without expensive specialty tools, and a greater knowledge base then that of the typical shade-tree mechanic.

Accordingly, the near future may be a propitious time to unload equities of DIY themed automotive companies, and even the 1970s muscle car project vehicle that you've been sitting on.

Peter St. Andre writes: 

Alternative view: more and more people will become interested in vehicles that don't have black boxes and location recorders built in.

Sep

26

Many speculators face the quandary of having to choose among concurrent position taking signals from multiple trading strategies, while also being constrained by a prudent maximum leverage level.

Beyond a simple even-split method, one could rank strategies by historic drawdown, mean-return, Sharpe Ratio, or T-Statistic, etc., or perform a back-tested simulation of different strategy combinations and levels to determine the optimal allocation.

You could also choose a system, close-out positions when indicated, then rotate the funds into others indicated to still be open (but how have expectations changed?).

Perhaps a spec could choose a combination of strategies which would form the lowest absolute intra-portfolio sum-correlation construction and fund to maximum leverage.

I've used several of these selection methods many times, and of course there are others, but is there a method for selecting an optimal allocation among concurrent trading strategies?

Alex Castaldo says:

An approximate method which has become popular in recent years (I almost said "all too fashionable") is Risk Parity.  You would allocate capital to the strategies in inverse proportion to their standard deviation. So if one strategy has a standard deviation of 15% annualized and the other of 20% annualized you would allocate (1/0.15)/(1/0.15+1/0.2) = 57% to the first and (1/0.2)/(1/0.15+1/0.2) = 43% to the second.  There is no strong theoretical justification for this, and it implicitly assumes that the strategies are uncorrelated and have similar expected returns.  But it is a simple rule that is one step beyond equal allocations.

Sep

9

 One has been watching youtube videos on tennis footwork with a view to improving Aubrey's squash game. Many videos talk about moving in to the ball rather than waiting. Apparently this is the secret of Federer's footwork with his walking step which just means, as far as I can see, hitting every shot as if it were an approach shot. Paul Gold has a series of 4 steps that he recommends. Using the eyes to watch the ball, and getting into an athletic position, taking a split step on every shot to take a proper first step, and getting to the ball with big steps pushing off the opposite foot to where the ball is going.

I wonder if these steps have a value for market people. Get prepared before the day with the proper equipment and study deciding whether you wish to buy or sell and which ones adjusting your trade level and size with the proper current volatilities and market movements and announcement. Trading and then preparing for the next shot…

Alston Mabry writes: 

The trading analogy for me is that I find myself in two basic modes: (1) reactive, waiting to see what's going to happen next, or (2) predictive, identifying what I think are the highest-probability paths over the next X time period, defining what I will do in each case and preparing for that action.

On the morale side, it's easy for lack or preparation or a losing trade to push me into mode (1); whereas getting back into mode (2) takes preparation, focus and discipline.

Anonymous writes: 

Related to the preparation stage of the game, it is interesting to pontificate about how many moves ahead board game players and sportspeople think and how the speculative game can be improved by adding this type of thinking.

I played basketball up to a fairly high level ( I played center for my state) and in that sport one only tried to anticipate one move ahead (to try and steal the ball or make the rebound).

My limited experience in tennis and squash leads me to think that the best in these games have time to think perhaps two moves ahead (Chair may have a view on that given that he has been known to hit the occasional hard squash ball just above the tin).

I read that chess and checkers players may think many moves ahead — perhaps all the way to a game's conclusion given an opponents error (or good move). Distinguished personages on this list might add meat to this point?

So, how many reactions ahead in the markets…? My various quantitative approaches likely have a substantially shorter holding period than most on the list so the following needs to be filtered by this fact:

* In terms of prediction, I have not been able to produce consistent alpha from any method that looks more than two steps ahead or behind (Market A's move effects Market A's future as well as Market B's future and Market A&B's move effects the future of Markets A,B & C)

* I guess one can also look at this in terms of degrees of freedom- more than 3 or 4 is probably too many. (Or to quote Arnold Zellner "…KISS….Keep it Sophisticatedly Simple)

* It might be a reasonable generality that the more steps ahead (or back) you look the longer needs to be your time frame.

Back more directly to Tennis & basketball. As a center in basketball I had two things to do in preparation. These were to be fully stretched out to jump high and to be completely focused on getting the ball to my pre- chosen team mate. When rebounding you have to commit before the shooter fully raises his arms. In tennis, the unbeatable ground strokes are often those hit on the rise — as it were. In both cases you have to anticipate to hit the perfect stroke or 'deny' the shooter.

The same in markets I think.

This comes back to being ready — obviously.

Pitt T. Maner III writes: 

I would wonder if there are specific training or virtual simulators (software) for traders that would be useful to identify and improve weak areas in preparation, execution, timing, psychological tendencies, etc.

For athletes and racquet players the analogy might be some type of virtual practice such as Virtual Tennis Academy where there would be actual analysis of footwork and stroke production in slow motion using attached sensors. With eventually perhaps some type of instant feedback (ie. sound, vibration) to cue the practicing player on what he or she is doing right.

Film analysis is becoming important in tennis as well.

A recent article, for instance, suggests that improvement in cognitive abilities in older persons is possible through the use of computer games:

"Commercial companies have claimed for years that computer games can make the user smarter, but have been criticized for failing to show that improved skills in the game translate into better performance in daily life1. Now a study published this week in Nature2 — the one in which Linsey participated — convincingly shows that if a game is tailored to a precise cognitive deficit, in this case multitasking in older people, it can indeed be effective."

The world of quantified self programs appears to be ever expanding. Why not financial and sports feedback too?

Charles Pennington writes: 

I tentatively have a theory that players stand way too far back to receive serve. One of the most awkward serve receives is a high backhand. But if you stand up close to the service line, perhaps halfway between the service line and the baseline, then you know that the ball is going to be bouncing nearby, and you can try to catch it low before it gets above your shoulders. If things go as planned, you'll punch the ball back and make the server have to scramble for the ball with little time to spare. However, I haven't really had a chance to try this out against a big server.

Anton Johnson writes: 

It is a joy to watch the masterful footwork of an accomplished base thief.

The speedster, with orders received, his eyes fixed on the pitcher, quickly side-steps, while never crossing his feet, feeling his way to tease the 12' danger zone. When sensing the pitcher suddenly whirl, with his weight biased to the left, he must cross right foot over left, to initiate the saving dive, and avert the embarrassment of a catastrophic pick-off.

However, when the enemy is committed, and with armed help at the plate, with explosive power he crosses left foot over right to continue the fight, knees powering forward, to slide just under the tag, to win the battle to own second base. 

May

28

Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.
 

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).

May

14

 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.

Nov

27

A post purporting to show that buy and hold investing does not work has appeared on our list. It is reprehensible propaganda and total mumbo. They do not take account of the distribution of returns to investing over long periods that have been enumerated by the Dimson group and Fisher and Lorie. It is sad to see this on our site. The arguments against buy and hold seem to be that the professors found that short term investing didn't work so they erroneously concluded that long term investing must be the alternative. Shiller is mentioned and cited with approval.

Alston Mabry writes: 

To explore this issue numerically, I took the monthly data for SPY (1993-present) and compared some simple fixed systems. In each system the investor is getting $1000 per month to invest. If during that month, the SPY falls a set % below the highest price set during a specific lookback period (the 3, 6, 12, 18, 24 or 36 months previous to the current month), then the investor buys SPY with all his current cash (fractional shares allowed). If the SPY does not hit the target buy point this month, then the $1000 is added to cash. Once the investor buys SPY shares, he holds them until the present.

For example, let's say the drop % is 10%, and the lookback period is 12 months. In May of year X, we look at the high for SPY from May, year X-1, thru April, year X, and find that it is 70. We're looking for a 10% drop, so our target price would be 63. If we hit it, then spend all available cash to buy SPY @ 63. Otherwise we add $1000 to cash.

Each combination of % drop and lookback period is a separate fixed system.

Over the time period studied, if the investor just socks away the cash and never buys a share (and earns no interest), he winds up with $239,000. On the other hand, if he never keeps cash but instead buys as much SPY each month as he can for $1000, then he winds up with over $446,000, which amount I use as the buy-and-hold benchmark.

If the investor uses the fixed system described, he winds up with some other amount. The table of results shows how each combination of % drop and lookback period compared to the benchmark $446,000, expressed as a decimal, e.g., 0.78 would that particular combination produced (0.78 * 446000 ) dollars.

Results in this table
.

The best system was { 57% drop, 18+ month lookback }, or just to wait from 1993 until March 2009 to buy in. Of course, it's hard to know that 57% ex ante. The next best system was { 7% drop, 3 month lookback } coming in at 0.99.

This study is just food for thought. It leaves out options for investing cash while not in the market. And it sticks with fixed %'s without exploring using standard deviation of realized volatility as a measure. So, there are other ways to play with it.

Charles Pennington comments: 

Thank you — that is a remarkable "nail-in-the-coffin" result.

Nothing beat buy-and-hold except for the ones with the freakish 57% threshold, and it won by a tiny margin, and it must have been dominated by a few rare events–57% declines–and therefore must have a lot of statistical uncertainty..

That's very surprising and very convincing.

(Now some wise-guy is going to ask what happens if you wait until the market is UP x% over the past N months rather than down!)

Kim Zussman writes: 

Here are the mean monthly returns of SPY (93-present) for all months, months after last month was down, and months after last month was up (compared to mean of zero):

 One-Sample T: ALL mo, aft DN mo, aft UP mo

Test of mu = 0 vs not = 0

Variable      N      Mean     StDev   SE Mean  95% CI            T
ALL mo     237  0.0073  0.0437  0.0028  ( 0.0017, 0.0129)  2.58
aft DN mo   90   0.0050  0.0515  0.0054  (-0.0057, 0.0158)  0.92
aft UP mo  146  0.0083  0.0380  0.0031  ( 0.0021, 0.0145)  2.65

 The means of all months and months after up months were significantly different from zero; months after down months were not.

Comparing months after down vs months after up, the difference is N.S.:

Two-sample T for aft DN mo vs aft UP mo

                  N    Mean   StDev  SE Mean
aft DN mo   90  0.0050  0.0515   0.0054   T=-0.53
aft UP mo  146  0.0084  0.0381   0.0032

Bill Rafter writes: 

A few years ago I published a short piece illustrating research on Buy & Hold. It contrasted a perfect knowledge B&H with a variation using less-than-perfect knowledge using more frequent turnover. Here's the method, which can easily be replicated:

Pick a period (say a year) and give yourself perfect look-ahead bias, akin to having the newspaper one year in the future. Identify those stocks (say 100) that perform best over that period, and simulate buying them. Over that year you cannot do better. That's your benchmark.

Then over that same period do the following: Buy those same 100 stocks, but sell them half-way thru the period. Replace them at the 6-month mark with the 100 stocks perfectly forecast over the next 12 months. Again sell them after holding them for just half the period. Thus the return from the stocks that you have owned and rotated are the result of less-than-perfect knowledge. Compare that return to the benchmark.

Do this every day to eliminate start-date bias, and then average all returns. The less-than-perfect knowledge results far exceeded the perfect-knowledge B&H. Actually they blew them away in every time frame. It's really obvious when you do this with monthly and quarterly periods as you have so many of them.

The funny thing about this is the barrage of hate mail that I received from dedicated B&H investment advisors, who somehow felt their future livelihoods were threatened.

If anyone wants that old article, send me a message off the list. We called it "Cassandra" after someone with perfect knowledge that was scorned.

Anton Johnson writes in: 

Here is a link to BR's excellent study "Cassandra", as it lives on in cyberspace.

Nov

13

 Whether it's politicians or bankers or previously highly regarded journalism i.e the BBC, it seems no amount of cutting sacrificial heads will vary the course of the ship. The culture has changed, and whether it's due to changes in morals, etiquette, the transfer of private to public companies, or an attitude of extreme competitiveness, I'm not sure. Listening to an interview I believe on the BBC the other day, they mentioned something they could have been sued for, and said something like, "yes we overstepped the mark yadda yadda", all the while staying very business like…. The interview finished with the memorable last line of "we got away with it!", which showed their true colors of course.

I don't have an answer, but I know that the BBC has been inviting problems for years in its transfer from high end to mass appeal, and as one paper editor mentioned recently in West Australia, words to the effect of "after all the masses are not that bright", they want more goss than substance….maybe that is the conundrum across the board.

Market wise…well…the need of most to think about themselves first and foremost, especially in times of chaos, will always provide the cane swinger with opportunities.

Richard Owen writes:

Like so many things perceived to be a linear spectrum (eg. left wing / right wing), at the extremes it bends round in a circle. In an attempt to achieve equality of opportunity, the world is now bending round to extreme disparity from that.

If you allow people access on a meritocratic basis, you need measurement. But all reasonable measurement systems exceed the patience of the professionals concerned.

It is everywhere, from employee measurement systems within General Electric a-la Jack Welch; political voting structures; the index measurement of asset classes. The aspiring middle class has become subject to as much whipsaw as Ed Seykota's SPU contracts.

In politics, you have 10 year duration policy being set in response to sentiment on 2 hour rotation news bulletins. Churchill used to read and paint in the afternoons to give him perspective during the war — can you come close to imagining that for a PM now?

This means the well held canes of family capitalism are stronger than ever.

Add in the fact that branded education and prime property is on the way to being repriced only for that family elite, and you have something quite pernicious in effect. If you look at where Hittlerite Germany really took off, the legitimacy came not through working class populism, but when the aspiring middle class goat soaked by currency default. It's when the 80-95-%tile (who have worked their asses off to always get grade B+) get their hands slapped down that things get really ugly. They are smart enough to create real havoc.

And I think what Craig points out is another symptom of this development.

Anton Johnson writes:

It is human robustness that is undergoing what could be termed reverse-evolution. Numerous historically attenuated genes, ranging from those coding for hemophilia to astigmatism, are now proliferating. Consequently, as a species, we may well morph into that frail, technology dependent brain-vessel depicted in the advanced alien species of science-fiction.

Aug

20

 This must be one of the most bizarre revenue schemes linking a tax to a beneficiary group. Not only does the passage of the tax demonstrate that skillful politicians know sin-taxes are the path of least resistance to raise revenue, they also know how to capitalise on the scientific illiteracy of their colleagues and constituency.

Quinn Signs Strip Club Tax:

"Strip clubs in Illinois will have to hand over a share of their revenues, starting in 2013, to help fund programs to prevent sexual assault and counsel victims under a law signed by Gov. Pat Quinn on Saturday."

Jan

22

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

Alan Millhone writes:

Mr. Millhone

Dear Chair,

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

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Sam Marx writes: 

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

Tim Hesselsweet writes: 

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

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

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

Scott Brooks writes: 

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

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

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

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

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

Pete Earle writes: 

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

Christopher Tucker writes: 

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

GAP Capital comments:

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

Anton Johnson writes: 

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

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

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

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Russ Herrold writes: 

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

Marion Dreyfus adds: 

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

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

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

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

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

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

Alan Millhone adds:

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

Ken Drees muses:

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

Gary Phillips writes: 

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

Anton Johnson writes: 

On baseball's rally cap superstition:

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

And hockey's Hat-trick.

Victor Niederhoffer writes:

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

Gary Phillips adds: 

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

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

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

Jim Sogi writes: 

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

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

Rudy Hauser writes:

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

Bill Rafter adds: 

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

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

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

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

Jan

12

 O'bama, Sage and Index Man should be proud. Relentless repetition of their divisive and hypocritical "rich and under-taxed evil capitalist" message has disseminated to the masses. A 2011 survey by the self-claimed nonpartisan Pew Research Center, found that 66%, which is an a remarkable increase of 19% since 2009, of respondents believe there is a strong or very strong conflict between the rich and poor, with the largest percentage gains among whites.

Excerpt:

Divisions within American society, conflicts between rich and poor now rank ahead of three other potential sources of group tension—between immigrants and the native born; between blacks and whites; and between young and old. Back in 2009, more survey respondents said there were strong conflicts between immigrants and the native born than said the same about the rich and the poor.

Dec

26

 It is amazing that this divisive "fair share" and "honesty" drivel emanates from someone who extracted the majority of his fortune from the financial markets. Reeling from the lost decade, his motive is to affect a future where after-tax comparisons will be more favorable to his passive brethren. From the John Bogle interview:

Q: What do you think about the ongoing discussion over tax fairness?

A: I believe the rich should pay more, but that's not a good platform for tax policy. What has gone wrong is that we've failed to recognize the difference between earned income and unearned income. Is it really fair for gamblers on Wall Street to pay a 15 percent rate when they make a winning investment, and an honest working person - a bricklayer for example - may pay an equal or higher tax on their wages than a gambler? That's absolute absurdity.

Dec

2

 Good afternoon everyone,

Would anyone be able to suggest any alternatives to the US dollar that I would be able to put my money into? What currencies or commodities would be worth using to reduce the risk of dollar? I must admit I know very little about this particular subject. I'm not necessarily looking at this as an investment in which I'm trying to get rich, I'm just looking for something that will hold its value better than the US Dollar. As I put money aside for various things in life, I would hope there is something I could have that would be worth the same ten years from now as it would today. Any insights or suggested reading material would be appreciated.

Thanks!

Corban

Tyler McClellan comments: 

If you want to buy things in dollars in the future then you'll want to hold dollars.

Gary Rogan counters: 

That's like saying, "if you want to put gasoline in your car in the future you need to own gasoline today". Given the 90%++ loss of purchasing power of dollars in the last 100 years there just could be better alternatives than holding them today. If the point is that nobody knows what they are with any degree of certainty, that's a valid point. 

Anton Johnson writes: 

Inflation protected (at least to the extent of official figures) US series I savings bonds seem to be a decent savings vehicle, especially when they are accumulated over time. Unfortunately, there are minimum ownership periods and the maximum annual purchase is limited to 10K per person.

Craig Mee advises: 

Beware of selling the low, Corban, effectively adding size in a market that's been trending south for some time.

If Euro goes to the dump, and USD goes bid a la 2008-09, then that may be a nice way to offload USD then and say buy Aussie at 60c to the USD. (We do have stuff in the ground that helps, although with interest rates cuts just coming through, it appears some goodwill that was present at the start of the year is being priced out of the market against the USD).

Good luck. Oh…beware of the Fed, or in this case FEDS, to up end things at any time…. though if history only always repeats to the letter, it would make investing a wee bit more straight forward…

Alston Mabry writes: 

With a decent time horizon, you could put some money into corporate bonds and good divvy-paying stocks. That way you get the divs and also exposure to cap gains. just happen to be researching some recently, so here is a diversified group of sample tickers:

IVHIX
PIGLX
PAUIX
NLY
MAPIX
IDT
TEF
HPT
CQP
MSB
VIV
CINF
RDS.A
PM
KMB
SYY
JNJ
ABT
INTC
PSB
PEP
COP

Leo Jia adds: 

Corban,

This is an age of vast changes. For that reason, we can easily lose our vision into the future in terms of what will be more valuable. Even though there are many discussions around the topic, I can't decide easily if the US dollar will be more valueless than any other currencies in the future. Many argue that it will lose more value, but I tend to think that it perhaps will be more valuable than most other sound currencies, for the very simple reason that the US has a more fundamentally solid mechanism of being a most promising country. The very fact that the people with big money are not running away from the US demonstrates it.

There is the notion (as Gary Rogan pointed out) that the dollar has lost 90% of its purchasing power over the last 100 years. While I agree that there has been a devaluation process going on, I don't think the notion should really be understood literally. Many things around any purchase (including venue, environment, safety, transportation, etc) have vastly changed from 100 years ago. All these add legitimate values to the product and hence cost for the purchaser. One can argue that the egg he buys today is not that different from that his grandfather bought 100 years ago. Yes, sure, but things in a social economy can not be taken separately. Many things in it are vastly different from 100 years ago: farmers' lives, air-condition for the chickens, refrigeration along the transportation, etc.

As to what can hold value better for the future, I would like to have agricultural commodities (hope to hear other arguments). I buy into the view that because people in China and India (accounting for nearly 40% of the world population) are getting richer, they will be demanding more higher-scale food like meat which then will demand more amount of lower-scale produces like corn or wheat (I have been actually experiencing the above view personally for the last 10 years in China). Sadly, the production of these lower-scale produces can not be increased easily, so these prices must go up. In the long term, the pressure for the price rise due to the imbalance of demand and supply will be added to the legitimate price rise (as I seasoned in the last paragraph), resulting in much higher prices in dollar's term. One note to add is that the inherent volatilities associated with these commodities along the way should be carefully considered.

Additionally if I may add as an option to where to put your money, it should be into your life, your personal and business interests, and perhaps some interests of any community you are in. My feeling is that this might be more important than anything else.

Laurel Kenner writes: 

 There are no safe havens any more. People have been remarkably complacent about the obvious rigging and zombization of financial markets, the transfer of power to lawbreaking elite firms, the restrictions on capital movement out of the country, the baldfaced lies about the nonexistence of inflation, the steady fiscal confiscation of personal assets, The fact that we still can have a meal at pleasure and joke about our plight means nothing in terms of economic freedom. Unfortunately, the one point that holds true is that the foundation of individual liberty is economic liberty. We have merely slipped back into the iron pattern of historical kleptocracies. Maybe that is why there has been so little effective resistance. Those who protest are marginalized by the mainstream propaganda machines. Case in point: Did the Fed just bail out Europe without anyone blinking an eye, and what does that mean for the global future?The only advice that I have found to make sense at all lately is "Be flexible." We are playing against a relentless statist enemy. Some Specs recommend Australian and Canadian currencies. That's merely a play on commodities. I need not remind anyone here that in the past century, the U.S. government made it illegal to own gold, and that a few upward ratchets on certain margin requirements would kill the commodities market. I don't speak from lack of experience. We are all traders; we all like the freedom that brings; and our livelihoods are in jeopardy.

Good luck to us all. The world has changed, and continues to speed with reckless blindness toward a future that I doubt will turn out well.

Alston Mabry writes:

Here is a question that might elicit some interesting answer:

Let's say you have $X (USD) that you must commit for the next five years. Where would you put it? Leave it in dollars? (Though a 5-year Treasury would make the most sense for "cash" with a 5-year lockup.) Gold? Stocks? Some other currency? Norway bonds? And why?

I don't have a good answer to that yet.

Steve Ellison writes:

My starting point on this question would be that diversification, including international diversification, reduces risk. The US economy and the Eurozone have roughly equal GDPs. Japan and the UK are smaller but still quite significant. China is tied to the US dollar. Therefore, a diversified cash portfolio might be 40% US dollars, 40% euros, and 5% each of yen, pounds, Swiss francs, and gold (in recognition of gold's historical role as a form of currency). One could fine tune this allocation to include small percentages of currencies such as the real and Canadian dollar. I would think of this allocation as the equivalent of an index fund, before considering the insights of the many on this list that know more about currencies than I do.

 

Oct

14

 Are HFTs like insider traders? Insiders have an edge because they know nonpublic information about their businesses. What edge do high frequency traders have? Do their fleeting orders that are pulled within milliseconds give them unique insight into order flow?

Victor Niederhoffer comments:

No. It gives them the insight to earn the bid asked spread which specialists used to earn and prevents others from doing the same. See Niederhoffer and Osborne on this point jasa 1966.

Vince Fulco comments: 

HFT machines and their algorithms, competing fiercely amongst themselves to be the point of the cathode (bid, the electron receiver) and the anode (ask, the supply of electrons) across which a trade sparks, make it possible for a market order in size to be executed within the public bid-asked spread, which, in stocks is a penny. That means if the bid is 42.12 and the ask is 42.13, a buy order will likely be filled at 42.127566.

Compare to not too long ago when the minimum increment was a sixteenth (six and a quarter pennies) and before that an eighth (twelve and a half pennies.) As long as we aren't competing to be market makers, we the trading and investing public have benefitted from the machines duking it out in milliseconds and micropoints to sell at the ask and buy at the bid. It has narrowed the spread, speeded up executions, and facilitated ever larger trades which do not disturb the price.

This increased mechanical competition provides depth, though it is much less visible depth because the machines can flash in and yank bids and offers faster than the message can travel from your retina to your lizard brain. The supposed lack of depth is simply because the depth has gone stealth. It is there.

The franchises available to humans to make the market are gone are will be in the liquid equities markets. The machines have taken over. Our edges in humans, while they last, must span larger time scales.

anonymous writes: 

This just seems like a better adaptation, right?

At least in stocks, the order book is locked until the order executes, and so there is no way to get into the book ahead of anyone else to provide liquidity for an order as it execute. Similarly, there is no front running possible as the order book is closed.

The NYSE Specialists saw the orders first and made the quotes, and so had an 'unfair' edge. Otoh, they had to buy on zero or minus ticks unlike the HFT guys who can take stock.

As an aside, I assume that much of the price spikyness is is HFT (generation something) gunning against each other.

Phil McDonnell adds: 

 The edge they have is that their co-located servers get to see your order 30 milliseconds before it becomes marketable. This allows them to front run orders with a fast acting algorithm. Their orders are acted upon instantly but not yours. In effect they get a 30 ms option on your order.

The opportunity is very similar to the wire scam in The Sting where the results of the track races are delayed so that the scammers can appear to be picking winners.

Jim Lackey writes: 

 I bid for 5,000 shares of a nazzy stock during lunch and watched the HFT gone wild. When ESRX was pre split and over 100 a share I fooled with it at lunch one day last summer of 2010. It's exactly like us back in the day watching instinet bids and offers and we soes the market makers. Problem is or the unknowing if they can see your market order (even if limit to take the offer) 1 millisecond before it goes public the HFT can take the offer and then be the next higher offer and make a cent or as Gibbons says 1/10th of a cent. That was flash orders that are supposedly banned but who the Hades knows.

However, if you know there is nothing in the dark pool throw a market order up for as little as 500 shares and watch them take it up .125 or .25 cents and right back down. It didn't upset me much but it was funny as back in the day the spreads on those stocks were always .25 and the 1/8th for the most liquid. Order handling rules of 1997 changed the game so market makers couldn't make a living they quit became day traders the bubble hit there were no adults in the nazz and well, you saw what happened.

Opposite was the 666 lows and flash crashes. 

That isn't an edge we had that with ISLD exchange 13 years ago. First in line is no big deal, that is playing low or high tick of the day and or trying to take offers just as you know it's about to take off. We all operate on scales and if your no filled at all or enough it's because you were wrong not because your last in line for the penny or the 1/4 on the futures. Co location is the last thing I worry about. Even if you hide your orders or use limits at the offer prices or even above where your scale would be I do fear shortly the order sniffers would make my bid thru the ask the bid by the millisecond it takes my order to go from my machine in Nashville to the CME. Then see my order codes and say wow this lack is on the ball today and I go to buy 5es and they buy 50,000…

Yes that was a joke.

anonymous writes:

Hi Phil,

As I understand it, if I send an order to NYSE, my order posts to the NYSE book, and if it is marketable, the book is frozen (no new orders into the book) until my order becomes unmarketable. Are you saying that participants other than DMM's can see my order before it gets into the NYSE book? If so, I am headed to OWS.

Thanks! Jared

Tradercraft writes: 

They simply see and can react to bids and offers more quickly. If you put in a bid to buy at 15.23, they will bid 15.232. You pull yours out, and they pull theirs. You can't compete with them at the sparking tip of the arc gap. They make their money by making the market, so the competition is to be the just-highest bid, and the just-lowest ask. They pocket the spread. Outside pay the spread. That is life in the markets.

Vince Fulco comments:

Trade flow for all non-HFTs gets screwed up. Inevitably you have to bid much smaller and with wider scales lessening the chance of a full fill. HFTs exist for no other reason than to goad one to pay up.

Jim Lackey adds: 

I am not going to argue with time and sales whether or not HFT adds or takes liquidity for that second. However all day long they are simply market makers or short term scalpers, so at some point they add liquidity back.

Look at it this way, if a HFT decides to front run and buy and that next second the euro drops and the algoes whack all the bids then HFT is now a seller, which is good for us if we are looking to buy 5-50 or 5 hours later at lower prices. It's only bad when I am not long and we rise or I am long and it's a dramatic last hour decline. How you, me, and traders vs. investors scale is a function of the magnitude of ranges, day change/velocity and margin/firepower at the end of start of runs.

If you want my vote to kill off HFT or triple levered ETF's I say start with the ETF's first. What difference is it to me if its GSCO MLCO, Floorbrokers or HFT trying to rip me off? Yet the Triple nippled ETF's that are used to get around margin rules now make the stock it self a derivative of a ETF or an Index.

In a way its as wacky as that ABX intex or other mumbo that at first was a design to help and hedge a market and became a weapon. CDS ETF's all that off the book. Makes being a bookie a tough game…for what good reason? People gave up on the game as its so rigged now we have 5-10% air pockets in the entire US stock market. Kinda silly…

Anton Johnson adds: 

Will the evolutionary terminus be that the pride of once cooperative machines turn on each other once their prey is pressured to extinction, or will there be equilibrium where the apex predators maintain both population and stress levels that permit sufficient sustenance for their prey to coexist?

Gibbons Burke comments:

They are doing that now. There are algorithms that are designed to exploit the patterns of the other algorithms. There are all sorts of games being played at the millisecond level which are predatory in nature, and adaptive.

Oct

10

 The field is ecology and the discussion is of the negative effects that one organism has on another by controlling access to a limited resource.

The foundation is provided by work on competition at the molecular level based on the work of Morowitz  that compounds of higher energy state increase at the expense of lower energy states, while energy is flowing into the system. This idea is extended to the study of sperm competition, nest destruction by wrens, competition among plants, competition among salamanders in ponds, competition at the shoreline, competition between finches relating to bill length and shape. Models of competition are covered with detailed examination of the Lotka - Volterra model wherein two species growth is each effected simultaneously by the other species and stable coexistence and exclusion develop based on the varying effects. Tools that make competitors more effective are covered including size, efficiency in using the resources,and foraging ability.No theory of competition is developed but excellent exploration of the reasons that scientists have been unable to reach a theory in this field and others are developed.

I have long felt that competition is the major factor behind our material and emotional well being. It gives consumers what they want, and makes the producer responsive. But like others, I hate competition when the adversary has an unfair advantage over me at the start. And I agree with Milton Friedman's point that you can always be sure that one competitor will always tend to bad mouth his other competitors. I have often told my daughters that the secret to a better romantic life is to increase competition among their suitors.

I immediately applied some of the models and techniques to the competition between those who have the better equipment and size to take the limited resources available in the trading field. I found the discussion of competition of whales for krill, and owls for prey gave me great insight into the ability to get there first with better size of the hft . The access to better information that the flexions have I found illuminated by the competitive advantages that high flying and better eye-sighted birds have in seeking prey.

The entire subject calls for study and reflection and humility in the pervasiveness of competition in shaping our life. An illuminating book.

Steve Ellison asks:

At whose expense do high frequency traders take out their profits? My first guess would be slower-moving liquidity providers, who are left with fills more likely to suffer from adverse selection. Liquidity takers probably benefit from high frequency trading (at least until there is a flash crash).

Victor Niederhoffer comments:

I believe they take their profits from any short term traders because they get there faster like an insect.

Anton Johnson responds:

An assured death by a thousand cuts.

Anatoly Veltman agrees:

Very apt, Anton. I can't imagine any counter-argument, given the statistics of $50m average daily HFT profit year-round.

Oct

5

Did Bank of America upset every woman in the world with their 5$ a month fee? The wifee just came in with new account info from a local bank. It turns out these little banks are offering lagniappes to new customers. She has been asking me for years should we move here or there for a simple checking account. I was informed I had ignored her requests but enough is enough for her. I look at the stock quote and thought.. why didn't she come with that idea yesterday.. It may have saved us more than a five a month. I didn't see the news till now about how the politicals told all to close their BAC accounts!

Ralph Vince comments:

Yeah, this is a very interesting phenomenon, and it is interesting in a twofold manner:

1. Women seem extremely steamed at this, even more so than men, and ARE acting with their shoes here.

2. Raising prices, on anything in this economic period, is akin to suicide, regardless of your industry. Just ask NetFlix or look at cable-tv providers, look at price-sensitivity on airline tickets or look how well the Chevy Volt has sold.

I think this move from Bank Of America is going to make them do a full-scale retreat on it — should be interesting. (Incidentally, just what IS their product?) 

Anton Johnson comments:

If debit card fees don’t stick, banks will have a revenue reduction, retailers will have lower costs, and consumers will be unaffected or benefit slightly because it is highly probable retailers won't lower prices commensurate with the purported 22 cents savings per debit card transaction attributable to the Durbin Amendment’s swipe fee caps.

May

6

It is refreshing to experience mythology in real-time. Yesterday, CL stop running was near picture perfect, acceleration through resistance, a short reversal and pause to retest, then a sharp move to take out the next.

But then again, describing a chart formation as being a resistance or support is subject to one's perspective. For clarity, support should replace resistance.

Victor Niederhoffer writes:

One must not forget the ecology of markets. All related. Down big in so many has gravitational and equilibrating return. 

Jonathan Bower comments:

Overnight CL trading reminded me of this Simpson's episode. Enjoy.

May

5

Glencore (aka the metal men) IPO top ticks a number of markets within days. Not even Blackstone et. al had that kind of timing skill in the last cycle.

James Goldcamp writes:

And don't forget the tendency for central banks to move to an accumulative posture relative to the metals. Alas, the "convergence" of these types of indicators is too infrequent I would suspect to be of counting value.

Anton Johnson writes:

And let's not forget the guaranteed to happen yin yang of Zell's of near perfect timing vs. Blackstone, and his subsequent dinosaur endeavor.

Apr

20

 1. "There is no such thing as easy money"

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]

3. It's bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

Mark Schuetz comments: 

A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?

Victor Niederhoffer replies:

Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.

Ralph Vince writes:

What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…

1. There is no such thing as easy money

This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."

11. All higher forms of math and statistics are useless in uncovering regularities.

Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it. 

Jim Lackey writes: 

About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!

Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.

Alston Mabry adds:

 12. One should not make one's analysis more precise than one's actual trading could ever possibly be.

13.
If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.

14. Never go on vacation with open trading positions.

Or, zooming in:
<click> home

<click><click> to lunch

<click><click><click> to the bathroom 

Paolo Pezzutti writes:

One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Alston Mabry comments:

Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Chris Tucker adds: 

Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.

Anton Johnson writes:

15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.

Jeff Rollert writes:

17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.

Rocky Humbert writes:

The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.

The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants

Jeff Sasmor writes:

About Jeff R's # 16:

16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.

Happened to me yesterday…

Ralph Vince comments:

With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."

Victor Niederhoffer adds:

Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.

Jay Pasch comments:

No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…

Ralph Vince adds: 

Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…

T.K Marks writes:

Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:

"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"

Jim Sogi writes:

Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.

Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.

James Goldcamp writes:

One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).

Ralph Vince comments: 

 Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.

They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.

They're looking for girls in the wrong dark alley.

It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.

They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)

If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.

Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.

Jeff Rollert adds: 

Amen. If it doesn't hurt a little, you're wrong.

Apr

5

Advanced apex predator skills described. (A good picture shown with the article.)

from a New Scientist story on "How Whales Hunt":

Some killer whales are adept hunters, but picky eaters. New observations of "pack ice" killer whales roaming the waters off the Antarctic Peninsula show they dine almost exclusively on Weddell seals, which make up just 15 per cent of the seal population.

Robert Pitman and John Durban at the Southwest Fisheries Science Center in La Jolla, California, documented how these killer whales, or orcas, cooperatively stalk their prey.

Often, one killer whale pops up to identify a Weddell seal perched on an ice floe (shown), then alerts others in the area. A group – up to seven were observed – then charges the floe, spawning waves that wash the seal into the sea. Finally, the whales surround the seal, tiring it before they drown it by pulling on its hind flippers.

Genetic studies suggest these pack-hunting, seal-eating killer whales make up a unique species, distinct from other varieties that feast primarily on fish or minke whales.

Anton Johnson write:

The seal's expression says it all.

Dec

31

UPDATE 1/31/2011:

Contestants Summary:

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

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

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

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

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

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

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

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

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

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

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

Contracts Summary:

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

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

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

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

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

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

Victor Niederhoffer wrote:

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

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

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

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

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

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

David Hillman writes: 

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

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

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

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

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

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

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

Market direction picks are wanted:

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

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

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

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

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

Bill Rafter adds: 

Suggestion for contest:

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

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

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

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

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

Ralph Vince writes:

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

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

I'm going to sit and do nothing.

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

Gordon Haave writes: 

 My three predictions:

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

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

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

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

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

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

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

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

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

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

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

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

Jan-Petter Janssen writes: 

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

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

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

Vince Fulco predicts:

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

Additional points/guesstimates are:

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

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

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

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

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

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

Potential negatives:

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

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

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

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

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

Mr. Albert enters: 

 Single pick stock ticker is REFR

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

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

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

Dan Grossman writes:

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

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

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

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

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

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

Best to all for the New Year,

Dan 

Gary Rogan writes:

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

Wildcard: Short Netflix.

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

Equal Amounts in:

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

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

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

.451

Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

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

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

Warmest,

William

Ken Drees writes:

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

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

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

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

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

Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

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

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

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

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

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

Scott Brooks picks: 

 RTP
TSO
SLV
LVS

Evenly between the 4 (25% each)

Sushil Kedia predicts:

 Short:

1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

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

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

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

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

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

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

Tim Melvin writes:

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

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

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

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

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

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

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

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

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

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

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

Other than that I am clueless.

Kim Zussman comments: 

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

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

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

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

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

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

Alan Millhone writes:

 Hello everyone,

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

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

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

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

Happy New Year and good health,

Regards,

Alan

Jay Pasch predicts: 

2010 will close below SP futures 1255.

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

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

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

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

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

Chris Tucker enters: 

Buy and Hold

POT
MS
CME

Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

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

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

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.

Cheers,

Gibbons

John Floyd writes:

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

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

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

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

A Mr. Krisrock predicts: 

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

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

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

4…commodities are peaking ….

Laurel Kenner predicts: 

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

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

Pete Earle writes:

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

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

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

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

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

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

J.T Holley contributes: 

Financials:

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

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

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

Metals:

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

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

Energy:

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

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

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

Agriculture:

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

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

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

Sex and Speculation:

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

Music:

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

Other:

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

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

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

Long - Common Sense.

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

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

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

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

I had to end on a Long note.

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

Russ Sears writes:

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

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

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

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

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

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

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

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

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

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

Yanki Onen writes:

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

Now the ideas;

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

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

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

-Sell contango Buy backwardation

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

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

- Leveraged ETFs suckers play!

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

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

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

Sincerely,

Yanki Onen

Phil McDonnell writes: 

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

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

SLV closed at 30.18 on Friday.

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

Net debit is .50.

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

George Parkanyi entered:

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

BUY SILVER at open

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

SELL and then SHORT SILVER at open

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

COVER and then BUY SILVER at open

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

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

RATIONALE:

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

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

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

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

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

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

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

Marlowe Cassetti enters:

Buy:
FXE - Currency Shares Euro Trust

XLE - Energy Select

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

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:

Buy:

VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

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

Jul

10

I found this article on how happiness and sadness are like infectious diseases very interesting.

Anton Johnson adds:

Correlated to feline population density?

Mar

1

people run from an approaching tsunami in Hilo ,HawaiiOne wonders about the impact of this earthquake on copper and basic materials prices. Is the infrastructure (rail, ports, etc.) in Chile damaged to the extent that copper shipments will be impaired for several weeks/months? And what of the demand for basic materials to repair all the other infrastructure? More ominously, is there a trend in increasingly destructive earthquakes (and collateral effects such as the 2004 tsunami disaster?)

Anton Johnson comments:

I found the paper "Measuring the Impact of Natural Disasters on Capital Markets" by Worthington and Valadkhani of Queensland University of Technology to be interesting.

George Parkanyi adds:

On vacation in Hilo last summer, we went to the tidal wave museum. There have been many major earthquakes around the Pacific rim in the past 100 years, yet only two generated killer tsunamis in Hilo Bay. The profile of an earthquake is very important to how much and how the energy propagates. The ones that tend to spawn dangerous tsunamis are the ones that cause a shearing and shift up or down of one side of the ocean floor, like the 2004 one in Indonesia. It is always correct to take the precaution of evacuating low-lying areas, because you can never know if any given earthquake will be one to generate a killer, but I don't think it is something to be overly feared, because of the relative infrequency, and the fact that there is usually plenty of time to evacuate. When you don't have a lot of time, and need to move really fast, is when you feel the earthquake, because that means it happened nearby, and is its own warning.

The risk of anyone's being hurt, in Hilo at least, is also lessened by the fact that Hilo was smart and didn't allow any re-building of residential buildings in the low-lying mapped out flooding zone. There are commercial buildings, but the chances of anyone being surprised at night in their beds is near 0. I'm pretty sure that Japan has similar measures in place along its coasts.

Kim Zussman writes:

Thanks to Big Al for the link, which produced the following academic study:

Looking just at earthquakes >7 magnitude, since 1900 has the death/year increased over time?

Running two regressions, one (death count) vs year, and the other (death count) vs year only for deaths>10, the slope coefficient was not statistically significant. Here for the second regression:

The regression equation is
deaths10+ = - 121592 + 66.3 Year

Predictor     Coef   SE Coef      T      P
Constant   -121592   131916  -0.92  0.358
Year             66.27    67.36   0.98  0.326

S = 30633.2   R-Sq = 0.4%   R-Sq(adj) = 0.0%

Note however the "Year" coefficient of 66 is positive (ie, rate increasing by 66 per year), so perhaps it will become significant sometime before Nasdaq 5000.

Jim Sogi comments:

There are interesting google results on earthquake and full moons. The theory is that gravity and tides contribute to geological pressures. We've discussed the full moon effect before on markets. Similar result for geological phenomena, but anecdotally very compelling.

Feb

25

Nobody uses, or even mentions the Fed Model any more.  — A Reader.

Not so fast. Verbatim from the latest minutes of the FOMC:

"The gap between the staff's estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield — a rough gauge of the equity risk premium — stayed about the same and remained well above its average level during the past decade."

I use several different "Fed Models" in my equity portfolios. One similar to Ed Yardeni's Fed Model suggests a US stock market risk premium of around 6.8%.

Anton Johnson adds:

This reminds me of the ongoing debate whether to use historic or estimates for the Fed Model earnings and/or interest rate inputs. Although aggregate consensus earnings estimates for the S&P 500 stocks can fluctuate markedly, a compelling case can be made that an estimate based model is more adaptive. Accordingly, I use estimated data in my version of the Fed Model, which is currently projecting a 11.7% return for the next 12 months.

Feb

21

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.

Feb

15

This study takes an intraday approach to test for Index attraction to round numbers. Data is DJIA from 1-18-1966 through 2-12-2010.

First, daily high-low range crosses of x100 rounds at index levels between 1000 and 13900 inclusive are summed. Next, data undergo natural log transformation. Then, percent crosses for each x100 round (i.e. 1000, 1200, 1300…1900) for each 1000 point range between1000 and 13900 is computed. Last, the percent crosses just computed are summed for each x100 round (for a total of 13 summed per x100 round, that is one for each 1000 point range), then averaged.

14939 Total Crosses

Column 1- x100 point ranges
Column 2- Actual percent crosses per x100 round
Column 3- Adjusted crosses per x100 round
Column 4- Adjusted percent crosses of per x100 round
Column 5- %R next period

1000    10.49%    1047    10.59%    .04%
1100    8.50%    867    8.77%    .08%
1200    9.48%    967    9.78%    .04%
1300    9.90%    1007    10.19%    .06%
1400    9.54%    956    9.67%    .02%
1500    10.42%    974    9.85%    .01%
1600    10.80%    995    10.07%    .00%
1700    10.44%    1029    10.41%    -.10%
1800    9.76%    1027    10.39%    -.04%
1900    10.66%    1016    10.28%    -.01%

Next three tables are consecutive crossings after a cross.

Column 1- x100 point ranges
Column 2- Actual percent crosses per x100 round
Column 3- Adjusted number of crosses per x100 round
Column 4- %R next period

Consecutive crosses next 2 days

4863 Occurrences

1    2    3    4
1000    4.19%    1002    .07%
1100    3.15%    729    .15%
1200    3.67%    901    .06%
1300    3.95%    990    .00%
1400    3.38%    861    .28%
1500    4.08%    879    .16%
1600    4.44%    911    .02%
1700    4.13%    962    .05%
1800    3.71%    945    -.07%
1900    4.37%    945    -.07%

Consecutive crosses next 3 days

3156 Occurrences

1    2    3         4
1000    2.78%    797    .03%
1100    1.98%    544    .00%
1200    2.44%    685    .02%
1300    2.56%    816    .00%
1400    2.15%    651    .40%
1500    2.75%    681    .24%
1600    3.00%    675    .00%
1700    2.64%    755    .08%
1800    2.35%    707    .00%
1900    2.74%    743    -.15%

Consecutive crosses next 4 days

2326 Occurrences

1    2    3    4
1000    2.04%    709    .06%
1100    1.31%    452    .25%
1200    1.82%    605    -.10%
1300    1.90%    759    .23%
1400    1.51%    571    .37%
1500    2.09%    605    .03%
1600    2.27%    585    -.04%
1700    2.05%    653    -.10%
1800    1.65%    618    -.04%
1900    2.07%    672    -.01%

Jan

29

the banker from monopoly[Editor's Note: TBTF = Too Big To Fail]. My friend Rocky Humbert posed the question: ‘If 1000 mini-AIG's and mini-Fannies are all imploding, why is that less of a catastrophic event than a single mega-AIG? Arguably, it's a more serious systemic risk…as the possible chain-reaction will be like the whack-a-mole game at the video arcade.’

His statement presupposes that 1000 separate actuarial teams would ignore or miscalculate risks inherent to derivatives. The assortment of risk management methods and individual company’s investigations initiated because of pricing disparities among competitors will illuminate many risk pricing issues that went unnoticed in the past. Notwithstanding past widespread risk pricing blunders, it is likely that risk management performed by 1000 separate competitive entities will lower overall systemic risk.

Rocky Humbert begs to differ:

I respectfully disagree with your premise for these reasons:

Thousands of supposedly independent and uncorrelated investors BOUGHT the housing related derivatives over the past several years; and all their models presupposed the same generalized assumption - that housing prices wouldn't decline nationally. This demonstrates beyond any doubt that a systemic event is systemic exactly because of a widely held belief. Any time large groups of people share the same belief, it becomes a systemic risk. How can you ignore the exception that proves the rule?

The wave of bank failures in the early 1930's was spread across the country in small and medium sized banks too. Similarly, the RTC which spent billions cleaning up the S&L failures of the late 1980's. Who was the TBTF institution in the 1930's ?

The equity quant debacle in the summer of 2007 demonstrated that most of these independent minds were using similar models. This was not a systemic risk event — but it demonstrates the illusion of independence among participants…both hedge funds and broker-dealers.

There are many many illustrations of similar phenomenon in the natural world — feedback loops, harmonic amplifiers, etc etc.

George Parkanyi adds:

Banks should be allowed to grow as big as they want, but not allowed to be counter-parties to each other where their own capital is involved. And certainly no borrowing from each other or insuring each other. (They are supposed to be competitors after all). That way, they would be transacting with each other only on clients` behalf (e.g. letters of credit, wire transfers, cheque clearing etc.). They should be able to take deposits, borrow from the Treasury with the transparency associated with that, and they should be allowed to trade their own capital on 3rd-party exchanges (again, not directly with each other). And of course they could form syndicates to spread risk when financing 3rd parties. This way their business, and sphere of exposure would be limited to the business they do with their clients and their proprietary trading through exchanges that have well-established margin rules and centralized, neutral clearing mechanisms. There would be relatively little linkage to allow a chain reaction to occur. (There would be some through lending to the same clients. One guy calling in a loan at a bad time could cause problems for the others. But this would just have to be risk-managed - you can`t take the risk out of everything).

Something like this would compartmentalize risk without having to treat institutions differently simply because of their size. Thoughts?

Jan

21

There are multiple methods of measuring investment risk. Several popular methods utilized by investment managers:

VAR (historic, variance-covariance, and Monte Carlo)

Sharpe Ratio

Modified Sharpe Ratio

Standard Deviation

Shortfall

Ulcer Index

Information Ratio

Intra-Portfolio Correlation

Drawdown

For investment capital attached to future outlays such as pension obligations and retirement account distributions, surely Shortfall should be included in the risk assessment tools mix. For those asset managers who are not tethered to an Index, Information Ratio is of little use and is clearly inferior at measuring absolute risk. Furthermore, for all but the most stoic of investment managers, Standard Deviation and Sharpe Ratio are deficient because they don’t differentiate pro-position and counter-position volatility.

Although each remaining method has strengths and drawbacks, all successfully measure risk. Maybe, a combination of methods throughout the investment decision-making process will permit a more comprehensive analysis of risk. Consider it ‘risk analysis diversification’, if you will.

One potential avenue could be to first figure out which individual strategies to deploy within a multiple strategy portfolio. This can be accomplished by using the relatively simple to compute and compare, and fittingly named, Ulcer Index (at least to those whose gastric ailment is not rooted by a H. pylori infection). Ulcer Index is apposite because its formula contains, instead of standard deviation as is used in Sharpe Ratio, the sum-of-root-mean-square of all periods’ percent-drawdown. Vital to maximizing precision is using long-term historic data. Importantly, data should include periods of extreme price excursion. If there is no long term data, generate a synthetic long term series, or if possible, select

a highly probable highly and positively correlated surrogate asset. Normalize the surrogate to the actual asset’s volatility over a comparable time period (compare periods after regular high volume has been maintained in a new issue). Next, Ulcer Index can be computed for each strategy’s returns over a uniform time period. Then, rank and check for correlation among strategies and choose accordingly.

Lastly, to engineer the desired overall portfolio risk/reward profile, optimize expected Intra-Portfolio Correlation and Modified Sharp Ratio. For accuracy, Modified Sharp Ratio’s (which incorporates VAR) inputs should be projections, partly extended from historic and if necessary synthetic data. Do expect to make regular revisions.

Of course, there are other combinations of methods to achieve risk analysis diversification benefits; this is but one example

Russ Sears writes:

The problem with these measures are they cannot measure the risks of cannibalizing the future for short term gains. The more a model is used, the clearer it is to all those involved how to tip the scales in their favor. Remember the chaos of the gyspy moth, overbreeding until the trees cannot regenerate leaves quick enough for the last generation.

Take VAR, its lack of liquidity measure, and do a cursory scan of the role it played in the overallocation to sub-prime, mortgages, real estate and structured credit or rating agencies, AIGFP, SIV's, banks and insurance companies required capital. Even those titans of business Havard and Yale fell for these gapping holes in measuring risks and performance. Soon everybody is overallocated to the same thing. Then suddenly everybody is surprised when the door is not big enough when the liquidity fire alarm is pulled.

For diversification of risks measures, I have had much more luck understanding the weakness of the model and trying to prevent myself or a company taking my advice from letting the weakness of the model predetermine my allocation or strategy. The genuis of Chaos Theory, in my estimation, is clearly understanding what a model does not and cannot measure. Then you won't expect it to measure all risks and are not alarmed by those that cannot see they stepped off the edge of a cliff. 

Anton Johnson responds:

Mr. Sears makes exceptional observations, and to extend on those, I would add that the endowment funds’ problems were exacerbated by inexcusable errors in basic portfolio management. By simply monitoring the portfolio and maintaining prudent volatility adjusted component size limits and intra-portfolio correlation level, much of the funds’ losses engendered by the managers’ usage of VAR, and their apparent ignorance of its shortcomings, would have been mitigated. Of course, the root cause of their problems was unfortunate asset selection and poor foresight; and that is an entirely different topic.

Jan

13

What should be the temperature in a trading room? I've been doing a little reading into the effect of ambient temperature on cognition and performance. A cursory search on pubmed and google scholar show some evidence that increased heat may lead to loss of vigilance, alertness etc. I, myself, would prefer to trade / study / work / relax in a room that was 16 C than 30 C. An Australian Reader.

Temperature perception is not a simple matter of degrees. As heat is absorbed by air (for example, heat radiated by a furnace) and absent supplemental moisture, the relative humidity of the heated air is reduced. Since water vapor has a higher specific heat capacity than air, relative humidity has a pronounced influence on a person's perception of ambient temperature.

Alex Castaldo adds:

The temperature factor is a part of the hedge fund folklore. The divorcee in Greenwich believes in a cold trading room and that is why some staffers there wear wool jackets while trading. 

Nov

21

A once popular eigenshibboleth is the need for stocks to finance retirement. There are lots of graphs of historical compounding of the SP500 over various periods, but I was curious about account balances over periods of retirement consumption. This is a simple (* see note) study of hypothetical $1M retirement accounts invested in the SP500, for 5 different individuals each retiring at the beginning of a decade: 1950, 1960, 1970, 1980, and 1990.

For everyone (except Goldman Sachs employees), they say one needs about 80% of their pre-retirement income to retire comfortably. $8,000 per month is 80% of $120,000 annual income (average government employee). Each of the 5 retirees puts $1M into the SP500 at the beginning of his retirement (his because a woman's work is never done), and each month sells stock and draws out $8,000 - leaving the balance in stocks. The balance of each retirement portfolio varies due to monthly drawdown + stock exposure, and the running account-balances are graphed in the attachment to compare balance variability and time to depletion for the different periods.

1950 did very well, with his account varying about $1.5M from 1955-69, and he didn't run out of money until 1989. Men didn't live so long then, so his widow must have been smart. The money lasted 39 years.

1960 wasn't so lucky: his account dropped rapidly in value, and was gone by 1974. Hopefully his wife was a professor too, and for the rest of their days they read books from the library together. Money lasted 14 years.

1970 unfortunately had to go back to work after 10 years, when his $1M was gone. Fortunately he got a job as a photographer for Playboy.

1980 made Einstein look like a Troglodyte. His account is still nearly $1M in 2009, and at times approached $3M. 1980 is a widower, and is friends with 1970, who set him up and he is now happily wed to a centerfold. Has been spending for 29 years and no end in sight.

1990 got off to a great start, but the last decade put him into Cymbalta, Cialis, and Metamucil. His account, which was worth $1.6M in 2000, is worth only $280,000 now, and he is calling the Senate today to make sure his meds will be free. 19+years and looking precarious; money may be gone in 3 years.

Note: *(study is very simple: inflation not factored, ignore effects of taxes, SP without dividends, earlier periods hard to index, no one has 100% in stocks, etc).

Chart

Anton Johnson comments:

An excellent study that demonstrates the perils of excessive withdrawal rates and underfunded retirement savings.

If we account for dividends and inflation which are not trivial, add government retirement benefits, and the modeled retiree varies withdrawal rates to the widely recommended annual 4-5% of gross account value, certainly a rosier picture emerges.

Kim Zussman adds:

There are many ways the retardees [Ed.: spelling?] could or should have allocated/withdrawn, but here I was trying to elucidate the effect of luck: when you retire vs the market then.  The graphs are reverse of often shown compounding up to retirement — adding X per month to stock account (Famous example Mr. Hill, the engineer who used Value Line to compound millions).

One notes the effect here of changing cycles:  1977-00 worked for all stocks, not just growth.  And since then, well, it's been more difficult.  Even difficult for Value Line:

"November 10th, 2009

Last week the SEC charged Value Line Inc., an affiliated broker-dealer Value Line Securities (VLS), and two of Value Line’s senior officers with defrauding the firm’s family of mutual funds. Value Line’s CEO Jean Buttner and its former Chief Compliance Officer David Henigson have both settled the charged by consenting to the entry of a cease-and-desist order, though they have neither admitted to nor denied the SEC’s charges.

The Commission found that Value Line had been redirecting portions of the funds’ securities trades to VLS from 1986 until 2004 and that Buttner and Henigson overall received “over $24 million in bogus brokerage commissions from the funds pursuant to this scheme, as VLS did not perform any bona fide brokerage services for the funds on these trades.”

According to the SEC’s press release, Value Line, Buttner and Henigson further misrepresented VLS’s “phantom brokerage services” to Value Line’s shareholders, the Independent Directors/Trustees, and the SEC."

What if you invest in something other than the stock market? In the interest of ethnic diversity, attached is chart of $1M retirement accounts, each drawing $8000 per month, and compounding 1, 2,3,4,5% interest monthly on the remaining balances.  I left off the current 0% interest environment, as an exercise for the reader.

Alston Mabry replies:

That's funny, because one of the authors of one of the investment books you listed previously, recently penned a journalistic piece about how maybe it didn't make sense to go to college, because if you put the college money instead into a savings account earning "just 5%", then you would get a better lifetime return.

The whereabouts of this magical savings account was not given.

Jason Ruspini writes in:

The effects of demographics on the underlying returns can't be too auspicious for more recent vintages. The parallel the Sage drew between 1954 and today seems very shaky in that respect.

Nov

11

Dividing DOW weekly closes into non-overlapping 25 week segments, I checked for large advances similar to now using:

{max close (recent 25W)} / {min close (prior 25W)}

Currently this quantity - the move to the high weekly close of the 25 weeks ending last week, compared to the low weekly close of the prior 25 weeks - is 0.51 (+51%). I checked back to 1929; there has not been a gain over 50% since 1983, then 1974, and in the 1930's (see attached).

Looking only at periods with gains >40%, here are the returns over the subsequent 25 weeks:

Date       25 max/min   nxt 25W
02/19/34        0.960   -0.142
08/28/33        0.957   0.024
02/27/33        0.793   0.925
06/27/83        0.584   0.021
12/05/38        0.529   -0.072
10/27/75        0.512   0.197
01/20/36        0.498   0.116
05/05/75        0.454   -0.017
10/19/87        0.446   0.032
03/29/43        0.441   0.033
07/29/35        0.439   0.173
05/12/86        0.418   0.072
10/21/29        0.403    -0.024

.                    avg 0.103

 Anton Johnson comments:

A quick look at all non-overlapping 25-week periods for weekly Dow 1929-Current yields a mean return of 2.73%; using this as the baseline results in a 7.56% excess return for the R>40% periods (10.29-2.73 = 7.56). However the 92.5% return in 1933 significantly skews the small R>40% sample. Median returns are 3.57% and 3.20% respectively, not much different from each other.

Nov

2

NascarDuring the weekend, there were several auto-racing events broadcast. While briefly paused on one of these broadcasts, NASCAR I believe, a commentator referred to auto-racing as a "sport". The comment struck a nerve; does auto-racing fit the definition of a sport?

I broadly define a sport as a skilled activity where the fundamental kinetic energy is produced by the participating athlete's muscles, with locomotion sometimes augmented by the effects of gravity.

Therefore, I argue that although professional auto-racing requires extraordinary physical fitness, focus and skill, a sport it is not.

Tony Kinoue remarks:

As an avid "motorsport" fan, I have to agree. I presume many fellow fans might find it offensive to say auto racing isn't a sport, but I believe it isn't.

A good way of classifying different activities as sports or not, is the risk you face when practicing them.

What would happen if a soccer player failed to score a goal? The ball would not enter the arbitrary area defined by general convention. May the L_rd save us all. The same can be applied to most sports that involve balls.

On the other hand, activities such as auto racing carry with them a much higher probability of mistakes resulting in serious injury or death. Boxing also comes to my mind as an example. Does this make them more or less of a sport than ball sports? I don't know, but to me they aren't sports.

And what about those "sports" that ESPN often broadcasts these days? Domino, poker, billiards. Lots of skill and strategy no doubt, but where's the risk? Monetary risk is a component in all sports described before these.

I'm not trying to imply one is better than another, but they are all certainly different.

Steve Leslie replies:

ESPN is Entertainment and Sports Programming Network. Therefore just because some activity is shown on the channel does not define it as a sport.

If auto racing is not a sport then what category would it be? It is entirely impossible to compete in auto racing without a car. That is a given. So where does the driver and the team fit in? To be a driver one must have great endurance, maintain excellent physical skills, such as quick reactionary times, reflexes, excellent hand to eye coordination and other qualities. Further, the team must have great physical skills. There is plenty of picking up and moving heavy objects, tires are extremely heavy, pit stops must be performed in seconds and it must be coordinated in a fashion to ensure the shortest time spent in the pits. Strategy is essential. A pit stop is like running a play in football. There is vast preparation throughout the week, strategy sessions before and during the race and a few seconds to execute everything. Auto racing is most definitely a sport when seen in its entire context.

Poker, on the other hand is a game. There is hardly any physical activity required. Blind people and quadraplegics play the game. And it can be played online.

Other games as shown on ESPN are dominoes, scrabble, spelling bees…

Billiards, darts, bowling, curling, cricket and horseracing are definitely sports. They just happen to be more subtle than baseball, rugby, soccer, and the major sports — football, basketball and hockey.

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