Sports emotions can range from satisfaction to exhilaration to inspiration or less favorably to frustration to anger to fear to panic, and emotions often change in just seconds when in training or competition.

The Sports Pyramid

Emotions is at the Top of the Sport Performance Pyramid with physical and mental the other two. Emotions dictate your ability to perform at a consistently high level under challenging conditions. Why do you want consistency from your emotions? As your emotions go, so goes your performance. The ideal: respond positively to challenges. How you master your emotions empowers you to use them as tools to perform better rather than as weapons to hurt your game.

Emotional Styles:

There are seven emotional styles among athletes: Bubbler, Actor Outer, Mr. Negative, Positive Thinker, Manipulator, Superior One, and THE GOAL, Grand Master. These are how athletes respond emotionally to their sport. Athletes with a certain style often react in a predictable way when they find themselves in a demanding situation. The emotional styles are defined as …

The Bubbler

A Bubbler feels frustration AND anger build slowly. A Bubbler often appears in emotional control because negative emotions haven't surfaced, YET! The Bubbler keeps frustration and anger bottled up or in check when performing well and the competition is mostly going their way. If competition turns or they make a crucial error, a Bubbler may bubble and boil over and they implode and lose emotional control. Often, when not able to reestablish control, a Bubbler ends up sabotaging for themselves the competition or others (doubles partner, spectators, fans). Bummer. They self-destruct.

The Actor Outer

An Actor Outer feels anger and frustration strongly, but expresses those emotions immediately and openly. No internalizing here -heart on sleeve. Showing strong emotions relieves (or so they think). Emotions arise, are expressed, and then are released. By doing this an Actor Outer maintains a kind of emotional equilibrium in balance. Up to a point, the ongoing emotional vent helps his performance by increasing motivation and intensity and keeps emotions in check; they think. The Actor Outer lets negative emotions out, but do they really let them go? When competition turns, rage builds up until it finally engulfs and consumes and then controls them. At this point, emotions become enemies and performance deteriorates to losing a run of points or repeating unforced errors over and over and over. They self-explode. They're ugly to watch detonate. They act out.

The Mr. Negative

The Mr. Negative feels strong negative emotions. Most common emotions are despair and helplessness. Mr. Negative dwells often on negative experiences and dwells on his feelings. The Mr. Negative may pout. He looks miserable. Mr. Negative is very sensitive to highs and lows of competition and emotions tend to mirror these natural ups and downs of play. When performing well and winning, Mr. Negative is fine; but if he plays poorly and is losing "down" emotions emerge and hurt his performance. Mr. Negative often has an absorbing defeatist attitude and may give up under pressure. Many players and most Mr. Negatives have some brooding qualities, and those qualities can prevent their getting to the top of their sport, or station in life.

The Manipulator

The Manipulator is driven by emotions to become a puppeteer. Psychologically he targets his competitor, the referee, the crowd or all three. He tries through intimidation, confrontation, and gamesmanship to cleverly control the situation to do as he pleases. He raises the ire of his competitor. He may look to get the ref to do a make-up call for a prior that went against him. The Manipulator may decide to turn the crowd against him just to fire himself up. Or, he may get the crowd to cheer for him by showing off and belittling his competitor's mistakes. The fatal flaw for the Manipulator is that without the ability to be a puppeteer or "drama queen" he falls apart and shrinks down to true size when he is unable to pull the strings.

The Positive Thinker

An extremely common style is the Positive Thinker. He believes when there is no basis for belief. When the parachute doesn't open and the reserve chute fails to deploy, Positive Thinker still says, "So far so good". The Positive Thinker mindset is based on 'all things are doable', when he believes. Why is the Positive Thinker a winner at the State level but a loser at the National level? The state championships brim with Positive Thinkers who use positivism as their training wheels. Then they run into a wall of talent at the national level. They fall apart at the ultimate level because any amount of thinking positively that doesn't address reality evaporates.

The Superior One

The Superior One is seen by his competitors as believing he is all knowing. He's so vain he probably thinks this paragraph defines him. He is also bent on giving post-points lectures, detailing rules nuances, and explaining his reality. The Superior One must pontificate. If he's slips from the top, the superior one may vent his anger, play mad at the world, and direct wrath at his partner or competitor. The flaw in his crown comes in the long run that he must continually correct and be correct to remain effective. If he is once wrong he loses the audience and there goes his grip. The Empower has no clothes.

The Grand Master

The Grand Master is the rarest of emotional styles. He seems to play sans emotion. He is all about executing his form and tactics. He seems to play in the zone or return back there on demand. He lets emotions ride through him that jolt most, and he continues with barely a grin or grimace all the way through match point. When losing or struggling, the Grand Master reinvests his energy into getting better. The Grand Master is unaffected by threat and negative emotions. Errors, a poor performance, and losing seem to slide off the Grand Master, as if he were made of Teflon. He owns the ability to NOT let pressure affect him. He is able to let go past mistakes and failure, like he has convenient short term memory loss. A Grand Master is a comeback king. He rarely shows his emotions, either negative or positive, and he maintains a consistent, calm, even demeanor, even during the BIG POINTS. He may be expressionless or don a cryptic Mona Lisa smile. This equanimity (calm, composure, and even temperedness) results in consistently high performances and positive reactions to the normal roller coaster ride of the game. Generally, the Grand Master is a winner or in worst case a happy, "I'm learning something", loser. He seems to learn, adapt, improve and figure it out. He usually reaches his potential and then he defines a NEW potential to shoot for.

What Is Your Style?

What emotional style best describes you? Think back to your competitions. What has owned you when it did not go as well as you would have liked (or as designed by you). And then, think of matches where you felt in total control, cool, energized, and confident. How did you respond emotionally? Were you a Bubbler, Actor Outer, Mr. Negative, Positive Thinker, Manipulator, Superior One, or Grand Master? It's likely that a pattern of emotional reaction will emerge in your sport that places you into one of the seven emotional styles.

Change Is Doable

Emotional styles are not so hard to change. Though some contend that you were born with a particular temperament, or in other words that we may be "hard-wired", if you define yourself and then practice a new 'self' then rewiring your emotion is possible. A real challenge but doable.

Step 1 & 2 To Emotional Control

Goal One: gain control of your emotional style (understand it). Now it will help rather than hurt your sports performance. Goal two: the more long-term goal is to alter your emotional style to one of the seven to naturally facilitate rather than interfere with your positive efforts.

Emotional Master or Victim?

Many believe they are the way they are. They feel they've little control over their emotions and nothing can be done to gain control. If emotions hurt them, they just accept it because they feel they can't do anything about it. They're emotional victims. Their emotions control them. Emotionally they hinder their ability to perform well and achieve their goals.

Become Your Emotional Master

Gain control of your emotions. Develop healthy and productive emotional habits. Emotions CAN facilitate your ability to perform and achieve your goals.

Emotional Mastery

The process of emotional mastery: recognize negative emotional reactions. When starting to feel negative emotions, know what they are, for instance, frustration (argh!), anger (rrrr), despair (woe is me) or bagging it and mailing it in (oh, well). Then identify what situation is causing them. Then let them go or shrink um down to controllable size or feed off them and suck their energy and redirect them toward powerful good.

Review Competitions

After competition, consider underlying causes. You might examine emotional baggage. If emotions are strong and present in other parts of your life, you might seek professional help. Focus on clearing emotional obstacles or hurdles. Understand emotional habits, how they may interfere with performance when less than constructive, and how to learn new emotional responses in sport and life.

Have Responses

Specify alternative emotional reactions to the situations that trigger negative emotions. For example, instead of yelling, "I am terrible," slap your thigh and say cooly, "Come on, play better." Or, instead of screaming at the ref after a disputed call, turn and take several deep breaths. Positive emotional responses help you let go of past mistakes, motivate yourself to perform better next time, generate positive emotions giving you more confidence, and allowing you to focus on what will raise your level of performance.

Practice Emotional Mastery

Emotional mastery skills and positive reactions may not be easy at first because negative emotional habits are ingrained. Realize how difficult it is to change a bad technical habit. You practice technique over and over with a pro or an XK Feeder moving you about and testing your game. Then, with commitment, awareness, control, and practice you're feeling better and your performance improves with positive responses. Boost yourself. Believe. And you're giving your all. In time, retrain your emotions into positive emotional habits. Result: transition from being an emotional victim to an emotional master with tools to not only perform better, but be a whole lot happier. A Grand Master.



 Will there be 7 inning baseball next year?

"MLB Exec Thinks Games Should Be Shortened to 7 Innings, Is Wrong"

To which I say that it costs $100-150 for a family of four to go to a baseball game, the players don't have a lot of interaction with the kids (at least not that I've seen), there's no longer much meaning to the idea of a league (never mind the weird uniforms sometimes used for inter-league play), every pitcher is pulled after 90 pitches and there's now instant replay appeals. Yessir, the problem with baseball and the reason it's losing little kids' interest is the 9 innings. It's all that attention-deficit disorder among the kids (now at 25% prevalence among those under 18), so it must be the 9 innings. I wonder what would have happened if the same marketing person had been at the PGA when Nicklaus ruled the fairways. 14 hole golf?

MLB needs to find someone who knows something about marketing. "The fault, dear Brutus, is not in our stars but in ourselves." The problem is within the MLB. Baseball–all of it, including 9 innings–is just fine as it is. But fix the above, and the kids will flock to the game—just as they have for more than a century.



Thought I'd share some things I'd developed over the years. I would love feedback or new ideas.

1. Signal strength is correlated with forward looking profitability. If you bucket your signal strength into 10 buckets, bucket 10 should have a higher sharpe ratio than bucket 1 out of sample.

2. Strategy PNL is sufficiently autocorrelated that introducing stop losses does not destroy the overall Sharpe ratio.

3. Choosing a rolling optimum window on a lagged basis does not damage strategy returns (or even improves them).

As a corollary, if there is alpha in the short term (10-21 day) rolling worst window it is a bad sign because it means that other people are implementing your strategy, stopping out and providing liquidity.

4. The data necessary to execute the strategy is hard to collect. Assuming Bridgewater hiring machine learning arbs all easily detectable statistical anomalies in medium term.

5. The data predicts other things that could signal equity improvements. Example: if you're predicting shipment volume using letter of credit issuance and that has a feedback effect into shipping stocks, you also want to see your LC data predict shipping volumes not just stock prices.

6. There can be a clear 'liquidity provider' identified. Whether retail, central banks, taxpayers, hedgers, distressed companies etc. Insofar as you're not accessing beta, probably 0 sum.

7. Long term signals are uncorrelated with 13-F holdings. If you're running a price/book model and realize that 8/10 hedge funds have holdings sized by price/book then you're in a crowded trade.

8. Volume is uncorrelated with signal entry and exit. Another way to detect crowded strategies.

9. Thesis scales to another asset market price action. i.e. you have something working that trades energy stocks, hopefully it works on oil as well. For equity fundamental factors, if there's no particular reason they shouldn't work in Japan, they should work in Japan.

10. Predicting a stationary timeseries is more valuable than predicting a trending one. Predicting the relationship between gold and gold miner stocks is more valuable than predicting the gold price. Predicting NOKSEK is more valuable than predicting EURUSD because it has shorter directional stretches.



 In preparation for my first fishing trip of the year next weekend, I watched the film Low and Clear. It starts with the usual boring fishing-zen dialogues, but then it presents an interesting parallel between mentor and student reunited for a steel-head fishing trip in BC. The mentor is a fishing master that has done little else with his life and has a relentless approach to catching fish. The student now has a life outside fishing, but he is not as good fisherman anymore and he focuses more on the experience of fishing and other superfluous things like a "spade cast".

This contrast reminded me of the time when I discovered that trading didn't need to be a beautiful process, it only needs to get the job done. And somehow I don't see around the guys who were obsessed about catching the big swing with fancy methods. I do see the disciplined hybrids (specs/grinders) consistently making money every year.

A quote from the Palindrome seems appropriate:

"A lot of people of average intelligence make a good living. Really smart people can accumulate a fortune if they are truly committed. The problem with you is that you like to do interesting work. Someone who wants to be rich doesn't care what he does. He only focuses on the bottom line. All day long he thinks how can he make more money. If that means setting up more shoe shine stands, that's what he does."

Happy Fishing, and trading!

Duncan Coker writes:

It is good to hear from another angler on the list. Hernan brings up the "winning ugly" concept as it relates to fishing and trading. It is definitely better to win ugly, then lose gracefully in trading, in sports and many other things. In fact all my trades are ugly. It is a scrappy dog fight.

Fishing, though, is a respite and pastime in nature, not a vocation. If I was a guide maybe I would feel differently. But as an amateur and outdoorsman, I like all the aspects, walking to the river, scouting for fish, setting up, casting. On style, I much prefer spending the day taking long casts with a dry fly versus "hucking-lead", the equivalent of bait fishing on a river. My fishing buddy and I fit the two different profiles well. It ain't pretty, but he catches more fish. I am slow and deliberate. He races from one spot to the next and probably works a bit harder on the river. I suppose it is how you define success. In trading it is clear, P&L is all that matters. In fishing a day on the river is always a winning trade and I don't define fishing success relative to anything. Like an aspiring Zen master on the river, fishing simply is.



"Economic Data–Fred–St. Louis Fed"

Download it because there are several longer time series like DJIA and SP500 won't be offered very soon. I use FRED on on a daily basis, but I have to say, their new website has many problems right now.



Data, from anonymous

March 28, 2014 | 2 Comments

 I often look at the amount of past price action used to attempt to predict future price action.

Some things that are useful to ponder, in my opinion, are:

1. Is more past data really going to help to make the future prediction more accurate?
2. Should there be a balance between look-back period and forecast horizon?
3. How important is data accuracy (tick level to daily range)?
4. Should reference points & times be changed every second, minute and hour of a day?
5. Should the definition of 'big move' and 'small move' be a fixed thing or relative to the market's current level?

For me, it's NO, NO, VERY, YES & RELATIVE.

Go Well.

Leo Jia writes: 

In Schwager's book "Hedge Fund Market Wizards", Jaffray Woodriff addressed this in the following way. Any comments? It does have to do with what one is trying to get, doesn't it?

"Do you give the same weight to data from the 1980s as data from the 2000s?

Sometimes we give a little more weight to more recent data, but it is amazing how valuable older data still is. The stationarity of the patterns we have uncovered is amazing to me, as I would have expected predictive patterns in markets to change more over the longer term."

Larry Williams writes: 

As I see it we certainly cannot compare data from the old pit sessions to today's electronic markets.

And how do we handle Saturday trading in the real old days or that markets were close on election day…or in 1967 the markets were close on Wednesday… or there used to be a massively important bond report the goosed bonds on Thursday??

We need to understand what the data represents.



Here is some Friday fun. Stimulated by the S-Man's comments about electrical utilities combined with the government report on corporate profit margins being near/at record highs while company hiring is sluggish….

Hypothesis: The S-Man has hypothesized that companies with fewer employees make better investments. This is consistent with the view that capital is cheaper than labor. And that government regulations have made hiring more expensive. Rocky accepts that companies with only one employee have no sex discrimination lawsuits. And companies with less than 50 employees have no ObamaCare issues. But do companies that produce more revenues per employee perform better per se (as measured by the stock price)? Rocky did a 5 minute back-of-the-envelope study on the 150 largest (by market cap) US companies.

He asked: what is the correlation between the 5 year total return of the stock price and the revenues/employee?

The answer: -.21 . That is, ceteris paribus, higher 5 year total returns are INVERSELY CORRELATED with higher revenues/employee. Or put another way, lower revenues/employee are correlated with better 5 year stock performance.

And it is suggestive that MORE employees producing FEWER revenues produce BETTER stock prices. Very counterintuitive.

This is a very sloppy analysis. But it's food for thought. Now it's pizza time. And that's even better food for thought.

(Rocky is sure that others have done this analysis in a more sophisticated way and he welcomes critical comments.)

Larry Williams writes: 

I tested revenue per employee a few years back so this is reaching into old rusty memory banks but the recollection is it was just "ok" as a value measure and did not fit all companies. Service industries have to have employees, some high tech and mortgage companies can get by with less.

Memory is clear that this was not anything special to use to find value in stocks.



 The stress test that the Fed uses, which involves a 50% decline in stocks, a 25% decline in real estate, and 11 % unemployment is totally ridiculous. [Supervisory Scenarios 2014 32 page pdf]. It assumes that one wouldn't have a dynamic strategy involved to curtail risk on the way down, and that an event that has only happened 3 times in last 125 years would happen again, and that banks should run their assets as if it were to happen imminently rather than handling them dynamically with decision making under uncertainty the way all are taught in business school.

It must be a propaganda method to diffuse attention from all the hundreds of billions that they gave to the banks during 2008, and a method of flexionism if you get the drift that Mario Puzo and Janine Wedel write about. It is amazing that this bank or that bank only failed the test qualitatively. What a sponge for flexionism is such a "qualitative " test which allows the greatest amount of bargaining and begging. What a world we traverse.

Rocky Humbert writes: 

I just browsed the Fed document to which Vin alludes. It can be found here.

I didn't read the document closely, but it's unclear what the pass/fail criteria entails. That is, whether the test is "insolvency" versus "solvency" or some level of capital after the stress. Perhaps someone else knows the answer to this?? It's key to understanding whether the stress tests are ludicrous.

Structural engineers design buildings and bridges for Category X hurricanes and Y richter scale earthquakes. It is accepted that these are extreme and rare conditions and engineering for these stresses involve substantial costs. It is also accepted that the structure may sustain damage in the calamity but will not experience sudden catastrophic collapse. My guess is that the same sort of mindset is at work here. Dynamic risk management is not possible in structural engineering for obvious reasons. In financial institutions, if one believes that the amount of stress/risk in the financial system is static, then dynamic risk management may not work either — because risk will simply move from one institution to another institution … but the overall stress remains in place. Would anyone disagree with this characterization.

Ultimately, I believe the question is whether the Fed should be engaged in ANY stress tests. Once the answer is yes, then we are debating about the magnitudes. And the debate is similar to whether the new Tappan Zee Bridge must tolerate 100, 150 or 200 mph winds before it collapses….

The key difference is that an contractor can put a price on the incremental cost of each 50 mph tolerance. I am unaware of any cost benefit analysis from the Fed in setting its stresses. And I propose that this absence of cost/benefit analysis is where an objective critic should focus his energies. 

anonymous adds: 

Then, there is the further question. Since the Fed has the only checkbook that never needs to be balanced, why is it engaging in the pretense that it cannot "save" any member bank no matter how "stressed" it becomes? I understand why it is important for everyone who trades to follow the entrail readings of the Delphic Committee; but, as the R-Man notes, it becomes difficult to understand how there can be "any cost benefit analysis from the Fed in setting its stresses".

As I reread Sumner's History of American Currency, I find myself wondering if the R-Man's fellow alumnus could possibly understand our modern minds. Could he truly understand how we define money as central bank credit and then actually worry about whether the sovereign can run out of the ability to print/digitize its legal tender? I doubt it.

From the Preface:

"I regard the history of American finance and politics as a most important department which lies as yet almost untouched. The materials even are all in the rough, and it would require a very long time and extensive research to do any justice to the subject. I hope, at some future time, to treat it as it deserves, and I should not now have published anything in regard to it, if I had not felt that it had, at this juncture, great practical importance, and that even a sketch might be more useful perhaps than an elaborate treatise. It follows from this account of the origin and motive of the present work, that it does not aim at any particular unity, but consists of three distinct historical sketeches, united only by their tendency to establish two or three fundamental doctrines in regard to currency."

Yale College, 1874.

Mr. Isomorphism writes in: 

Anonymous, I find your final paragraph especially compelling, even more than the rest of your argument. However probabilities of catastrophe cannot be estimated. It's dubious whether they can even be quantified. Also human or social costs resist economic quantification. Against an unmeasurable times an unquantifiable, what basis do regulators have for precisely calibrating the cost and dimensions of their bulwark?

It seems to me one cannot reasonably do MB=MC, but rather very loose upper and lower bounds are the best one could argue with.

P.S. Even in normal times, eg the FDIC's various ratios are not calibrated against an historical "utility function". If a balance is achieved it's surely between the personalities and the powers of the regulators and the regulated.



 BBC 4 put on a documentary about the creation of the album Tubular Bells this weekend. It was one of the biggest hits of the seventies and one of the top sellers of all time.

What was interesting about the documentary was a number of coded and in some cases explicit jabs at Richard Branson who financed the recording.

Instead of a visionary, he was titled as a used car salesman who sold imported records illegally by one chap. Other pokes were directed towards Branson's lack of musical knowledge and his betrayal of the 70s sound by financing punk bands.

This is perhaps a bit odd given that many of the individuals featuring in the documentary were sitting in palatial recording studios or homes that might not have existed had Branson not hustled for a record that may have become a damp squib.

When Oldfield, in a panic, nearly pulled out of the launch concert, it was Branson who corralled him onto stage. It was presumably Branson who helped locate and negotiate the deal that made Tubular Bells the soundtrack to film the Exorcist and sent international sales skyrocketing.

Branson has recently had a second book published about him by Tom Bower, neither of which are fully complementary. Perhaps sour grapes are contagious?



March 2014 E-mini S&P 500 (Dollar) ESH4 3/21/2014 3/21/2014 3/24/2014 1893.30 (Official settlement price for the E mini S&P march futures)

Highest price for the S&P index today is 1883, cash settles 10 points higher @1893!! (E-mini futures last price 1881.75). Guess what, if you actually bought ATM options right before the expiration, you would have hit the lottery every single time. Check to see the data for your self. If this isn't price fixing I don't know what is.

(Link to the past settlement prices)



 I recently saw the movie Snowpiercer. I thought it was very interesting. Before going, I checked IMDB which rates it at 7.6/10. The short intro is:

"In a future where a failed global-warming experiment kills off most life on the planet, a class system evolves aboard the Snowpiercer, a train that travels around the globe via a perpetual-motion engine."

I didn't have a very high expectation, thinking that it is yet another sci-fi movie from Hollywood, but on a weekly half price day, I went to watch it anyway.

I must say that it is one of the most thought provoking movies I have seen lately.

It is about the debate of two opinions: 1) everyone, especially the lower class, should stay in its place for the overall harmony and equilibrium of the habitat that is made possible by the ruling elite class; and 2) the lower class should revolt and overturn the ruling class in order to achieve equality. The movie seems inclined toward the former with an ending that due to a revolt the habitat is destroyed and nobody survives.

Given the nature of movie censorship in China, it is very interesting to see the intention of showing this movie.

IMDB seems to indicate that US show time is June.



"U.S. says Russian decision not to ease Ukraine crisis 'regrettable'"

(Reuters) - Russia's failure to take steps to ease the crisis in Ukraine is "regrettable" and the United States is ready to respond quickly following a referendum planned for Sunday on whether Ukraine's Crimea region should join Russia, the White House said on Friday.

"We have obviously not gotten to a situation where Russia has chosen to de-escalate, where Russia has chosen a path of resolving the situation peacefully and through diplomacy. That is regrettable. We will have to see how the next several days unfold," White House spokesman Jay Carney told a briefing.



I would like to share some thoughts regarding present and past market correlations. One of my mother's sisters, aunt Franca, spent her life with my grand father, taking care of his many vices. She used to tell me that to have an edge on events they used to check share activity in Textiles and Heavy Industry in order to anticipate probable war declarations, or military activity. The rationale is clear.

The government ordered uniforms and mechanical spare parts before undertaking belligerent efforts. The same went for paper and other similar indicators that showed some kind of economic activity. For this reason I have given a look, first at the long term graph of copper, then added the S&P index.

The resulting picture gives an idea of a total and sudden decorrelation of the stock market and price of copper since mid 2011. I'm sure that better statisticians will be able to justify such a strange phenomenon: economic prosperity and declining raw material prices.

And mind you, not any raw material, but copper, the dear metal, the center of the electronic and electric universe. The S&P has risen roughly 49 percent since September 2011, while Copper (COPA LN bbg ticker, etf quoted in $ in London) has lost 22 percent in the same period.

The visual shock is, of course, much stronger than the raw numbers. Is this predictive of a market correction?

Not sure about it, although the crowding effect of larger and larger troops of SPU bulls give me a chilling feeling down the spine and the uncomfortable "dejà vu" state of mind.

Alston Mabry writes: 

If one were to search the interweb for the "copper, china, collateral", one would find several stories claiming that copper is used as collateral in the "shadow banking system" in China and that sharp moves in price are due to such stores being liquidated.



 Has anyone noticed the action in the hog market lately?

A rapidly spreading PED virus with an 80% mortality rate among piglets has already killed off 4-5 million pigs or roughly 4% of the market.

The market is taking this very seriously and has been going ballistic this past month.

I am glad to not be short hogs right now.









 There are several things to be considered here. First, the aircraft. The Boeing 777 is one of the most reliable aircraft ever built. Only three of the aircraft hulls have been lost:

1. British Airways flight 38 crashed short of the runway at Heathrow on Jan 17, 2008 due to ice crystals in the fuel that clogged a heat exchanger and prevented the engines from delivering thrust at a critical point on the landing approach. This situation only occurred in certain Rolls Royce engines [Trent 800] and has since been resolved by a new design of the engine oil fuel flow heat exchangers and restrictions on the amount of time the aircraft is permitted to operate with fuel temperatures below -10 degrees Celsius. This can safely be disregarded as a possible cause in the Malaysia incident.

2. Last years highly visible Asiana 214 accident at San Francisco was due to pilot error and a failure to maintain proper airspeed on the landing approach — there was nothing wrong with the aircraft.

3. On July 29, 2011 an Egypt Air B777-200ER was destroyed in Cairo when a fire erupted in the cockpit while parked at the gate [Final Report, Egyptian Ministry of Civil Aviation 172 page PDF]. This was attributed to a probable electrical fault or short circuit involving the first officers oxygen mask delivery hose, but the cause was not conclusively proven. It resulted in a a Boeing Alert Service Bulletin that in turn prompted an Airworthiness Directive that "requires replacing the low-pressure oxygen hoses with non-conductive low-pressure oxygen hoses in the flight compartment." [2011-NM-279-AD 8 page pdf]

The Cairo incident is interesting in that a cockpit fire can cause catastrophic damage and result in the loss of the aircraft, see Swissair Flight 111. A cockpit fire could reasonably prevent the flight crew from communicating their situation with air traffic control especially if it was fed by oxygen and required prompt attention from both pilots.

There was some speculation about an electrical failure which may have been the cause of the disappearance as well as the cessation of communications. I seriously doubt this however, as the B777 is equipped with a RAM Air Turbine to generate sufficient power to run essential systems in the event of such a failure.

Also, it is possible that the aircraft, like Air France 447, was transmitting system diagnostic data to the airline (not air traffic control) via ACARS  (which could provide clues) but if this information exists, we haven't heard about it yet.

In this article in today's New York Times  Malaysian authorities have stated that radar data may indicate that the flight had "possibly attempted to turn back". As a radar controller, and a witness to the events of 9/11, I can state that if there is radar data available, even if the aircraft's transponder was shut off or disabled, one can make reasonable assumptions by linking any strong primary targets to the last beacon targets if they are consistent with the track or with the turn characteristics of that type aircraft at it's last known altitude and speed. This is exactly what air traffic control did when the transponders aboard American 11 were turned off. There were strong primary radar returns that began where the beacon returns ceased and they were certain that they were looking at American 11 as it turned south down the Hudson river and when it disappeared over Manhattan.

As we don't have access to any radar data that the Malaysians may have, we cannot make any statements about it other than what we hear from them.

If there was a change in course this could imply many things — the crew was distracted by something like a fire or severe problem with the aircraft or possibly a cockpit intrusion. The fact that nothing was communicated to air traffic controllers could also imply that the crew was either too busy and therefore unable to communicate or they were prevented from communicating by intruders.

It is certainly possible that the aircraft was hijacked. A loss of transponder returns would occur if hijackers were savvy enough to turn the transponder off and a change in course would be consistent with a hijacking. This aircraft was fueled for a long flight and if the aircraft was indeed taken by force, there is no telling how far or where they might have taken it.

There is also the possibility of some sort of catastrophic explosion. Possibly a bomb or dangerous or poorly stowed cargo. There are many precedents for cargo fires, Value Jet 592 comes to mind as does Federal Express 1406 [Accident Report, 147 page pdf] (This flight may be of particular interest to DailySpec readers as it was carrying,I am told by persons directly involved, on the order of 100 million dollars in federal reserve notes on their way to Boston to be taken out of circulation and destroyed.)

There has also been speculation of a possible crash/suicide by one of the pilots.

This too is not unprecedented, Silk Air 185, Egypt Air 990, and most recently LAM Mozambique 470 are all suspected to be murder-suicides by members of the flight crew.

Any of these scenarios may prove true. The search area is very, very large and if the aircraft went down in the water, it may take a long time to find debris. There should definitely be some identifiable debris — even if the aircraft exploded. Strangely, it may prove easier to find evidence of a crash in the sea than one on land. Floating debris will probably persist on the surface for some time, whereas a crash site in remote territory may be amazingly difficult to locate, especially if their was no fire or if the aircraft came down in small pieces. If this happened over dense jungle or forest, there is very little chance that it will be detected from the air.

I am just as anxious as the next person to know what truly happened. This will take some time, investigations cannot be rushed.

Pitt T. Maner III writes: 

There is an attempt to crowdsource the satellite imagery in order to remotely sense objects that might be related to the crash zone.

I have not seen this site before. In the oil industry "lineament analysis" of aerial and satellite imagery was used to try to find surface features that might be associated with potential subsurface geological structures.

So it is like looking for a small, anomalous linear feature–"needle in a haystack" as they say. Problem being that there are many linear features caused by breaking ocean waves, seafloor substrate, clouds, shadows and such.

It seems a computer program could also look for aligned pixels or anomalies and at multiple bandwidths.



Let's assume the HFT does take a 1/2 tick out of the market per trade. But reflect back to the good old days when you would call in your orders to the floor. Then the locals would sit on the order for 1-2 minutes allowing plenty of time for front running, and other evil dong, then charge execution commissions of .50bp to 100bp. This was all before decimalization so instead of spread of .01 or .005 on stocks you had spreads of .06 or .25, higher by a factor of 5x. For a stocks or futures trader I will go with current electronic age even with those pesky HFT algos. If I was a floor broker, sure the old days were a lot better, but if you are sitting upstairs today beats by a mile.

Jeff Watson writes: 

But the trouble with the electronic market is that it's harder to know the size of the market (ie: how much wheat is really for sale in the pit). Plus, the electronic market eliminates the visual and auditory clues that one would get in the pit. The feel of the grains has changed significantly since electronic became the mainstay, but a bad fill is a bad fill, and your market order can get you a bad fill.

Gary Phillips writes: 

Floor brokers in the bond pit were under extreme pressure to provide institutional customers with good fills

Brokers were only as good as their last fill…

Good fills were taken for granted, but fills that were perceived as bad, were always acknowledged and then contested.

Adjustments for bad fills were de rigeur, if a broker wanted to retain his business.

But when a broker had an error, he had to eat it himself.

The risk /reward was definitely skewed against the floor broker.



 What took so long? I do not know. The Putin nomination makes some sense. If you look at it objectively, they gave the prize to Obama, when Obama was barely elected president and had done nothing for World peace.

Putin has done a lot for world peace.

Firstly, he is keeping a tight leash on Russian hardliners that want nothing more than a return to the good old USSR (the article from this month's print version of Bloomberg Magazine about Sechin missed the point by so many yards that I will not even begin talking about it).

Secondly, he averted a war in Syria.

Thirdly, he is defending the right of people to self-determination in the Crimean part of former Ukraine.

Very objectively, he saved more lives than Mother Theresa.



 "Low Protein Intake Is Associated with a Major
Reduction in IGF-1, Cancer, and Overall Mortality in the 65 and Younger
but Not Older Population"


Mice and humans with growth hormone receptor/IGF-1 deficiencies display major reductions in age-related diseases. Because protein restriction reduces GHR-IGF-1 activity, we examined links between protein intake and mortality. Respondents aged 50-65 reporting high protein intake had a 75% increase in overall mortality and a 4-fold increase in cancer death risk during the following 18 years. These associations were either abolished or attenuated if the proteins were plant derived. Conversely, high protein intake was associated with reduced cancer and overall mortality in respondents over 65, but a 5-fold increase in diabetes mortality across all ages. Mouse studies confirmed the effect of high protein intake and GHR-IGF-1 signaling on the incidence and progression of breast and melanoma tumors, but also the detrimental effects of a low protein diet in the very old. These results suggest that low protein intake during middle age followed by moderate to high protein consumption in old adults may optimize healthspan and longevity.



Something I wonder about is at what stage does a "meaningful" run higher need to be justified with a fundamental reason that's ongoing, equating to the acceleration and allowing you to hold stock at these levels or at least be overly geared to the long side?

Boris Simonder writes: 

Can you quantify the definition of meaningful. Surely there's a wide interpretation.

If the security is gapping up aggressively, or in an usual way, more than its group peers, there may indeed be fundamental reasons behind it to justify holding the security. On the other hand, less liquid securities could just move faster (higher beta) without any fundamental reason we see today or the time of the move. But then again this could also apply to any security. The trick is to use the right input/tool (to justify a position) at the right time, regardless of methodology.



 The purpose of this post is to stimulate discussion about an important market development. It's not a prediction.

I believe that one of the most widely accepted memes in the financial markets over the past several years has been that the Chinese Currency was/is undervalued, manipulated and would not go down and must eventually go much higher. The fundamental arguments for this were the persistent balance of payments surplus, purchasing power parity, competitive advantage/cost, political pressure, the history of currency movements in places like Japan, relative growth rates and growth potential; monetary base; and the list goes on and on and on. In fact, I can't find any credible opinion to the contrary. (A couple of summers ago, Bill Ackman made a big PR splash buying "cheap" calls on the HK dollar predicting an inevitable and massive revaluation.)

Over the past few weeks, the Yuan has reversed course and started to decline. It has had a violent and 3 sigma decline in the past 3 days. The story is that the Chinese authorities are encouraging a "wider trading band."

I am not offering any predictions here. But it is striking that the impulse move is in the down direction, not the up direction … all the more so, when the universally accepted truth is that the Yuan can only rise.

Is this just a counter trend move? Or is something bigger going on? If the Yuan starts declining instead of rising, what are the second order effects on other markets? If this is more than a counter trend move in a secular bull market for the Yuan, then I believe there are some very important implications. Unfortunately, I'm not smart enough to know whether the supposition is true and/or what the second order effects may be.

A good place to start thinking about this might be historical analogs. What are the historical analogs? And when does the perma bull Yuan story get stopped out?

Alston Mabry writes: 

I agree. With all the issues out there on shadow banking, credit bubble, CBOC actions, ghost cities and shopping malls…who actually knows what's going on? If anybody "knows', it's the market itself. Once China frees up capital controls, import controls and currency controls and becomes relatively transparent accounting-wise…then the RMB will move on economics…mostly. But right now there are so many "shadow issues" in play that it's hard to assess the situation other than on a short-term trading basis.

Richard Owen writes: 

Disregarding the background 'China story' which is the key determinant of the secular factors (eg, do you believe China is massively insolvent or not, does it matter), when currencies are 'newly' brought to market (in the sense of being a new regime, if not a new currency), they often trade off initially. Domestic holders want to diversify and foreign buyers have no structural reason to accumulate inventory, thus have a 'show me' attitude on price. And since fx is a short duration asset, nobody is holding for the carry and a trend begets itself. Or to put it another way, as yuan trading is liberalised, does the marginal holder likely want to diversify out of existing stock more than a foreign holder wants to get into? Comparables are perhaps the euro introduction, where despite a hugely profitable convergence carry on long bonds, even underwritten by the ECB discount window, it initially sold off. Perhaps more analogously, when South Africa empowered its blacks, the Afrikaans community thought the end was nigh (as some chinese entrepreneurs do now) and began liquidating everything and selling into offshore currencies. They misread the situation, however, and the sandtown community provided a bid to the Afrikaans. My friend's uncle bootstrapped a working mans savings into a billion by buying the real estate liquidation, putting in newly arriving AAA multinationals as tenants and riding the yield curve down from teens to single digits.

anonymous writes: 

In the face of 2008 downturn, the Chinese government created more money than was done by the ECB or the Fed. The shadow banking system carried on making new loans to reestablish the housing bubble. Based on that slice of data, the RMB should not be rising against other foreign currencies, but falling.

Yes, trade surpluses are supportive to a currency, but China's big trade surplus with the US is balanced by some trade deficits with sources of raw materials, and production machinery, so that their trade surplus overall is not as big as with the US. The foreign direct investment into China has been very high as has the Carry Trade where borrowing in low interest rate countries like Japan and buying higher rate Chinese Treasuries, was profitable and gained even more as the RMB rose. This looks to be reversing and is thus a negative for the RMB and is big at maybe a half trillion dollars of hot money.

The image is of the Chinese government suppressing the currency to keep its exports growing and doing so by buying US Treasuries, and that was also pushing the image higher. But Chinese people are buying gold for safety, indicating that they have seen government spending and do not have confidence in the RMB. I think a downward spike in RMB could be followed by more selling if Carry Trade unwind becomes big. But PPP and Trade surplus will limit the move eventually, IMO.

anonymous writes: 

I also agree, (Chinese financial reporting is awful) but the assertion that we can know many outside variables from the US$ of the equation is very important. (Current account surpluses and deficits bear many similarities to double-entry accounting, in that aggregate balances in one direction or another should balance each other out.)

I submit that the current state of Chinese property and credit markets bear many similarities to what Hyman Minsky termed a "deviation amplifying" mechanism in his Financial Instability Hypothesis.

However, if asked how it will play out, my tendency is to say that at some point over the next few years, they are at substantial risk for a debt deflation. Personally, I'd have a tough time convincing myself to be short a deflating currency.

Charles Pennington writes: 

OK, here's an "N=1" kind of study…

Back in mid/late 2011 the Swiss franc ("CHF") was strengthening violently against the Euro, with the Euro almost going down to parity with CHF. Then the Swiss stepped in to weaken the CHF and forced the Euro back up to 1.2 CHFs. The Euro sat there, pegged at 1.2, but everyone feared that the risk was that the Euro would fall below 1.2. Instead the Euro ended up moving higher against the CHF in mid-late 2012 and 2013. Very similar to Rocky's China story.

Since mid 2012, EWL (the Swiss market etf) is up about 55% and FEU (the EuroStoxx etf) is up about 40%. EWL is probably a bit less volatile than FEU (though I didn't check), so EWL's gain is yet more impressive.

So the N=1 conclusion is that you should buy Chinese stocks.



Another festival in India today. Don't irritate or make Lord Shiva loose his temper or the markets across the globe will trade at zero the moment he opens his third eye.



I'm not sure which prof (Charles or Alex) was mentioning shorting the cost of certain stock at 60% ++ in one of the posts, but I found this interesting paper on the subject: "The Shorting Premium and Asset Pricing Anomalies".

Here is a two line summary of the paper:

1. The cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha

2. Top decile stocks by shorting premium (cheap to short) returned an average of 0.75% (gross) and 0.11 % (net) in the next one month, while bottom decile (expensive to short) returned -0.71% (gross) and -0.17% (net).



 I just finished watching England defeat Ireland (just) in a very close game in the Six Nations tournament.

The way the game develops between the two teams is quite reminiscent of markets trading in ranges before a large directional move.

There are a lot of frustrating back and forth with the play not moving much along the pitch. One can observe the crowds starting to get frustrated (and those watching at home or at the pub have gone to get a drink or whatever) then all of a sudden BANG….a player has moved 40 or 50 feet at it's on. Everyone scrambles toward him looking for the pass or to knock him down (no padding over here - take note Gridiron aficionados).

Then after the play all settles down again. Anyway, three cheers for Her Majesty's finest.



Condition: $SPY up for five or more days in row , and current day is plain Tuesday.

(no NYC winter storm in the prev week/day/month, nor new Fed chairman's first year in the office are considered)

data since Jan 2000 on spiders…



The stop loss, if not used properly, will kill by a thousand cuts. It operates on fear — fear of decimation, which is a powerful and justified fear, but a fear just the same. A rookie's desire to keep his losses small will inevitably lead to a host of small losses over a long period of time. But it is hope which will keep him in the game, feeding his account every few months with a few hundreds or thousands more dollars in the hope that some day he will strike it big, all the time netting his broker a tidy sum in commissions.

Fear and hope are powerful motivators but they can inhibit your ability to think straight, which puts you exactly where the professionals want you–making hasty and rash decisions.



At the risk of telling all to be calm before a crash….I offer the below chart as an antidote to the 2014/1929 'analogue' stuff flying through cyberspace at the moment.

One hopes Messrs Stigler & Lorie would be proud of me.

Phil McDonnell adds: 

One of the common caveats in looking at correlations and analogs is that the correlation should be based on price changes rather than price levels. Using levels leads to spurious high correlations in both directions.

My concern is that using charts of price levels is essentially the same thing as calculating a correlation based on levels. It will lead to spurious conclusions.



Working backwards, whenever the trailing 12 month returns on $EEM were less than -9.3% , the forward 12 month returns (by dollar cost averaging?)von dividend adjusted data, based on month end values underlined were 3 non-interleaving instances.

Date    $EEM    t-12 (%)    t+12
Jan-14    38.19    -11.72      ??
Jul-12    38.02    -15.17    1.68
Jun-12    38.03    -16.03    0.34
May-12    36.21    -20.78    11.30
Apr-12    40.55    -13.91    4.44
Mar-12    41.25    -10.01    1.43
Dec-11    36.44    -18.79    19.05
Oct-11    38.83    -9.87    3.01
Sep-11    33.39    -20.16    20.31
Aug-09    32.5    -9.85    15.14
Jul-09    32.93    -14.42    17.43
Jun-09    29.66    -27.16    17.53
May-09    30.34    -33.17    16.55
Apr-09    26.17    -40.54    49.10
Mar-09    22.65    -43.82    72.58
Feb-09    19.38    -53.74    86.53
Jan-09    20.68    -49.66    71.76
Dec-08    22.79    -49.47    68.98
Nov-08    20.66    -54.83    80.49
Oct-08    22.89    -53.79    51.03
Sep-08    30.76    -30.53    16.42
avg    31.25
std    29.10
min    0.34
max    86.53
t-test    4.80



 During dinner conversation, Lindbergh expressed annoyance about his son's mountain climbing. I asked why he was concerned.

"Too risky" he said.

"Who are you to talk about risk after flying across the Atlantic in a single engine monoplane?" I asked

"One must measure risk in terms of gain." he replied. He didn't see much gain on reaching the top of a mountain.



 The cat parasite Toxoplasma gondii, which can cause blindness in people, has been identified in Beluga in the western Arctic. The discovery by University of British Columbia scientists has prompted a health advisory to Inuit people in the region who eat the whale's meat. Researchers say it is an example of how the warming of the Arctic is allowing the freer movement of pathogens.

Gary Rogan writes: 

Beware of Global Warming: it now causes blindness in the Inuit people. I bet there is also a link to the non-randomness of the down-for-the-year to up-for-the-year transitions. Researchers say Global Warming is ultimately responsible for anything (a) random (b) non-random.



TWTR, from Kora Reddy

February 6, 2014 | 1 Comment

This is post-facto, and I have to count on the whole data set, but $ZNGA, $FB, $GRPN etc, tanked by more than 10% on their first ER date with the street… now $TWTR …



 The mocking press about Sochi accommodations shorts the many thousands of workers who made a great effort to create a venue where none existed previously. Given the well known corruption and central command government in Russia, expecting 5-star hotels by journalists, athletes, or spectators was never realistic.

"Journalists at Sochi are live tweeting their hilarious and gross hotel experiences"

Putin bears much responsibility for the mockery so far, because of his ego, vested interests, tsarist regime, and hostility toward the West. Probably Gorbachev would have been given more slack, and would have rightly approached such a task more humbly. No doubt Mexico, under similar circumstances, would have been given a full pass.

There are many who believe we in the US are living under an increasingly repressive and controlling government. Russians have lived like this for a thousand years. One of their few permitted joys is pride over national sports. I for one hope they have reason to cheer at this Olympics.

Tim Melvin writes:

Mocking press my flaming ass. This is the Olympics and Russia committed to providing world class accommodations in their bid package. The rooms are not finished and some have no water. At least one hotel is telling people not to use the water on skin as it is dangerous. Do you think for a minute it would be this bad if Austria or South Korea had won the bid? If it was never realistic they should not have won the bid. Period.

Gary Rogan writes:

It's amazing how corrupt the whole world has gotten: very little of importance is done for the right reasons. Nobel prizes, Olympic venues, Global Warming. It used to be that individual countries and locales were corrupt, and that's still going strong, but globalization has led to global corruption. Everything is Kabuki theater of one form or another.



 I'm just a poor businessman, and haven't the wherewithal this week to consider a rigorous study, but I often look to JB's Bollinger Band indicators for guidance on the persistence of moves in various financial instruments, indicies, and single stocks. When one looks at the S&P cash index with Bollinger bands overlayed (I use the generic/default settings on Bloomberg), one sees that in many cases over the past year (though also over longer periods), when the index crosses either band, there is frequently an opportunity to profit from a reversal.

That always struck me as a natural consequence of competition of private interests in a marketplace, in which panic or excitement tend to burn themselves out rather quickly. But look at the same Bollinger band charts overlaid on treasury futures. The trending seems to be much more pronounced than in equity markets. When the price crosses one of the bands, it does NOT, as of late, tend to be followed by a short-term reversal.

One wonders if the propensity for markets to obey an oscillatory behavior (like SPX) or to disobey (like USM4) implies that trend followers may actually have a discernible (not random) chance to succeed from time to time.



 I just spent a week with a bitcoin millionaire in his low 20s.

I think I was previously missing out on the cultural revolution in all this. This guy and the others are utterly committed to a world of privacy and anonymous transactions.

I threw out all my arguments about why bitcoin might fail. In addition to some good technical answers his basic idea was "so what, we will just move on to the next one, we are never turning back."

I suppose the relevant question for those of you with college ages kids is whether or not they are adopting this mentality.



While this band of brothers has taken a turn to the bearish camp, I can think of 100 quantitative reasons that one is in the bullish camp, starting with the stock bond ratio being at a 3 month low.



It would be wise to review prior periods of Fed Chair transitions, for their equity and bond moves and overlay that on election years.

But I am not sure I'm wise.

anonymous writes: 

Date              Chairman                        DJIA     CAGR         t    t+1    t+5    t+10    t+20    t+62
13-Aug-14    Charles S. Hamlin               Market Closed till end of year ??           
10-Aug-16    William P. G. Harding           90.05    1.17    -0.23    0.3    2.07    4.2    2.49    16.77
01-May-23    Daniel R. Crissinger             97.4     17.49    -1    0.67    -2.04    -2.05    -1.41    -8.21
04-Oct-27    Roy A. Young                     198.88    6.15    -0.45    0.17    -4.95    -6.07    -8.65    1.03
16-Sep-30    Eugene Meyer                   237.22    -32.86    0.25    0.22    -6.09    -10.41    -19.06    -21.81
19-May-33    Eugene R. Black                 81.75    14.23    -0.99    -1.88    2.42    8.99    15.95    15.11
15-Nov-34    Marriner S. Eccles               99.72    4.51    0.3    -0.33    -0.25    2.67    3.05    1.28
15-Apr-48    Thomas B. McCabe             180.27    11.15    0.64    0.2    0.61    0.39    1.24    5.7
02-Apr-51    William McChesney Martin, Jr. 246.63    6.05    -0.53    -0.25    1.48    3.29    3.29    2.91
02-Feb-70    Arthur F. Burns                  746.44    0.07    0.32    1.48    1.24    0.97    5.49    -1.72
08-Mar-78    G. William Miller                750.87    9.04    0.55    -0.12    1.03    0.89    1.74    15.4
06-Aug-79    Paul A. Volcker                  848.55    15.42    0.28    1.33    3.15    4.47    2.84    -3.35
11-Aug-87    Alan Greenspan               2680.48    7.91    1.69    -0.42    -0.96    1.56    -4.9    -26.91
01-Feb-06    Ben Bernanke                10953.95    4.72    0.82    -0.93    -0.87    0.96    0.65    4.22
03-Feb-14    Janet Yellen                  ~15848.61                       

avg        0.13    0.03    -0.24    0.76    0.21    0.03
stdev        0.73    0.85    2.66    4.67    7.78    12.68
t-test        0.63    0.14    -0.33    0.59    0.10    0.01



"The Top 100 Selling Drugs":

Hypothyroid medication levothyroxine ( Synthroid, AbbVie) was the nation's most prescribed drug in 2013, whereas the antipsychotic aripiprazole ( Abilify, Otsuka Pharmaceutical) had the highest sales, at nearly $6.5 billion, according to a new report from research firm IMS Health on the top 100 selling drugs in the United States.

Following levothyroxine as most prescribed were the cholesterol-lowering drug rosuvastatin ( Crestor, AstraZeneca), the proton-pump inhibitor esomeprazole ( Nexium, AstraZeneca), and the antidepressant duloxetine ( Cymbalta, Eli Lilly).

Rounding out the top 10 most prescribed drugs in 2013 (in order) were the asthma drugs albuterol ( Ventolin, HFA) and fluticasone propionate/salmeterol ( Advair Diskus, GlaxoSmithKline), the antihypertensive valsartan ( Diovan, Novartis), the attention deficit drug lisdexamfetamine dimesylate ( Vyvanse, Shire), the antiepileptic pregabalin ( Lyrica, Pfizer), and the chronic obstructive pulmonary disease drug tiotropium bromide ( Spiriva, Boehringer Ingelheim).



 The film White Men Can't Jump features two basketball hustlers: Billy Hoyle (Woody Harrelson) and Sidney Dean (Wesley Snipes).

1. Billy consistently bets his whole account on each game. He gets ahead quickly for a number of games, but also repeatedly wipes out.

2. Sidney, on the other hand, is diversified. He bball hustles, but also runs a food stop and decorating business. He takes a share of the bets Billy fronts.

3. Billy owes hard money. As a result, he has two mafiosos trailing him.

4. Sidney (per Billy) would rather look good than win. He takes risks which don't further his financial goals.

5. Sidney and Billy eventually meet with success by entering a competition funded by sponsors. No money is risked. They have learnt to leverage OPM.

6. When either winning or losing, Billy goes on tilt if criticized. After his biggest victory, having won his money back, he bets Sidney his whole proceeds that "white men can jump".

7. The biggest financial success turns out to be Billy's girlfriend, Gloria. She believes - seemingly irrationally - that her destiny is to be selected for quiz show Jeopardy. Sidney eventually persuades the security man from the Jeopardy studio lot to get her in. Such was her persistence that the irrational became actual.

8. Deception operates repeatedly. There is:

- the trojan horse: offering to play with any partner, having placed preppy doofus Billy in the court stands;
- the thrown game: Billy is paid by some mafiosos to throw a championship match;
- the false friend: Billy and Sidney form a hustling team, but Sidney plays to lose thus hustling his own partner;
- the shakedown: to make a grub stake, a bball player tries to rip off a liquor store;
- rule changes: a hustlee, having realised that he is the mark, refuses to pay up and pulls a gun; and many others.



SPY 20 day range (defined as 20 day intra high - 20 day intra low ) / (Avg(20 day intra high, 20 day intra low) printing a value of 1.97% = (184.94-181.34)*100/(184.94+181.34)/2

Not many instances since 1993.

Paolo Pezzutti asked:

Kora, what are the implications from a practical perspective?

Kora Reddy replied:

12/13 times SPY (for interleaving trade samples) closed higher 20 days later, but the sample size is too low to make a bullish bet.

3/4 times for the non-interleaving samples, SPY closed higher …

12/13 times SPY closed higher than the current close in the next five days at some point of time ( i.e first profitable exit, otherwise exit at fifth day at close.)

Kim Zussman expands:

Dividing SPY into non-overlapping 20 day periods (counting back from 1/22/14 to 1993), I checked for Kora's low range periods.

Range = 20D HI / 20D Low
The most recent range appears to be the lowest in the series, 1.0198 (1.98%)
There were 11 other instances of 20D range <3%; and the next 20D appears to be very bullish:
One-Sample T: nxt 20d ret
Test of mu = 0 vs not = 0
Variable N Mean StDev SE Mean 95% CI T nxt 20d ret 11 0.0146 0.0161 0.0048 (0.0038, 0.0255) 3.02
Here are the instances:
Date H/L nxt 20d ret
04/07/06 1.023 0.022
12/16/93 1.023 0.023
04/08/13 1.024 0.036
08/18/05 1.024 0.015
07/27/93 1.024 0.028
01/14/94 1.026 -0.005
06/22/05 1.026 0.009
12/20/13 1.026 0.015
01/25/07 1.027 0.021
10/12/95 1.029 0.019
04/01/93 1.029 -0.022
avg 1.025 0.015



 The recent plea by the Israeli defense minister (supposedly uttered in private) for Kerry to leave Israel alone coupled with a not particularly flattering characterization of him indicates the level of frustration with him in Israel. This Administration is engaged in nothing less than a deliberate attempt to destroy Israel if only they agree to the terms. Since the US supplies a lot of the spare parts and Israeli weapons, their pleas to agree to self-destruction are not gentle urgings of a misguided friend.

Even if you assume that Kerry is only confused and not malicious, he behaves like a drunk who is looking for his lost keys in the middle of the night under a lamppost, and when asked if he had lost them there replies that that's the only place where he can see anything. Nothing will get better for the US if Israel capitulates, so you have to ask yourself what his (and his masters') real motivation is.

David Lillienfeld writes: 

I see this as one more step in Israel's international re-alignment. Israeli forces were at one time dependent on French arms, until the French decided that selling arms to the Israelis brought more problems than it solved.

Stefan Jovanovich writes: 

David's comment about Israel's use of French military equipment deserves attention. For the decade following the first Suez crisis (1956) France was Israel's sole supplier of aircraft, tanks and naval vessels. During that time Israel was not by any means an "American ally". Eisenhower, who knew how utterly disastrous Korea had been and how weak the U.S. was strategically, wanted to avoid even the possibility of another European war (not exactly in America's best interests then or now), and the Suez crisis offered the United States an opportunity to be "on the same side" with the Soviets and all the anti-colonial member nations of the U.N. (He was also clever enough to know that the British, French and Israelis had utterly destroyed Egypt's military capabilities.) At the same time, it was very much in France's interests to have a foreign "customer" for its own armaments manufacturers, especially if DeGaulle's vision of France as a "third force" was to be achieved. The British came to the party much later, in the 1960s when they provided the Centurion tanks on which the Merkava was based.

All this is, by now, truly ancient history. The United States now has closer financial and technical ties with the IDF than with any other country's military, including those in NATO. (We are not sending Britain or France or Germany or Italy $5B a year in military aid, $4B of which returns to the U.S. for the purchase of American armaments.) I don't think enough attention is now given to how large a force Israel now has (I can understand why it is in their interest to be seen as David against Goliath, but in pure military terms that is far from the truth.) Israel now spends about $15B in its public military budget and (my estimate) another $5-$10B (not including U.S. aid) that is not publicly-disclosed; that puts it on a par with China, if you exclude the money that country spends on what is essentially a jobs program for its equivalent of our national guard.) Israel is the only country in the Middle East that has an independent launch capability. The other countries that can put heavy payloads into the air are Britain, Russia, U.S. France, S. Korea, Italy, Germany, China, India, Japan, Brazil and Ukraine. There is no evidence that any of these countries are eager to provide Iran, Palestine, Saudi Arabia or any other country in the region with free use of such a delivery system, given the fact that the Israeli's have an ICBM (the Jericho) with an 8,000 mile range.

It seems to me that Israeli politicians in control of the government have come to the same conclusion that Reagan did in 1983 when he established the JPMG and Sharon and Weinberger began having what the diplomats call "discussions". The Israeli governing coalition knows that there is absolutely no domestic political risk in ignoring completely the opposition voices of "moderation" (whatever that means); and there is a great deal of domestic political risk in actually doing anything to stop further settlement on the West Bank or reducing the recent Israeli arms build-up. The Europeans won't like it any more than they approved of Reagan's arms build-up; but there is nothing they can do about it. They no longer have the Soviets to fear as they did in the 1980s; but they also no longer have the actual armies that they had then. All they can do is join John Kerry in clucking.

To answer David's question: "No". Morgan did not lock people in a room. That is as much a fiction as the Protocols of the Elders of Zion. The dynamic was the opposite; the question for the meeting was who would be allowed to be in the room and who would be kept out. Everyone knew that the clearing house would resolve the panic just as it had earlier domestic ones. This was not a crisis of gold leaving the U.S. as it did in 1894-5 because people feared Americans would stop crucifying mankind on a cross of gold - i.e. paying its creditors in money rather than IOUs. The issue in the 1907 Morgan meeting was whether or not your paper would be among the notes accepted at par. My own "conspiracy theory" about the founding of the Federal Reserve is that the "good" people in favor of reform et. al. were appalled that the banks had been able to resolve the crisis without "help" (sic) from the government. Roosevelt was particularly infuriated; but the two-term tradition for American Presidents forced him to leave the White House before he and the Progressives could do anything about this monstrous exercise of the freedom of contract.



 While everyone fawns over Google's purchase of Nest, there's this little piece on whether the Nest thermostat might provide a means for the NSA (or someone else) to go snooping in your home. I'm not so sure that this purchase will work in Google's favor as much as one might have thought from all the hoopla. Google may learn some useful things from Nest, but trying to justify the purchase on that basis may be a stretch. This reminds me in some respects of Cisco's purchase of Stratacom back during the dot-com boom (you remember, when webvan was going to put Wegman's, Safeway, and Whole Foods out of business).



 WSJ today has an article that's critical of companies that do big share buybacks. It features quotes from Chanos, who says he's shorting some of the buyback companies. Much of it seems wrong to me.

HPQ is cited as an example of a buyback disaster — "if only" HPQ had just invested in real opportunities instead of those buybacks. I thought though that HPQ's problem wasn't the buybacks, but the high-priced acquisition of a software company that turned out to be fraudulent. Obviously they would have been much better of if they had used that $15 billion to buy back shares.

The main target of the article though is IBM, which seems like a particularly bad choice. IBM's earnings have grown by a factor of 3 over the last 10 years while its share count had dropped 35%. Furthermore, IBM is one of the few companies to have reduced its share count even during the 2008/2009 period–the count went 1385, 1339, and 1309 million in years 2007, 2008, 2009.

anonymous writes: 

I think your analysis is quantitatively accurate, but the typical bottoms-up analyst has a much shorter lookback period than you do, 5 years at most, and with good reason.

The fact of the matter is that IBM has had extremely low/negative "organic" revenue growth for several years. The CSFB analyst has made the most consistently cogent representation of this argument, and "FCF conversion attributable to shareholders" (FCF post-financing, post-M&A) has been ~70% of earnings and falling … and FCF conversion has deteriorated every year since 2009 as a fundamental analyst/PM myself (of internet stocks).

I would never use a lookback beyond the current management team, and probably 3 years or less. I suspect Chanos keeps an extremely close eye on FCF conversion combined with -ve organic revenue growth, and sees aggressive corporate buybacks within a rapidly deteriorating fundamental backdrop as a form of management corruption, in which management chooses to invest excess capital in juicing their own stock options, instead of reviving the company's longer term prospects. This is endemic of "blue chip" tech conglomerates that no longer know how to generate organic growth.

I am not quite as familiar with HPQ but i strongly suspect it's a similar thesis.  I was totally bewildered by Buffett's decision to load up on IBM in 2011 as were a lot of people who covered IBM. It violated every one of Buffett's own rules.

Side comment: since Chanos is compensated on "negative alpha" instead of absolute return (i.e. if the market is +20% and Chanos's short portfolio is only 10% against him, he is "up 10 percent on the year") he has the luxury of fighting these longer-term wars against these kinds of companies.  It's very hard to fight a stock that's buying back 10% of their float per year, which probably makes them more attractive to shorts who can take a longer view.

Gary Rogan writes: 

Stocks (or rather companies) that can't go organically but don't shrink are like perpetual bonds, but with an upside option in that someone can buy them for the cash flow. At the right P/E they can make a lot of sense.




 Offer and withdrawal + crowd = volatility

"Police calm angry crowd at Wrexham's 99p Stores sale":

Police were called to a discount store to calm angry shoppers chasing 50p bargains in a closing down sale.

The 99p Stores in Wrexham was temporarily closed after crowds of shoppers flocked to a half-price sale which was advertised until 28 January.

However, many became angry and refused to leave when staff put prices back up to the full 99p price.

It has been reported the shop was due to shut because the lease was up but the sale ended when a lease was agreed.



 Since you're talking about PEs, I will crosspost this bit:

Listening to Ed Hyman on Wealthtrack. Hyman says he thinks 2013 was like 1996 and that the next few years may turn out to be like the late 90s, as in: +20%, then +30%, +27%, +20% - he specified those percentages - which would mean for the S&P:

year close
2013: 1848
2014: 2218
2015: 2883
2016: 3661
2017: 4394

If you also plug in the earnings growth %'s from the 1998-2000, you get these stats for the S&P:

year: earnings, pe
2013: 107.45, 17.2
2014: 116.60, 19.0
2015: 117.08, 24.6
2016: 136.67, 26.8
2017: 148.44, 29.6

Considering Ed Hyman's comparison to 1996, one can't help but think, "yes, but"…back then we were looking ahead at the interweb and all its spinoffs, and investors thought tech companies would post astonishing future earnings, resulting in the fact that in early 2000, the top 20 firms in the QQQ had a combined PE ratio of 83. The future looked bright.

In the current world, what big factors could drive up the market PE to something like 30, as in the previous post? Two things come to mind in the macro sense:

1. "Developing" countries, especially India and SE Asia, really loosen up the regs and start to take off at an even steeper rate of ascent. Global GDP follows and grows at twice its "normal" rate.

2. A period of serious inflation.

What else?

Gary Rogan writes: 

Being able to map this year on some other years for the purposes of predicting the next few years sounds like wishful thinking. Multi-decade returns from this point on are likely to be subdued because this is somewhere between a "fairly valued" and relatively expensive market. This means little in the next few years, which are relatively "short term" for this purpose, and nobody really knows whether trend following or trend reversals will predominate. And since a number of surprises that will affect the treasury rates are in store, some of which will depend on the actions of a few men and one women, these short-term guesses are likely to remain nothing but guesses. 



Think You Have It All? Not Without A Personal Poet On Retainer

Sure you made a jillion. Made it with a social media triumph that allows hordes of vacuous people to spend their days sharing pictures of their cats with millions of friends online. Or maybe with a brilliant derivative that destroyed the economic future of a small country in Europe.   You earned your jillions. And you bought all the boy toys that were supposed to make you happy. You’ve even begun the laundering process of this money by giving bits of it to environmental and cultural organizations, thereby earning the right to be endlessly surrounded by chirping Gaian groupies and anorexic graduates with fine arts degrees and meaningless titles at large museums, all seeking to glom even more from your bottomless pile.   But it’s not enough. Why? Because every Tom, Dick and Jane billionaire is doing the same — except Jane who bought a lot of girlie goodies instead of boy toys.   So now you’re thinking: Mike, how do I set myself apart from the billionaire herd? Here’s my answer: With a personal poet on retainer. Someone to elevate just another multi-million dollar wedding, christening or bas mitzvah into an event that will ring down the ages. And not only bring you this singular joy to which only great wealth is entitled, but memorable rhyming discomfort to your enemies as well. For the poet’s quill can sting like an arrow as well as happily tenderize like a good stool softener.   Interested? You betcha. But you’d best get in touch with me promptly. Before someone who hates you and has even more money gets to me first.  

Email to mike AT wallstreetpoet.com [replace _AT_ with @] . Serious inquiries only.

Wallstreetpoet's [Michael Silverstein's ]  newest book is The Devil's Dictionary Of WallStreet.



In the days of my youth, there were two national department stores, Sears and Penney. It was a fierce rivalry between the two. Penney tended to do better at the soft goods, Sears, the hard goods. Regardless, they competed against one another. Over the last couple of decades, it seems that rivalry waned. I can now definitively state that this rivalry is back on. Competition, the essence of America! It seems that both companies are in a race to see who can get to Chapter 11 first. Or maybe Chapter 9.



 Are the low prices in ags related to the drop in oil since oil is used for fertilizer to grow ags?

Jeff Watson writes: 

Partially, but the crops have been very robust worldwide, there's lots of supply, and remember that we're coming off of a major bull market in ags that started in 2007. That explains some of the gravity as for the past 5 months, one has been able to sell any strength in the grains and make money. This market behavior almost reminds me of the 80s. Since during this bull market, farmers have added enough storage to make many elevators redundant. Sometimes, if you watch the front month of wheat or corn, it will be up a couple of cents while the rest of the grains are down a few cents. That's the grain companies trying to shake some of that stored grain loose from the farmers. One can make money off of that.

Jack Tierney writes:

Maybe this is part of the reason, from the president.

U.S. EPA modified its proposed 2014 renewable fuel standard rule last year after the White House raised concerns about production targets being too high and based on unreliable analyses, according to documents from interagency reviews of the draft proposal.

EPA's proposed rule released in November calls for the first-ever reductions in the amount of conventional, corn-based ethanol and advanced biofuels that refiners must blend into gasoline. Its release shook markets for corn and energy and alarmed biofuel producers scrambling to secure investments.

The rule would require refiners this year to blend 15.21 billion gallons of renewable fuels into petroleum-based fuels — lower than the 18.15 billion gallons that Congress anticipated when it wrote the RFS into statute in 2007.



 It was in July 13, 2012, more than a few months ago, when Specs were voicing concerns about Facebook, including that it was valued at an "astronomical" amount, and daughters were reporting their friends were getting bored with it. FB was at $31 then; it's at $55 now. It must be very bullish for a stock if kids are getting bored with it.

Jim Sogi writes: 

I'd agree with the Professor. Just because it's not in style with kids doesn't matter. When Boomers and Grandmas use it, it's become very successful and more likely to last than a fad. I use FB to stay in touch with kids and friends in a nice way. It's a better tool than email in many ways as a killer app. There are flaws, and they are making it worse, but the idea is the same.



 A few months ago, we had an animated discussion regarding the long-term viability of Facebook (and by extension its value). Reports were already starting to surface at that time that youth were moving away from FB. Some ethnic groups like blacks had moved on to other sites, such as MySpace. While most of these reports were US-focused, there is now similar findings for European youth. How FB will address these changes, if it addresses them, is not clear. Also unknown is what the recent disclosures of FB's responses to NSA surveillance requests is also not known. In any case, evidence is mounting that FB is a passing fad, at least among youth. I do not know of similar reports for their parents.

Peter Tep writes: 

In terms of cool factor amongst youth, 12-25, I believe FB is indeed fading but its usability is still second to none. As a Google+ user also, I can say that there is no comparison to FB, especially since one can also keep in touch with his older less technologically inclined older relatives.

Twitter definitely has the edge over FB now in terms of instant connection etc and teenie boppers can feel more connected to their beloved celebrities.

Although fading, I'm yet to believe that there will be a worthy competitor of FB.

My 2c



For those who understandably thought that the Iran front would be quiet while Iran built their nuke, ’twas not to be the case.  It seems Iran is determined that if more sanctions are levied at it (and the US Senate is certainly headed in that direction, White House be damned), it will raise its enrichment program to a 60% level—well beyond any claim of a peaceful use. I’m mystified as to why Iran did this, unless it’s trying to further upend the Obama White House (I’m not sure that’s possible at this point) or to taunt the Israelis (which would be thoughtless, since the one country that won’t hesitate to strike is Israel. Given that Kerry is trying to shove a treaty down Israel’s throat and is being adamant about not releasing Jonathan Pollard even as it demands that Israel release convicted murderer, I don’t know that Obama has much credibility left in Jerusalem to throttle Bibi back. One thing is clear: When Iran detonates its device, assuming Israel has not struck Iran, Bibi’s political career will be over. I doubt Bibi is willing to accept that possibility. That’s my take. I’m sure there are some other ones on this site.



Bonds trade up ~ 5 points, 130-15 to 135-23 in a few seconds, and then the market trades both sides for close to a minute. Certainly enough time for someone who "points and clicks" to take advantage of the "mis-pricing", on the way back down, and now they've canceled all trades above 131-12….

"It was a fat finger"

If that were true then there would have been an instant return to prior trading levels without two way action. It took close to 20 minutes to go back to the prior levels with many up and down ticks.

I'm sure all the little guys who (thought they) bought back their shorts at 131-00 are really happy it's trading at 130-10 now that they're stuck with their longs….



 Here are some personal observations from years working in the nuclear power industry that might be helpful for those interested in energy markets.

1. Since most plants need to produce power 100 percent power all the time, most managers see the power markets as inconsequential.

2. Unlike the gas turbine business, it seems nuke managers are unsure about production costs. Yesterday, I saw a slide where a senior person merged capital costs with operating costs to claim higher production costs. It seems self-defeating.

3. It seems DOE has been captured by industry groups. In particular, NE seems to be captured by NEI. Most of their data seems to come from NEI.

4. It seems DOE's NE thinks their primary role is to be the repository of other peoples' thinking. It appears they are not taking any leadership responsibilities.

After discussing this with some colleagues, we think we know some of the [financially] troubled nukes:






5. As Prof. Richter pointed out, there is no national effort to save the nation's nukes. Most industry activity has been redeployed at the state level. It seems desperate.

6. Industry leaders are mostly old white men who are drawing big salaries. The industry is managed like a country club, not a business. Their dues are too high and too few people are willing to pay the price.



 [Editor's Note: Every year at Dailyspec we post the story of "Stubby Pringle's Christmas" by Jack Schaefer. It is a wonderful, heartwarming story. Hope you enjoy it and Happy Holidays.]

High on the mountainside by the little line cabin in the crisp clean dusk of evening Stubby Pringle swings into saddle. He has shape of bear in the dimness, bundled thick against cold. Double stocks crowd scarred boots. Leather chaps with hair out cover patched corduroy pants. Fleece-lined jacket with wear of winters on it bulges body and heavy gloves blunt fingers. Two gay red bandannas folded together fatten throat under chin. Battered hat is pulled down to sit on ears and in side pocket of jacket are rabbit-skin earmuffs he can put to use if he needs them.

Stubby Pringle swings up into saddle. He looks out and down over worlds of snow and ice and tree and rock. He spreads arms wide and they embrace whole ranges of hills. He stretches tall and hat brushes stars in sky. He is Stubby Pringle, cowhand of the Triple X, and this is his night to howl. He is Stubby Pringle, son of the wild jackass, and he is heading for the Christmas dance at the schoolhouse in the valley.

Stubby Pringle swings up and his horse stands like rock. This is the pride of his string, flop-eared ewe-necked cat-hipped strawberry roan that looks like it should have died weeks ago but has iron rods for bones and nitroglycerin for blood and can go from here to doomsday with nothing more than mouthfuls of snow for water and tufts of winter-cured bunch-grass snatched between drifts for food. It stands like rock. It knows the folly of trying to unseat Stubby. It wastes no energy in futile explosions. It knows that twenty-seven miles of hard winter going are foreordained for this evening and twenty-seven more of harder uphill return by morning. It has done this before. It is saving the dynamite under its hide for the destiny of a true cowpony which is to take its rider where he wants to go – and bring him back again.

 Stubby Pringle sits in his saddle and he grins into cold and distance and future full of festivity. Join me in a look at what can be seen of him despite the bundling and frosty breath vapor that soon will hang icicles on his nose. Those are careless haphazard scrambled features under the low hatbrim, about as handsome as a blue boar's snout. Not much fuzz yet on his chin. Why, shucks, is he just a boy? Don't make that mistake, though his twentieth birthday is still six weeks away. Don't make the mistake Hutch Handley made last summer when he thought this was young unseasoned stuff and took to ragging Stubby and wound up with ears pinned back and upper lip split and nose mashed flat and the whole of him dumped in a rainbarrel. Stubby has been taking care of himself since he was orphaned at thirteen. Stubby has been doing man's work since he was fifteen. Do you think Hardrock Harper of the Triple X would have anything but an all-around hard-proved hand up here at his farthest winter line camp siding Old Jake Hanlon, toughest hard-bitten old cowman ever to ride range?

Stubby Pringle slips gloved hand under rump to wipe frost off the saddle. No sense letting it melt into patches of corduroy pants. He slaps rightside saddlebag. It contains a burlap bag wrapped around a two-pound box of candy, of fancy chocolates with variegated interiors he acquired two months ago and has kept hidden from Old Jake. He slaps leftside saddlebag. It holds a burlap bag wrapped around a paper parcel that contains a close-folded piece of dress goods and a roll of pink ribbon. Interesting items, yes. They are ammunition for the campaign he has in mind to soften the affections of whichever female of the right vintage among those at the schoolhouse appeals to him most and seems most susceptible.

Stubby Pringle settles himself firmly into the saddle. He is just another of far-scattered poorly-paid patched-clothes cowhands that inhabit these parts and likely marks and smells of his calling have not all been scrubbed away. He knows that. But this is his night to howl. He is Stubby Pringle, true-begotten son of the wildest jackass, and he has been riding line through hell and highwater and winter storms for two months without a break and he has done his share of the work and more than his share because Old Jake is getting along and slowing some and this is his night to stomp floorboards till schoolhouse shakes and kick heels up to lanterns above and whirl a willing female till she is dizzy enough to see past patched clothes to the man inside them. He wriggles toes deep into stirrups and settles himself firmly in the saddle.

 “I could of et them choc’lates,” says Old Jake from the cabin doorway. “they wasn’t hid good,” he says. “No good at all.”

“An’ he beat like a drum,” says Stubby. “An’ wrung out like a dirty dishrag.”

“By who?” says Old Jake. “By a young un like you? Why, I’d of tied you in knots afore you knew what’s what iffen you tried it. You’re a dang-blatted young fool,” he says. “A ding-busted dang-blatted fool. Riding out a night like this iffen it is Chris’mas eve. A dong-bonging ding-busted dang-blatted fool,” he says. “But iffen I was your age agin, I reckon I’d be doing it too.” He cackles like an old rooster. “Squeeze one of ‘em for me,” he says and he steps back inside and he closes the door.

Stubby Pringle is alone out there in the darkening dusk, alone with flop-eared ewe-necked cat-hipped roan that can go to the last trumpet call under him and with cold of wicked winter wind around him and with twenty-seven miles of snow-dumped distance ahead of him. "Wahoo!" he yells. "Skip to my Loo!" he shouts. "Do-si-do and round about!"

[For the rest of the story, please follow this link]



If you have a young friend or family member wanting to study markets, they might look at the power markets. They are so large, they are fascinating and no single person can master them.

Consider this:

The market's primary commodity moves at the speed of light. Unlike grains, it cannot be stored. Unlike natural gas, it must be consumed within femtoseconds of being produced (that is a split second).

On the production end, the commodity's financial attributes are entirely dependent on other commodities, most of which are uncorrelated.

On the delivery end, the commodity's financial attributes become dependent on another commodity, which is also uncorrelated. That commodity is wires, which is also auctioned at market.

Once the market is mastered (good luck with that), the student learns it is only one of ten markets operating in North America. Then the question becomes, how does the commodity move between and among markets? The issues of market seams and pancaking suddenly become relevant.

Opportunities are growing:

Power markets are at the beginning stages of development. Not only are power markets growing in North America, they are growing in Europe and Asia. China has power markets. Southeast Asia is starting a new market.

Minds are open. Opportunities abound. Careers are just starting. There are many ideas and concepts to be considered. The issues range from public policy to information technology. There has to be over 100 dissertations waiting to be written.

One interesting person for potential graduate students to consider is William Hogan. His name frequently pops up in FERC, DOE and market meetings. There are others.

The concern:

There are people with good intentions who could ruin the markets. Many want to bypass the markets by claiming the need be the exception. Their arguments range from national security, to reliability, to preserving jobs, to stranded assets to who knows what. Unfortunately, some of those arguments could have traction with policymakers.

Before anyone goes there, this is a bipartisan concern. Most in the industry love free markets - for you. They just want to preserve their cost-plus assets.

The list:

This is just a thought. While I am not personally qualified, perhaps the chair and list members might consider offering their insights. This is a good time. Policymakers are looking for thoughtful people to help them develop and expand markets.

Even if there is not personal interest, if you hear of young economists looking for careers, they might be interested in power markets. They don't need engineering. They need to understand money and markets.



 To My Fellow Gold Advocates,

Objectivist and Forbes contributor Harry Binswanger has a new article which explains gold's spiritual value.

Gold is not "a barbarous relic" (Keynes) or "filthy lucre" (preachers) but an objective, esthetic value whose meaning has roots in the nature of how our minds work and the need for incorruptible moral integrity. Gold is the symbol of remaining pure and true. Which is why wedding bands are made of gold.

Gold jewelry is fully as objective a value as utilitarian goods, such as bread or automobiles. Those goods provide value by being consumed-by being used up. You eat bread and it is gone. You drive a car and it wears out. Gold is almost unique in being an Unconsummable Consumable. Like Aristotle's Unmoved Mover, gold provides value without being itself affected.

Gold is the ultimate expression of mind-body integration. It is the symbol of purely, "crassly" material value because it is beautiful-i.e., because it is a spiritual value.

Here is the article: "In Praise of Gold"

Kind regards,

Ed Thompson

Victor Niederhoffer writes: 

This article seems more sensible about gold than bitcoin's threat.

Jim Sogi writes:

The heft and sheen of a $1300 gold coin is beautiful. The idea that it does not require the full faith and credit of any government is also beautiful.



 Here am I in New York City, no time for longer philosophy right now, but quick observations. After talking to friends in recent days, left and right, all ages, NY TX IL …. I'm not sure the real problem is left vs right or statists vs libertarians or socialists vs capitalists, etc.

Because all those worldviews have deeper roots…

Here is what strikes me as possibly the REAL issues…

1. Emotionally driven public policy. (Holy Moses, there is a homeless man, somebody give him some money now! Raise the minimum wage! Ok, problem solved!)

2. A public that is illiterate in arithmetic (not math) and afraid of it, of data, of statistics.

3. A public with no education in economics, even the most basic understanding of how prices clear markets and how that is just as beautiful as dinosaurs and butterflies.

Of course I am saying it's a failure of our k-12 education system.

Its not socialist teachers…I see little evidence of that though of course some exist but I don't know that the students believe them….it's teachers and students piling up over the years who were never shown these things (analysis, rationality, economics) in the first place. It's a problem of curriculum balance. Every grade schooler probably knows how to recycle and figure their carbon footprint. And how to "give back."

I also think there is a real gender gap in these items, especially the emotion point for many women voters. Perhaps not unlike the gender gap in science and technology.

Or something along those lines…you get my drift….


Gary Hoover


Chairman/CEO Bigwig Games, Inc. Play Hard and Prosper

Chris Tucker writes: 

Here is a video of the talk Gary gave at the Junto, almost verbatim.

Richard Owen writes:

Mr Hoover should add John Lewis in the UK to his list of impressive department store business models. Great talk.

anonymous writes: 

I also enjoyed Gary's talk very much. Seems the historical mechanism for success in retailing has been increasing quality while reducing price. I have been wondering about this lately with respect to healthcare. Along the lines of retailing, in the wake of the recession my patients seem more sensitive to cost, and they don't want to be "nickled and dimed".

Over recent years in my periodontal practice, I have reduced fees, increased service, and do many more things without charging. Despite loss in local employment (Amgen layoffs, etc) and increasing competition, we've stayed quite busy. However like some of the retailers, our profits are down. Presumably by keeping fees low we have preserved market share.Some of my nearby colleagues take a different approach. Since their busyness and revenues are down, they raised fees - as if this will compensate for lack of demand. They are still not busy, but they do have patient flow and stay in business.

Recently I did some grocery shopping at a local supermarket I usually stay away from, which is a small chain known for high prices. One bag with a few items (including Chilean Sea Bass) cost $126, and I vowed not to come back. While in the market I saw several patients from my practice who looked very happy to be shopping there. Like many in our community, these were affluent people who don't need to budget for groceries. Perhaps they obtain status by paying extra to go to an expensive fancy grocery? The exact value of health care services is much harder for the consumer to judge than groceries. Perhaps my high priced colleagues are aiming for this demographic, and are willing to sacrifice market share. And if so, status-spending is a different twist to supply/demand.

Gary Rogan writes: 

 It is well known in high-end retailing (or actually retailing of any "prestige" products) that raising prices often increases sales. The function of prices is to communicate information about quality in that world. How can any self-respecting "prestige" buyer think highly either of themselves or the product if it's priced like cheap junk? I don't like people who think better about themselves when they pay more, but that doesn't change the reality of what sells at the high end. 

Rocky Humbert adds: 

Shopping in our local over-priced "gourmet" market last weekend, I noticed some brilliant-looking Chilean Sea Bass for $29/pound. I didn't buy any. I noticed an in-store special for Starkist Tuna for $0.99/can. I bought 15 cans. What are the lessons here?

1. It is arrogant and foolhardy to make judgments about other market participants and their motivations. The market and the economy works because participants have different preferences, values, and information. The vendor wants to know, and big corporations spends billions to shape the preferences. But they really don't and can't without unintended consequences. I didn't buy the Sea Bass because I was making a Paella. I bought the tuna because one of our cats is on a high-protein diet and at 0.99/can, the tuna is substantially less expensive than gourmet high-protein cat food!

2. Shaping customer preferences is not the same as offering a product that consumers want in a shopping environment that consumers enjoy. The couponization of consumers and the recent experiences of JCP and Sears illustrate this point well. My Lexus dealer offers an oil change for $50 whereas the Jiffy Lube charges $30. Lexus can take 3x as long as Jiffy Lube. Where do I go? Surprise! I go to the Lexus dealer because the waiting area is more comfortable, they treat me better, they have "free" coffee and danish; they give me a "free" car wash; I can do work while waiting so it's productive; and it's a generally more "enjoyable" experience. What is my enjoyment worth? Do the math. Are other people there because they are making a statement about "being seen" at the Jiffy Lube? Who knows. Product differentiation occurs at many different levels. But overall, it's rational and derives from utility curves.

3. I find that many people who have missed this stock rally (and I wish I had been more aggressive) rationalize the opportunity cost by thinking that the people who participated are "wrong". The rally has been "engineered" by the Fed. The long term fundamentals don't support the expectations. It's going to end badly. The Nikkei didn't go anywhere for X years so the S&P will do the same. Blah blah blah. I think the real story and lesson is that making value judgments about other people is not a productive exercise. Not in business. Not in the markets. And not in life.

Gary Rogan adds: 

 My favorite example of a case where judging motivation is easy comes from one of the behaviorist books I've read where a lady who owned a boutique in New Mexico had a display case of handcrafted Indian jewelry that wasn't selling at all. Once, preparing to go out of town she left a not to her assistant instructing her to mark down the jewelry with a suggested percentage. Due to her poor handwriting, the merchandise was substantially marked up instead of down, and to the owner's surprise almost completely sold out in just a few days. I will arrogantly (but not foolhardily) assume that the marginal utility of the jewelry came from the high price and not the suddenly changed quality or usefulness.

Rocky Humbert responds: 

Mr. Rogan, we both agree that there are many such examples of what you describe. Brands and pricing and intangibles matter. However, the academics often argue that these consumer preferences demonstrate irrational or gullible or other behaviors that are not "efficient" or not "optimal." My point is that the underlying supposition that "optimal" or "efficient" is a universally accepted, static, independent variable, is questionable at best, and misleading at worst. . If you voluntarily partake in an activity, you are getting "value" from it. If the activity is transactional and involves a seller and buyer, then both participants are getting "value" from the activity — or they would not engage in it. To the extent that the transaction is "zero sum" financially does not mean that some other intangible value is not being created. An observer might just not understand what the value is. It's all about personal utility curves.

An observer watching me decline the $29/lb Chilean Sea Bass and buying 15 cans of $.99 tuna would reach a very different conclusion than the truth. An observer wondering why any particular individual decides to shop at Whole Foods, Trader Joes, or the local A&P will similarly come up with questionable conclusions. (I'll bet that the person who started this whole thread doesn't shop for food regularly! Spending 60-90 minutes every week in a supermarket can be a huge chore and one of the attractions of Whole Foods is its environment and presentation.) Sure you can buy the same diamond on 47th street as at Tiffany's for a fraction of the cost. Is it the status of the blue box? Or is it the certainty and comfort of the buying experience? Or is it laziness? Or something entirely else. Countless examples of this.

Gary Hoover writes: 

 The books about marketing luxury and super luxury goods list many techniques which are the opposite of standard marketing wisdom for mainstream products. These include creating product shortages, ignoring negative reviews and keeping them off your website because you only want to talk to your advocates, raising prices to create status appeal etc.

While a walk down Fifth Avenue or other luxury districts worldwide might make you think otherwise, luxury goods are still a relatively small part of the economy. Neither BMW nor Daimler-Benz are in the world's top ten vehicle makers in units, though their dollar revenues rank them higher (especially due to Daimler's big truck and bus operations).

But the luxe segment has grown dramatically in recent years.

Nevertheless, the real dollar volume rests, like the last hundred years, in serving the huge and growing global middle class. Those companies have to pay attention to "old school" rules like price elasticity and great product availability and distribution.

In walking stores in New York the last few days, I was intrigued by the volume done by Swiss Chocolatier Lindt, with multiple Fifth Ave locations, who now drives their product through mass merchandising outlets like the drugstore chain, apparently without ruining product quality or perceptions thereof.

Amanda K comments: 

 Gary (aka Free Market Liberal),

As a female libertarian who has worked in the tech field for years, I definitely see the gender gap in both areas. I suspect that there is a higher percentage of people in tech that are libertarian-minded than other fields. Is it because they are more logical? Because they spend a disproportionate amount of time surfing the web for good ideas? I don't know. Even my female scientist friends reject small government… and they are supposed to be so logical! Of course, they are paid by the government so they may be a bit biased:)

Warning – Politically Incorrect Paragraph (or PIP) below:

I suspect that many of my girlfriends voted for Obama because he is handsome and youngish, they are more easily guilted into voting based on ethnicity, it's cool to vote Obama, to vote against him is to admit that they were wrong the first time around, and Mitt Romney is a plastic man – there is nothing to latch onto. In other words, they vote for emotional reasons.

There may be another issue in addition to the three issues you outlined:

4) A public that has abandoned basic moral principles. For example, if everyone recognized that it is wrong to steal, then it would be obvious that asking the government to steal in order to give money to the homeless guy is also immoral. Schools would be a symptom, not a cause of this problem.



P.S. – ENFPs and INTJs are the most likely to be libertarian with 5% chance each. The only letter in common is N: Intuition. One of the Myers Briggs websites contains the following statement as part of the description of an N: Sometimes I think so much about new possibilities that I never look at how to make them a reality. Sound like any libertarians you know? ;-)



It just occurred to me that, with a profit of 36 bps, this trade reminds me of the Fed's QE, where the banks take the money and then give it back and get paid on the balance. I wonder where the "approx" is in the Fed's fine print?



 A silver lining in detroit's bankruptcy?

In the short run, a recent ruling in the Detroit bankruptcy is a win for muni bond investors and a loss for city employees. The longer-run consequences could make both sides better off.

Stefan Jovanovich writes:

When my Dad was doing the circuit as a textbook salesman in the late 1940s, he managed to visit every one of the lower 48 states — all (except for New Jersey and Connecticut and our home state of New York) by train. He once told me that those travels were what gave him the time to think about schools and school book publishing and the changes that could be made.

On his trips to Michigan Dad would visit our relatives in the Detroit area — his mother's brothers and sister and their children. Three of Dad's cousins worked at Dodge Main; and one of them was a union rep. Dad, who had never worked with his hands in life but had been raised by Wobblies, was a dedicated New Deal Democrat; so, of course, were his cousins.

On one visit Jerzy, the cousin who was the union representative, invited Dad to come visit him at the plant. Jerzy had his own window office on the 3rd floor of Assembly Building; the office also had an interior window with venetian blinds that looked out on a section of the line. During his visit Dad, showing the usual Jovanovich tact, asked what the blinds were for. "Privacy." And, what was the need for privacy? Dad's cousin, like all good politicians, knew that some things needed to be kept private. In his case it was the pinochle game that the cousin, other shop stewards and the Dodge assistant plant managers in charge of labor relations played after lunch each day.

I can believe that many and probably most of the "city employees" in Detroit were unaware of the fiscal impossibility of any business or government being able to pay the defined benefits that they were promised. The people working the line at Dodge Main, including Dad's two other cousins, were blissfully unaware of the pinochle game.



To: Alan Millhone and GM Rich Beckwith 

Molo oldman and dr. b: Today i am watching tv, the memorial service of tata mandela, and Obama is here. You know oldman tata mandela used to win checker tournament in robben island prison and i was going to invite him to watch the match in february and as humble as he was, he would have come. He was asked what kept him motivated when he was in prison for 27 years and he said "i knew i would come out one day". Lubabalo



 Deep in Baja five years ago, an exhausted, supply-less hiker was picked up by a crystal hound. The Senior took me hunting with him at certain ledges on the sides of washes showing former black volcanic activity. He taught me to spot a round dome rock that was as ugly as any other, except when you tapped on it. On knuckle rapping, if it made a hollow sound… We danced around the rock yelling, 'home run!'

It was worth a fortune, in Mexican terms; a 3' crystal sold for $80 (a week's salary). Continuing the hunt two days a week for a month, I helped him lug dozens of 30-120 lb. crystals up and into the pickup, and for the three hour drive north to San Felipe in Baja. A thief at night began stealing them, so I slept in a nearby abandoned trailer until they could be moved. On weekends, we sold them at the tourist swap meet and business was good, especially after I started putting desert cactus in the larger crystals making them planters. Others were fashioned into fountains.



 Hi Victor,

I'm wondering if you have studied bitcoin at all? Or do you only consider a market once its very liquid?

Victor Niederhoffer writes: 

Seems ready to implode.

Barry Gitarts writes: 

Based on what?

Victor Niederhoffer writes: 

Crooks are using it.

Barry Gitarts writes: 

Isn't that the case with all money?

Victor Niederhoffer writes: 

It will be shut down because it competes with things the government like to monopolize.

Barry Gitarts replies:

That was a fear earlier, however the senators, agency heads and Bernanke all seem to think it serves a purpose and are afraid to stifle the innovation:

Ultimately isn't the government just run by short sighted politicians who just want to be reelected? Any politician who stands up against bitcoin or any internet application stands the risk of being "Ubered" (see this article).

Bitcoin does seem to be a disruptor for traditional banking, but so was the internet for the post office, newspapers, tv and retail, that only grew the internet not kill it.

This reminds me of a half joking quote by Russian entrepreneur: "If you create a business that disrupts big business in Russia they will kill you, in America they buy your business."

Victor Niederhoffer writes:

I remember Peter Theil the founder of PayPal
saying that if they knew what he was doing, they would have shut him
down. As it is, only the Lousiana Attorney General was fast enough out
of the box to try to shut Paypal down. 

Richard Owen writes: 

Like all good bubbles, there is a legitimate story at hand. Even with Tulips there was a valid story of rarity that then seemed as psychologically permanent as does now the rarity and desirability of a Van Gogh.

Bitcoin is a bit like the currency of an island entrepot whose domestic economy is tiny and whose export base is mainly composed of criminality and laundering and for which the currency of the island is disproportionately held as wealth of a group of island oligarchs [I suspect he has sold some and someone might correct, but it appeared superficially that the founder's bitcoin may have a billion plus market value?]. Many accidental paper fortunes are held by bitcoin miners: will they stand passive in the face of volatility?

Of the three social gatherings I attended Weds to Sat of last week, all featured discussion of bitcoin and at one - of the type featuring participants who, to listen to their narrative over time, would appear as genius and never to have taken a loss - the non-documented boastage of coups won and utmost sagacity shown in the BTC market. Mr Thiel is smart: he is financing the pick and shovel providers, not running a large position in coin.

So yes, why not $10k BTC, but also, why?

Henrik Andersson writes: 

 Richard, this is clearly the mainstream/consensus view - bubble. The contrarian trade is not always right (far from it), but was is clear is that many commentators don't understand the many faces of bitcoin. What is also clear is that a good investment decision (long term, not trading) can be done on the premise that the highest probability is that the ultimate value is zero. The question is what probability do you put to the USD 10k scenario. "Nothing is more powerful than an idea whose time has come" Victor Hugo.

Richard Owen writes: 

 You make very good points, and I am sure you know all sides of the argument well. If you are long bitcoins I hope very much it is for a large and successful profit. Please manage your risk well. I am not smart enough to assign a probability to $10k. The thoughts are offered without prejudice and are an honest sampling of my experiences as have occurred. I have no position either way and should be distrusted or discredited on that basis. There may be commentary that it is a bubble and my thoughts or analogies may be derivative and unoriginal. The price is possibly also a form of consensus and that is that each BTC is worth a bunch of money, and increasing. As many have gone bankrupt shorting bubbles as being long. 

anonymous writes:

I recall the great Jim Rogers saying that Hysteria is the first thing to look for, but one still needs to pinpoint a reason to go against it. The kind of examples he gives are buying stocks in country's whose stock markets have been closed, buying tea plantations when the price of tea has plummeted etc. Bitcoin? Might just have to let it play its course. I think its a bad joke, but even I must admit it did survive the 50% drop recently before this latest headline grabbing advance. Anyway, this is just my two cents and I have no interest in even attempting to try and speculate with or against it. 

Jan Peter-Jannsen writes: 

Bitcoin as a technology is superb. Bitcoin as a currency is questionable. Bitcoin as an investment is a bad bet.

A great strength of Bitcoin is that it is open source. Any experts can validate the code, and so far there seems to be no flaws. The crypto-curency works!

But cannot open source also be a great weakness? Anyone can copy the code, improve it, and make an even better alternative to Bitcoin. Is there any reason to stick to Bitcoin if and when that happens? Bitcoin is volatile, no prices are quoted in Bitcoins and very few have both their income and expenses in it. Those who use Bitcoin need to exchange to and from other currencies, so why not switch to another digital currency?

In terms of investment I believe it is a bubble. The supply is very low; many coins have been lost and the majority of coins are probably in the hands of the founders. I guess they are selling at the moment, but at a low enough speed to keep the bubble growing. In terms of demand; everyone talks about it these days.

In the coming years I predict new payment systems to arise based on technology pioneered by Bitcoin. But Bitcoin itself will soon be forgotten.



 It's the international year of statistics, and each month here at SAS we celebrate a different statistician. For December it is Karl Pearson. This was posted on our internal web this morning, I thought this might be a nice posting for the DailySpec.

Hope you are all well, and happy holidays.

Celebrating statisticians: Karl Pearson

In celebration of the International Year of Statistics, the final statistician we celebrate is Karl Pearson. His work in the late 19th and early 20th centuries laid the structure of mathematical statistics.

Born March 27, 1857, in London, England, Pearson was raised in an upper-middle class family. He studied mathematics from 1876-1879 at King's College, Cambridge, graduating as the third-ranked among those receiving a degree. This scholarly success allowed Pearson to pursue further studies, which were very diverse in nature, and not suggestive of his future as one of the founding fathers of statistics. These included physics, physiology, German literature (he was actually offered a post in the German Department of Cambridge University), and socialism.

Following in the footsteps of his father, he studied the law and was called to the Bar in 1882, but he never practiced. Even as a Professor of Applied Mathematics at University College London starting from 1884 through 1890, Pearson was highly respected in a variety of areas, but had not yet moved into the study of statistics. This changed in 1891 upon meeting Walter Frank Raphael Weldon, a Professor of Zoology at University College London. Weldon also introduced Pearson to Francis Galton, who was interested in heredity and eugenics through the introductions of ideas of correlation and regression. With this, Pearson now wrote papers on heredity and evolution, leading to advancements in the correlation coefficient, introducing the chi-squared test and early ideas regarding p-value and ideas on hypothesis testing. The Pearson system of curves meant to describe non-normal curves served as the basis for continuous probability functions, and laid out ideas of principal component analysis

Pearson, Weldon and Galton co-founded the Statistical journal Biometrika in 1901, which still remains a top journal for statistical theory. His book, The Grammar of Science (1892), with Pearson's own ideas on relativity, was read by a young Albert Einstein. Pearson was elected a Fellow of the Royal Society in 1896, awarded the Darwin medal in 1898, and awarded an honorary LLD (a doctorate-level academic degree in law) from the University of St. Andrews and a DSc from University of London. Pearson was offered the Officer of the Most Excellent Order of the British Empire (OBE) in 1920 and knighthood in 1935, refusing both due to politics (he had very strong views towards both socialism and eugenics). Karl Pearson's son, Egon S. Pearson, was also a prominent statistician (Neyman-Pearson Lemma) and eventually took over his father's position at University College London and as editor of Biometrika. It seems fitting that after starting out with R.A. Fisher as the first statistician celebrated for the International Year of Statistics, we end with Karl Pearson.

There was a long and public feud between Pearson and Fisher over each other's views. This lasted even beyond Pearson's death in 1936 (see Edwards, 1994, for a fascinating read) when Fisher was asked to write about Pearson's life for the Dictionary of National Biography, an entry that was subsequently not used. Perhaps some of Pearson's achievements are overshadowed in that the study of statistics started moving towards maximum likelihood estimation and hypothesis testing at the end of Pearson's career. However, from the website "Earliest Known Uses of Some of the Words of Mathematics," consider some of the terminology attributed to Pearson (though he was not necessarily the originator of the idea itself):

* Standard deviation
* P-value
* Histogram
* Contingency table
* Spurious correlation
* Random walk
* Chi-square
* Goodness of Fit
* Hetero- and homoscedasticity
* Pearson's coefficient of correlation (r)
* Method of Moments
* Mode
* Skewness
* Kurtosis

On examining this list, I have to appreciate how many of these terms have become ingrained into our statistical vocabulary without giving thought to their origins. As the International Year of Statistics draws to a close, we celebrate Pearson, and give thanks to his contributions to the field.



Should junior buy (and try to hold) at new lows or new highs?

Checking SP500 monthly closes 1955-present, there were 9 closes which were 5-year lows. 5-year highs occurred 173 times.

Holding each buy to the present (SP at 1807), the average return of each buy (not including dividends) was:

5YLo (9): 1152.0% 5YHi (173): 1152.8%

Evidently waiting for rare 5Y lows meant missing out on numerous entries when the market was up but destined to go up further

Waiting for Godot- Lucky Speech



BTC, from anonymous

November 28, 2013 | Leave a Comment

 The Bitcoin market has to be one of the best markets to pyramid i.e. highest possible auto-correlation.

The difference being that you can't be stopped out. No leverage, just hard cash.

Reminds one of Chair's wealth creation in the Silver market.



 One thing I notice in unsophisticated investor-traders such as myself is that the positions one takes are usually supported by an unspoken prediction: "I will know when it is a good time to sell this and I will be able to do so."

Gary Rogan writes: 

The beauty of really long-term investing is that you don't have to have this unspoken prediction.

Victor Niederhoffer writes: 

And to add to Mr. Rogan's "beauty", you take full advantage of the most marvelous aspect of arithmetic, the power of compounding. And furthermore, you reduce to a minimum the vig from flexionic and top feeder activity.

Anatoly Veltman writes: 

Can't dispute all of the beauty. The problem is that only a narrow group is willing to commit: those who set aside slow money. Most suffer from the "hot money" bug: how to make money work its hardest. Willing for the money to die trying.

Gary Rogan writes: 

Very poetically put. It also illustrates the following point: in any kind of investing or trading the problems and solutions come in two flavors, namely those of competence and those of psychology. Even in long-term investing you still have to decide what to buy and when to buy it, so it's not immune from either category.

S. Humbert writes: 

Buy and Hold (for the medium term) is not, in my view, enough to earn a living from. Please let me explain before you fry my IP address.

In the past 30 odd years alone, even the unleveraged long only holder of US stocks has had many barren years (and multi year) periods when he lost or didn't make.

In my usual, inelegant fashion, what I am saying is that if you trade for a living — for yourself (i.e. at the sharp end of the game) then buy and hold alone doesn't cut it. (Unless you start in 1982 or 2009 or some other retrospectively chosen low). This does not dilute the effectiveness of the strategy, I'm just saying an individual's perspective and starting point dictate what weight one should give to the passive, low vigorish strategies.

Frankly, a low single digit return with a very poor Sharpe Ratio over the lady two decades LESS retail friction, well… I certainly couldn't have lived off that taking into account my extremely modest circumstances when I started my speculative business in 1990. Anyway — it's at all time highs now right!

Ralph Vince writes: 

Worse–you're still going to touch that money. You're going to take a morsel, or add a morsel, you can't sit there and forget about it.

Now you're on the curve.

Now, if you are 100% invested, you are completely doomed, and it isn't a matter of if.



 Among the fascinating anecdotes in Art Shay's fascinating book Album For an Age, which I am reading with delight, is this description of the way they bought companies in Chicago in the 1970s. Nat Cummings of Consolidated and Henry Crown of General Dynamics and Hilton had a regular gin game at the Drake every Sunday evening. An entrepreneur with a major paint company, Kirsch asked Crown if he could present him with his game plan and financials with a view to a purchase. Crown said okay, meet me at The Drake, but be brief because I don't wish to interrupt the game. It would be disrespectful. Kirsch spoke for 5 or 10 minutes to Crown giving him the lowdown and the price. Crown said, "I'm afraid that the asking price is too high. Good luck to you. I'll discard the 9 of spades." Without interrupting the game Cummings said, "young man, I like what you said. I"ll buy your company. Hendry, how many points did I leave you with on that gin."

I wrote to Art: "My only regret is that I did not know you and your wife in previous years. I am an avid collector of books and letters and would have had so much to talk about with your family. And what a family it was."

Art replied: 

Likewise. Anyone who sends Bo to another continent to make business decisions should be worth meeting. It's still possible. I have 2 shows opening in Chicago–BUT have a nice show of celebrity pictures opening in NYC March 6 at the Morrison Hotel Gallery, 136 Prince Street in Soho. I'll be there. 

I'm 91, but am resolutely planning to do a new bio based on my 150 or so blogs on Chicagoist.com vault of Art Shay. I'm syndicated in 14 US cities, plus Toronto, Shanghai and London. Impetus came from a piece I did titled "Sleeping With Elizabeth Taylor and other perks of the photo trade." It got well over 50,000 hits. Look it up.



 Most of the people who come in my store say, "Glass? I would break it within an hour."

Did their mommies slap their hands once too often? You would think that we lived in a nation of klutzes, so thoroughly have these people been indoctrinated to use plastic.

The things I sell are borosilicate glass, an exceptionally strong and practical formulation fired at extremely high temperatures. Think Pyrex, Duralex. Sadly, verbal assurances fail to convince.

Today, I tried a new tack. "Drop it," I suggested to the customer. He hesitated. I shrugged. He dropped it.

I really didn't know what would happen. I had knocked all the bottles off a display table a couple of days ago without one of them breaking, but he was holding the bottle a foot higher. When he came in, I was in the middle of planning just such an experiment for after hours, with dustpan at the ready.

He dropped it. The glass survived.

"That was very convincing," he said, and paid.

Convinced of the power of demonstration, I sold a GlassFlask to the next people who walked in by pouring boiling hot water over a tea flower and offering them a taste in a Dixie cup.

It is bitterly cold today, and some people come in just for the Kleenex on the checkout counter.



 There is a serious game of cricket happening at the moment between England and Australia. A test match which goes for 5 days. In that 5 days fortunes are made and lost and reversed on a daily basis.

The comment section of most papers following the action gives one a good indication of herd mentality. If this is the same representation of those trading markets news and announcements, then it is little wonder most are caught off guard. A day ago it was all pro England comments and the Aussies were toast, and today it's…. "Doomed, we're all doomed, I tell you. Well played Australia. England haven't a hope in hell of saving this Test."



 If you clicked on this email expecting to find my latest prescient thoughts on Apple, you will be disappointed.

Rather, I'm looking for some inexpensively-valued stocks in iNDIA and iNDONESIA. (I know, I know, Russia is supposedly cheap too.)

I looked at the big caps in the India ETF's and they don't look cheap for a country that is suffering from the early stages of a capital flight. And I don't trust my Bloomberg for finding diamonds in Chanakyapuri.

Does anyone have some favorites? As Sergeant Joe Friday would say, "just the tickers, Ma'am

(Don't be shy. I only harass Mr. Rogan when his stocks go down.)

Many thanks.

Sushil Kedia writes: 

Define a CIX b'berg as: CNX Nifty Index / CNX500 Index. That would be a ratio of Largest 50 stocks index and the broader 500 stocks index.

A severe flight into safety has played out. Looks like the penultimate round. Obviously the small and mid caps have had visited 10 year lows, more than half of the 4500 listed stocks trade at P/B <1 and about one fourths of the stocks are at a P/E <10.

Elections are due in the first half next year for the Union Govt. Important state elections in 5 states results on 8th Dec.

New high in large cap index got everyone's granny to orgasm. Market closed lower last 5 days.

Flight into safety brings a market to all time highs, with no breadth so to say. The severe divergence in small caps and mid caps produced a jumbo rally in them briging them to be now "overbought".

While the hoi polloi rejoices both the new high trip in the prior weeks and the sizzling rally in smaller stocks, there are heavy signs of distribution. This market is right now hollow.

Flight into safety… hmm… a final scramble of a flight away from safety, i.e. no place to hide remains due…

Well, if this time its different is an adage everyone heard all their lives, I am watching outside of India, while sitting right inside here. Will emerging market currencies sell off? Will this whole world sell off ONLY after FED actually tapers off and there would be no reward to those who will anticipate and speculate?

Cheap… without some reason? The obvious may have first become unobvious, yet once more.

Jeff Rollert writes: 

Bristol Myers gas had this strategy for years. They're basically banks now.



$WFM - Whole Foods posted its first material slowdown in sales post the recession - Credit Suisse

Richard Owen writes:

YE reporting is going to be a minefield of canaryism: intra-shutdown slowdown vs. Th-Th-Th-Th-Th-… That's all, folks.



 I recently spoke with two doctor friends (an independent study with n=2) about their relationship with the government in their medical practice, specifically in Medicare. Both were quite willing to get paid a fraction of the normal cost to treat their medicare patients or not get paid at all. This they could shoulder. One recounted that late in the year, around this time, state medicare funds completely dry up and they get almost nothing in pay from medicare. What they could not abide however, was government oversight/compliance in the name of fraud prevention.

Now that all the easy targets and hucksters in FL have been rounded up, government needs to find other sources of revenue. So they go after legitimate doctors. One received a $300k fine for minor offenses in not checking certain boxes on certain forms. The other was reprimanded and fined for working pro bono on some patients and not others. Apparently he was not qualified to make a determination over who he could treat for free. The government fraud receipts have gone up from a few $100 million several years ago, to over a billion now and is a part of funding ACA. With so much focus on demand (ACA, affordable this or that), very little consideration is given to supply. Incentives for doctors are largely ignored. They predicted fewer hospitals staffed with fewer doctors. On a positive note maybe Walgreens or Rite Aid will fill in the gaps with NP's and there will be a positive certainly unintended consequence.



Note: This was a brilliant article by Ken. It should be read by all market people, all athletes, and all others. I'd like to retain Ken to teach my children a few things. I wish I knew and practiced all these things. vic

"Feet-work" for Racquetball Court Movement

Ken Woodfin

How you move on the court greatly affects how you play because ultimately when you aren't there you can't create your competitor's despair.

First, here are movement suggestions for your feet, or "feet-work", and how to build these skills. Second, we'll progress to tactical feet-work and how using certain feet-work skills will raise your game in specific match situations.

I. Feet-work Skills

• Stay Active

Keep your feet alive. And begin from the middle! Here we start with simple principles and then we cover other effective and innovative movement skills.

- Keep moving

When you close in on a ball, take small adjustment steps as you read the ball. Keep your feet light and moving so you may adapt to the bounce of the ball. Play the ball instead of allowing it to play you. Think of it as when your feet stop moving your brain may stop, too! So keep your feet alive, your mind open, and then react and stay active right up until you can just about reach out and pluck the ball out of the midair. Then set your back foot, wind up as you walk into your shot and stroke confidently.

- Go Middle

After you stroke the ball make it *your* tendency consistently to move middle. Even in a slower paced rally, like a nick lob game or ceiling ball exchange, simply *take a walk* back middle. That walk gets you in prime coverage position. When you stay on the fringes of the court, such as against the back wall, up against a sidewall, or locked in the service box after serving, you leave yourself way out of position. Take a more proactive, tactical approach and seek control of the middle. From the middle you may move where you see the ball going or you may move to allow the required straight and crosscourt shots owed your competitor. Now let's explore faster ways to move about the court and always return to the middle.

• Athletic Body Position

How tall are you? Play a little bit shorter than your full height. Why? Know that as soon as you stand up too tall, you have to drop down to move, burning up your moving time. Also, when you bend down too low, you first have to rise up a little to move most efficiently. Slightly bend at the waist. Flex your knees and ankles. That slight body coil spring-loads your whole frame to be ready to move about the court more easily and smoothly.

• Be "ambi-footress" - Start on Either Foot

Choose to avoid being, for instance, just right footed, like you may be right-handed or right eye dominant. Learn to start out equally well off either foot and you'll be able to move about the court even more efficiently and quickly. You can teach yourself to be "ambi-footress". Place your heels flat up against the back wall. Step off aggressively with one foot. Sprint off the wall for a short distance. Return. Switch to the other foot. This exercise is done for two reasons. One, by learning to take shorts sprints off the wall, you train yourself to eliminate a possible false step backwards, while you step off strongly with the lead foot to begin your sprint. That forward only move makes you faster because you don't start going forward by first going backwards. Two, by switching feet and drilling with both, you teach yourself to step out equally well with either foot as you move about the court. That duality makes you a more versatile, efficient mover and harder to back into a corner.

• How to Shuffle Step

Most players are very familiar with the shuttle step as a form of court movement. Here is a short primer: Start near back wall facing either sidewall. Drop down a little height-wise and slide step sideways away from the wall using the foot furthest from the wall. To complete a shuffle step, slide the trail foot sideways, bringing it up next to the first landing foot before you continue your sideways shuffle.

• Power Down to Stop Shuffle Step

As you reach the service line or first line, put on the brakes by bending your lead knee and then flex your trail knee to lower your body. This knee work gracefully stops your forward momentum. The braking move lowers you center of gravity. Bending your knees uses their natural shock absorption to slow down your body when moving about the court. The ability to stop puts you in better, lower position to: (1) perform a balance stroke, or; (2) "freeze" to cover as your competitor strokes, or; (3) bolt to take off in another direction. How do you *bolt* best?

• Why Use Crossover Steps?

The crossover step gobbles up ground from the get-go. To teach yourself to crossover, again do the shuffle step from the back wall toward the service line. When you approach the first line, again put on the brakes by bending the outside leg and then flex the trailing leg. The control method first: As soon as you stop, push off the lead, outside leg and step off in the opposite direction with the trailing leg, the one furthest from the line. Take off in a sprint towards the back wall and slow down well before you reach the wall. That's the SLOW way! Now let's learn the faster, crossover way.

- Crossover As You Learn

To incorporate the crossover, repeat what you did before by shuffling to the service line. This time, when you get to first line, bend that outside, lead knee, then inside, trail knee, brake, and push back as you pivot off both feet (on the pads behind the toes). Then stay extra low as you turn your hips and shoulders and crossover aggressively with the outside, trail leg. Make it a big crossover step. Drive your arms, even pumping with the one holding your racquet, as you dash your very best to the back court. This big crossover step simply makes you faster. The crossover step works for several court coverage situations, such as …

- Dash Forward

When you're stuck in the back court or right up against the back wall and you can see the competitor placing a low kill in the front court or when you see a high ball about to fly way off the back wall, use your jets to dash forward. How: First step crossover into a low, arm pumping all out sprint. Stay low and run quietly or avoid stomping. On the way decide which shot you should hit? Take off running with the ball making sure the ball is away from you. If the ball is flying off the back wall, keep it in the corner of your eye to avoid it running up your back. Use the racquet in your hand and pump both arms to run to where you think you can intersect with the ball while letting it drop extra loooooow.

- Play Keep-away vs Always Drop Shooting

Front court rundown shot tip: get up sideways to the ball and selectively use soft drop shots against a rapidly closing competitor. Be ready to snap off an angled pass toward the least covered back corner. Only when the competitor checks up and backs off to camp on your pass should you hit a soft, disguised dropper.

• Just Jump

An advanced form of the shuffle step is a flick of the feet into a small leap or jump. The jump is used to begin your move or jump to a stop. The player jumps back, sideways or forwards off both feet at the same time. The jump is used to instantaneously adjust your positioning to: (1) clear for your competitor; (2) approach the ball, or; (3) start your run. The landing of the jump is ideally soft and springy, ready for more movement. Still lots of little adjustment steps remain to get in the best position to cover or to flow into a ball that's still reacting to walls or spin. Both an analogy and a metaphor may help explain the ease of the jump and the importance of still moving after landing.

- Leap to Start Analogy

Watch basketball players standing along the free throw lane. After a made fee throw the players do a little rising up leap to get their engine running before they head down court to switch ends. That leap on court can be a little more plyometric or a rapid leap to move over some distance. Learn to emulate a b-ball player by getting yourself in motion.

Mighty Mouse Swoosh Metaphor

Oftentimes players land like Mighty Mouse just even with the ball as if to say, "Here I am to save the day!" But really Might Mouse has lots more still to do. Landing a little behind contact allows for momentum to be built up in the post landings stroke. Coiling back and then stepping into the ball or at least moving forward into the ball is best done with little adjustment steps, then weight back and through, and timed body prep and uncoil.

• Split Step Potential

A technique well known in tennis is the split step. In serve and volley tennis, as the server approaches the net, at the "t" formed by the center line and the back line of both service boxes, the net rusher spreads his feet to a two-footed, paused landing type hop versus coming to complete stop. He reads the situation and then takes off toward the angle where he sees or *expects* the ball to be. The same principle of using a split-step may be applied to racquetball, too.




- Split-Step Tactical Cover

After stroking a deep pass or ceiling ball, dash forward to the dashed line. Step on the line with one foot, and spread your feet to a balanced, on your toes, split-step ready position. Partially face the competitor and read his shot. Get ready to take off toward any one of the 4 quadrants (4 corners). Adjust. If your competitor must retreat to a back corner, you may split-step again to angle off and partially face the competitor.

- Block the Reverse

Move and split-step ON the imaginary diagonal line between the ball in deep court and the opposite front corner. On the diagonal you have a good view of the competitor, while you face the front corner on that side of the court. You get to legally block the reverse by the competitor when you get there before he can set up to shoot. On the diagonal you're ready to cover first the down the line, then the front court, then the crosscourt, and always a ball back through the middle. If instead you were to just face the front wall, widest DTL balls may be just tantalizingly out of your reach.

• Crisscross, a Football and Basketball Feet-work Staple

When you move sideways along the sidewall and you can see the shuffle step is just not gonna cut it and you need to get further, faster, the crossover step with the trail foot BEHIND your lead foot, the "crisscross" gets you there on balance, quickly. As you crisscross, the foot that's being crisscrossed acts as the post. That post foot is your temporary balance point supporting you until the other shoe lands. The crisscrossing foot lands just past the posting foot. Then the posting foot flashes ahead to complete the crisscross. Crisscrossing is sort of a skipping maneuver behind your back. The object of moving about the court is to go as efficiently as possible. The crisscross allows you more options when you need to move sideways lickity-split. As an example, many top flight players serve and then crisscross with their lead or plant foot behind their trail or back foot as they retreat out of the box. It's all about the way to most quickly move and clear the box to cover the receiver's options by being a “littler” further back. A crisscross is much faster than the shuffle step out of the box. A full crossover step commits you more toward the side where you crossover leaving you more vulnerable to the crosscourt return angle. So the crisscross-over is often the crossover of choice to escape the box. The crisscross is an example of a transition to tactical feet-work. Now let's look at more tactical feet-work examples.

II. Tactical Feet-work

• Banana In Approach

Ideally stroke the ball from a light, springy, slightly closed stance, with your front, plant foot half a sneaker closer to the sidewall than the back, push off foot. The partially closed stance allows you to turn your body into a forehand or backhand. How do you get into that ideal stance off BOTH wings? Once you've moved behind and to the side of the ball so that it's about an arm's distance away, you're ready to take on the *banana in approach*. Set the big end of your imaginary banana as the back of your stance. It'll be the push off leg. Then step in with a curved stride with your plant, front foot. This is the "banana in approach", stem in. Stem in means your weight pulls "in" toward the stem or in toward your body. This flow of force and body weight in toward your center gets your legs involved. Force then works up through your hips, turning your torso and finally catapulting your upper body as it synergistically connects to your lower body for greater summed forces.

• Jab and Cross

When the serve is not rocketed into a corner, use the time to jab step with the foot closer to the ball. Then crossover with the trail foot to both close your stance and apply better force and weight into your return. The crossover offers the best balance, while ideally allowing you the receiver to take the ball out in front or ahead of your stroking shoulder.

• Crossover Lunge For Photon Serves

When you pick up a super-fast "photon" serve as it rebounds off the front wall or worse case, as it rockets by the server, crossover with the far leg and lunge low. Be purely focused and doggedly determined to get the ball back to the front wall. Know that you may make contact BEFORE your lunging leg lands, but fear not; you WILL land! The crossover step also serves to coil your shoulders and your racquet naturally flares back with them. Use that natural prep and look to go down the line with your ROS or even DTL to the ceiling to push the competitor sideways and back. Know the main object is to get the ball back to the front wall. The secondary objective is to get the competitor out of the middle. Even a crosscourt pass or ceiling may work because the server will many times be moving your way pursuing the flight of his serve and blanketing the line which is the most dangerous return. Often making good string contact will be enough because you may use the server's power against him to bunt the ball away from him before he may react.

• 2-step Serve Footwork

Paint the edges of the very back line of the box with your sneakers. The foot that will be the plant, lead foot in serving stance starts ahead of the other. The feet are slightly apart and you're in a slight crouch or balanced bend while not squatting down. The racquet is out in front of you in a threatening position. The ball in your offhand resting against, let's say the grip of the racquet. Step up with the back foot toward the front foot. Land inside the front foot and just behind it with both sets of toes pointed at the sidewall.

*Rec: as you step up, draw your racquet back and use and your other arm like a tightrope walker holding his balancing bar.

- Immediately crossover with the front foot toward the front of the box, even landing with the arch of your foot on the front line. Then work your plant leg against your push leg to power your drive serve.

• Get Out of the Box

AFTER you serve and complete your full follow-through your next step is to get out of the box. When you stay in the box you make yourself vulnerable to the pass you can't reach or the ceiling you can't short-hop. Sure you're closer to the attempted kill, but "he", the receiver *sees* you and his pass may rocket by you. So clearing the box, even by just a step, improves your chances considerably.

- How to Get Out of the Box

The way to get out of the box is to first regain your balance. Most of your weight is ideally on your front foot after you serve or stroke. So backshift your weight from your front to your back foot. Take a crossover step with your front foot toward the middle and partially spin toward the ball to flow out of ”no mans' land" in the service zone. Only body spin enough to get a view of the receiver over your shoulder. For protection use your racquet head to look through your strings as you cover your head.

- Retreat with a Crossover or Crisscross

The crossover step is the fastest way to retreat out of the service box. The crossover step may be in front of your back foot or it may be a crisscross-over behind your back foot, which will be covered later. The main point is to avoid a stretch back step with your back, trail foot. A step with your back foot spreads you out, slows you down, exposes you to a loss of balance and an inability to quickly reverse your field should you need to dash back into the front court for a possible low return. Pivot on your back foot and crossover. After the first “crossover” step do another crossover to cover ground even faster. You may shuffle, side-to-side to flow back for serves you read the receiver will return way back in deep court. However, compared to the crossover, the shuffle is in slow motion, as you retreat out of the service box.

- Practice Getting Out of the Box

As part of practicing your serves, practice the crossover (or crisscross-over) step to get into center court. The ultimate objective is to straddle the dashed line with both feet. At a minimum, make your goal to touch the dashed line with your back foot. ALWAYS BLOCK REVERSE pinch angle. From there you can cover most all ROS's. Finish by angling off and face the sidewall in the front court and be ready to blanket the line, your primary and most vulnerable cover.




 Prof. Charles Calomiris of Columbia Business School will speak at the Junto this Thursday evening about his forthcoming book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, co-authored with Stanford Political Science Prof. Stephen Haber.

"Systemic bank insolvency crises like the U.S. subprime debacle of 20007-09…do not happen without warning, like earthquakes or mountain lion attacks. Rather, they occur when banking systems are made vulnerable by construction, as the result of political choices."

Fragile by Design

Time: 7:30 p.m. - 10:00 p.m.

Date: Thursday, November 7th

Place: 20 West 44th St., ground floor

Format is highly interactive, with plenty of opportunity to engage the speaker. Hope you can make it.

P.S. I paste in below Calomiris' review of The Bankers' New Clothes, which appeared in Barrons.online this week.

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, by Anat Admati and Martin Hellwig

Reviewed by Charles Calomiris

"Capitalism without failure is like religion without sin," as economist Allan Meltzer once wrote, a stricture that applies with special force to the capitalist activity of banking. When banks that cannot pay their bills are protected from that failure by government, the banking system not only allocates funds inefficiently, it may recklessly pursue risks that bring down the economy.

The financial crisis of 2007-09 wasn't the first to demonstrate that government-protected banking systems tend to blow up. Over the past three decades, there have been over 100 major banking crises worldwide in which government protection often encouraged excessive risk-taking. Given these concerns, authors Anat Admati, a finance professor at Stanford University, and Martin Hellwig, a director at the Max Planck Institute for Research on Collective Goods, deserve much of the praise they have received for *The Banker's New Clothes*. By raising public awareness about the dangers of taxpayer bailouts of "too big to fail" banks, they have contributed to the growing support for stronger, prudential regulation of the banking system, especially in Europe and the U.S.

 The two main cures the authors propose are another matter. They would force banks to maintain much more of their financing in the form of equity rather than debt, so that bank stockholders rather than taxpayers bear the downside risk of bank losses; and they would break up global banks into much smaller entities. Both proposals, if implemented as specifically set forth in this book, would be quite costly in social terms and unlikely to avert future bank crises.

Admati and Hellwig assume that increasing bank equity is a matter of boosting the minimum requirement for the book value of equity relative to assets, which includes loans. Were it only that simple, but it is not; increasing the equity ratio based on book value does not necessarily increase the true bank equity ratio. Also, any simple equity-to-assets requirement could encourage banks to pursue hidden increases in asset risk. Empirical studies of bank failure typically find no relationship between the book equity ratios of banks and their danger of insolvency. This does not mean that raising equity ratios is a bad idea—just that requiring increased book equity by itself does not result in higher true equity, much less in higher equity relative to risk, which is the essential goal of regulatory reform.

Taking their book's title from Hans Christian Anderson's fairy tale, the authors completely dismiss the idea that higher equity requirements might entail costs as a "bugbear" that is "as insubstantial as the emperor's
*new*clothes in Andersen's tale." In their view, "For society there are in fact significant benefits and essentially no costs from much higher equity requirements."

This view has been proved false by decades of research. The potentially high cost to society from requiring high equity-to-asset ratios is a reduction in banks' willingness to lend. When a bank is forced, either by sudden equity losses or by increased regulatory requirements, to raise its ratio of equity to assets, it typically decides to reduce lending rather than to raise equity to maintain its existing amount of loans.

Not that recognizing the costs and complexities of boosting ratios means we must abandon the idea altogether. Raising equity is costly but worth it, because the benefits of a stable banking system exceed the costs of reduced loan supply that would result. Accordingly, I would raise required equity to roughly 10% of assets, about twice today's level.

But we must also ensure through additional reforms that banks maintain that ratio in actual equity, not just book equity, and that they do not offset that increase in equity with a big increase in risk. Higher equity will work as a reform only if it occurs alongside other changes in regulation to ensure that banks maintain adequate equity relative to risk. All this is a far cry from the authors' call for a simple hike in required equity ratios, based on book value, to about 25% of assets, without accompanying reforms.

What about breaking up big banks? The studies on which Admati and Hellwig base their conclusion that there are no social advantages to large-scale, global, universal banking are simply not useful for judging the scale advantages of global universal banks. The data used in those studies come mainly from banks with very narrow ranges of products, services, and locations. Citing those studies to gauge the efficiency of global universal banks amounts to an apples-and-oranges confusion between two very different types of banking enterprises: small traditional banks and global universal banks. One cannot be a global universal bank, with multiple product lines and locations in scores of countries, with an asset base of under $100 billion. Such banks provide important and unique services to the global economy, which Admati and Hellwig are wrong to dismiss.

Despite these criticisms, The Bankers' New Clothes is an important book that identifies correctly the central problem of government protection of banks. But regulators should not single-mindedly focus on very high book equity requirements or on breaking up global banks. When those prescriptions prove to be costly and inadequate for the challenging problem of reducing bank instability, policy makers might find themselves as naked as the emperor in Anderson's story.



 I have a hypothesis that older people with money to invest put too much value on youth in their investments, i.e, that they think that young people and things that young people buy are better than other things. I wonder if this is because of their desire for immortality or just a rejection of their loss of virility. I looked for articles that were relevant to this hypothesis but not having the scope or sweep of Pitt, or Mr. E, I have not yet struck pay dirt.

Vince Fulco writes: 

Add to the mix of hypotheses, worry about not keeping up or relevant on world developments, IT, or scientific advancements. It is exhausting for some generations given they were raised with sliderules.

Scott Brooks writes: 

Isn't it fair to say that the growth companies of yesterday are the value companies of today?

Older people probably want, at least, some growth in the portfolio, so they invest some of their money with the younger generation who generally more innovative and/or more attuned to "newest" innovations and idea's that come out.

This makes me think of the thread that we had on the open list last week about music. The older we get, the less we are attuned to modern (innovative?) music. We become entrenched in what we know and what impacted our lives growing up.

My theory is that the growth stage of our lives occurs during our teens, 20's and 30's. In our 40's we begin to transition into entrenched value stages and by our 50's (and one), we are value driven.

I think this applies to music and investing.

However, if we are smart (and I'd like to think we are…..at least some of the time), we inherently understand that "youth innovates and invents" and we want to be a part of that.

And since by the time we are in our 40's (and up) we have the money, we are the ones that the "youthful innovators and inventors" come to for cash to fund their ventures. And if we missed the Angel/VC and even IPO stage, we'll still invest a portion of our portfolio's with them to harness their vision……and recapture some of our own lost youthful vigor and insight.

Kim Zussman adds: 

Perhaps this wasn't the case before Microsoft (Apple, Google, Facebook, etc) showed that young computer mavens could hit it big, and that nerds will rule the world. People who came of age in the PC era.

Weren't the big success stories pre-1980's stodgier companies?

Scott Brooks writes: 

Wouldn't it be fair to say that GM, Ford, IBM, were the growth and innovative companies of the Henry Ford and Bob Hope Generations?

IMHO, every generation has their MSFT or AAPL, or GOOG……it's just that by the time we know about them (we being the next generation), they've become value companies.

The car companies and airline companies of our parents generation were the equivalent to the computer companies of our generation.

Pitt T. Maner III adds: 

 One would think that the influence of youth is increasing due to the higher use of the internet by the over 50 crowd (which includes me).

1. "Baby Boomers Driving Technology Wave":

'What explains the rapid pick-up of tech tools among the older crowd? "The younger investor is usually an influencer towards their parents in terms of technology," says Ryan by email.

The numbers dovetail findings by the Pew Research Center's Internet & American Life Project that more than half of adults 65 and older are online today. They're flocking to YouTube, social networks and shopping sites—while also growing more comfortable using banking and other financial services online. They form a surprisingly active demographic for Facebook, where 57% of those 50 to 64 are on the social network, according to Pew.'

So you might look at who are the main internet influencers with respect to individual stocks and the stock market and older internet users. For instance Cramer appears to have a fair amount of online "clout" with respect to stock selection as might several others on CNBC.

2. There are many companies trying to figure out and somewhat quantify who the influencers are– such as Klout.

3. This is a recent paper on the influence of the collective mood state on Twitter with respect to the market.

Behavioral economics tells us that emotions can profoundly affect individual behavior and decision-making. Does this also apply to societies at large, i.e., can societies experience mood states that affect their collective decision making? By extension is the public mood correlated or even predictive of economic indicators? Here we investigate whether measurements of collective mood states derived from large-scale Twitter feeds are correlated to the value of the Dow Jones Industrial Average (DJIA) over time. We analyze the text content of daily Twitter feeds by two mood tracking tools, namely OpinionFinder that measures positive vs. negative mood and Google-Profile of Mood States (GPOMS) that measures mood in terms of 6 dimensions (Calm, Alert, Sure, Vital, Kind, and Happy). We cross-validate the resulting mood time series by comparing their ability to detect the public's response to the presidential election and Thanksgiving day in 2008. A Granger causality analysis and a Self-Organizing Fuzzy Neural Network are then used to investigate the hypothesis that public mood states, as measured by the OpinionFinder and GPOMS mood time series, are predictive of changes in DJIA closing values. Our results indicate that the accuracy of DJIA predictions can be significantly improved by the inclusion of specific public mood dimensions but not others. We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the DJIA and a reduction of the Mean Average Percentage Error by more than 6%.

4. That reminds me of these websites



avoiding the herd

5. This influence effect on the older investor might have to be considered with respect to the depressing findings asserted by this research:

"Examining the economic costs of aging, we find that older investors earn about 3-5% lower annual return on a risk-adjusted basis. Collectively, our evidence indicates that older investors' portfolio choices reflect greater knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging."

David Lillienfeld writes: 

And the problem is that it's unclear that there's any company to take over the place of MSFT, AAPL or GOOG besides AMZN, which can't seem to earn any money (real profit, not just revenues). I had hoped that my now, there would be some suggestion of which companies those may be, but I'm not seeing them.

Scott Brooks writes: 

You could have said almost the same thing about railroads…..then came big steel.

You could have said almost the same thing about big steel….and then came GM.

You could have said almost the same thing about GM…..and then came IBM.

You could have said almost the same thing about IBM…..and then came MSFT.

You could have said almost the same thing about MSFT…..and then came GOOG.

You could have said almost about GOOG…..and then came……?

You have successful well run companies that create cash flow and then use that cash flow and credit to buy up smaller (other) companies….and become dominate.

Isn't that just the way the eternal business cycle works?

Isn't that really just the way of mankind and government?



I knew many Silicon Valley entrepreneurs on the spec list and in business in the late 1990s. To a man, they all refused to invest in other Silicon Valley companies claiming that they knew everyone in the industry, and they were all phonies, and finaglers, not to be trusted. The kind that hyped their stock, sold out and repeated in some other field with the glow of unjustified success on their backs.

I have met many who fit this description since. However, I did not generalize the situation to Canada, but apparently I should have as the iconic Canadian company's insider trading of the last several years, and announcements before sales shortfalls (they were big on "shipments" rather than sales shows. The big product presentations as Disney should have been a signal.

keep looking »


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