This is an intriguing piece, but I have no sense as to how well founded it may be. Any thoughts anyone?

"Wall Street Skips Economics Class"

Mr. Isomorphisms writes: 

Noah is not credible among his peers, although he's at least infamous. He's stirred up this DSGE discussion beforeâ€"or, rather, piggybacked on Delong/Krugman/blogosphere discussion of same.

In fact I think when he first started blogging (6 years ago? basically a PhD ago) he expressed some reservations about DSGE.

E Falkenstein has made the same point as have numerous econ PhD holders, that the mathematics used in econ grad school is not considered valuable by industry. By contrast FEM gets things done and is flexible enough so the people who deal with the real world (and lose money there) can fill in the tedious details and jerry-rig something together that really works, in the here-and-now. So in short, people have been making this critique for a long time. And even longer if you include the predecessor Arrow-Debreu general equilibrium theory, which was also of only academic interest. I don't think the "only academic interest" critique is particularly damning. Academics want deep answers whereas money-makers want something that actually works right now, and leave the hard critical thinking for mañana.

Two things I noticed from googling around this story: 1) Mark Buchanan writing the same piece in January in bbgView, cites Noah. And Dr Buchanan is a physicist, not an economist. 2) Someone added to Wikipedia that apparently the ECB uses a DSGE model. It doesn't surprise me at all that econ PhD's are more likely to work for a government than a hedge fund. Think about any economic model you've ever seen; it's almost always from a policy perspective. Economists are interested in social engineering, so fairness; discrimination; unemployment; inflation; tax policy; utility; housing shortages; bubbles as they affect the man-in-the-street; benefits of trade to the man-in-the-street…Financial econometrics is a small subfield of economics-in-general, meaning it's a small subset of what economists are interested in. So it doesn't surprise me that they're not good at predicting financial markets.

anonymous writes: 

I like Duncan Foley's critiques, because he goes back to the Walrasian auctioneer which is a more reasonable starting-point of where the fully-cleared markets goes wrong, and where in my opinion geography-less, individual-less theory diverts from common experience of market participants.

As far as I can see this sort of critique gets at the heart of what's going wrong without being too focused on specifically DSGE or Aâ€"D or some other clas of models.



One of the greatest features of any market is they enable price discovery. The words are almost interchangeable. Markets equals prices. Once a price is established from hundreds, thousands or millions of transactions, then the laws of supply and demand, scarcity, comparative advantage, can kick in to allocate resource to create the greatest aggregate wealth. Also things can be measured when there are accurate prices to study baselines, make comparisons, and determine trends. The opposite would be true for industries where there is no price discovery. I can think of one big industry prices where discovery is notably absent and there is much waste as a result.



 The Hawaii housing market is starting to warm up after years of lethargy. It lags behind the mainland markets and a good sign of a market cycle maturation. Inventory is low. There have been cyclic bubbles in the local market for vacation condo's and home from mainland, Canadian and Japanese investors over prior market cycles. Excess money from various world markets makes it way to the luxury market as 2nd homes or vacation homes here. There are many new home building projects, busy contractors in sharp contrast to the last several years.



I picked up this nifty short book Deep Risk: How History Informs Portfolio Design by William Bernstein today. I'd be interested in hearing the thoughts of others who've read it. For the rest: the theme is roughly "portfolio theory in emerging markets" (i.e., with real risks to buy-and-holders, not just "fluctuation risk" which only hits those who dip in and out.



 I had a cab ride last night with a 53-year-old Romanian immigrant. He grew up milking cows manually and his father earned $1 a day. Driving a cab in New York is hard work. When this driver comes home at night, he has to go out for a walk twice in the evening to relieve the stiffness in his back and bottom. He jokes that he tells his wife, "You'll have to go with the milkman, because I'm too tired." But he now makes $400 a day, equivalent to the average monthly wage in Romania when he was growing up. He has saved his money, so that without going too heavily into debt he has bought a spacious two-level apartment in Queens with a garden and a parking space. His two teenage daughters have the whole second level as their rooms. He bought what he thought was a giant-sized flat screen TV for $2,000, but his daughter's room was so big that from her bed to where the screen is, she can barely see the image. He and his wife emphasize education, with the result that his elder daughter was one of 100 students accepted to a top school that had 15,000 applicants and his younger daughter has a 97 average. Summing up, he is proud that coming from a humble beginning, he has become a millionaire by owning his own cab and a medallion that he bought for $200,000.

A truly inspiring story: By being part of a government-operated conspiracy to suppress competition, he has amassed $1 million of wealth based on economic rents. Heavy lobbying perpetuates this scheme. Just one question: What will the value of the collateral he put up for his home loan as Uber becomes better established?

Paolo Pezzutti writes: 

This story shows once again how the generation of immigrants now 50 or so years old lived the American dream. The romanian taxi driver was able to arrive in the US penniless and end up sending his kids to good universities, buying a house and owning a very valuable medallion. The story of growth and success has occurred to millions of immigrants over the past decades. This is what really is fascinating about the US. The question is whether the US is still able to sustain the American dream. Will the new generation of immigrants find it harder to integrate in the society, find a good job and provide education to their kids?



Shortly before Gowex confessed to financial reporting fraud and went bankrupt, a leading technical analysis firm said the stock could rise by 29%. A fundamental research shop, in contrast, set a target price of zero. Some chartists don't think their field is discredited by practitioners who rely on astrology.

"Technical Analysis is Fundamentally Flawed" [My article in Forbes].



 This article raises questions with regards to the private sector-government relationship. Interesting that a young firm like AMZN is winning these sensitive types of contracts vs. IBM, etc.

For whatever reason it brings to mind something I noticed when I was a kid. When two or more horses are in a corral or pasture together there is always a "leader" or "boss". And then one day something occurs and the relationship shifts– the power dynamic is reversed. The owner is not always around to see what triggers the re-orientation but it is usually fairly obvious to him/her. The key is that one has to be paying attention to the relationship, most people would not see it.



Goldman saved me the trouble and published a study showing that since 1974 the world cup winner gets a 3.5% one month outperformance boost (n=8). In this case it would take the DAX right back to 10,000 where it ended two weeks ago. I don't doubt it will get there. Even factoring in the cost Germany will shoulder in aiding its weaker brethren, the market seems to take it all in stride as part of doing business on the continent.



 It could have been one of Fed's greatest ever victories, an absolutely amazing comeback to take it to the 5th. However I think his age and fitness let him down. He was all over Novak in the early part of the 5th with Novak in trouble receiving treatment….and the Fed let him off the hook. (It must have taken it all out of the Fed to get to this point, but now was not the time to let up). Then he then got beat as the younger player gained his footing. A lesson to us all. If you're in trouble in a market you're well experienced in, don't stop out at breakeven when it counts…. push harder when you smell blood and be prepared for a long night.

One further thing that should be mentioned is the very big edge Novak had in the 5th set was that he served first. An even larger reason for the need for the Fed to score an early break when Novak's body was in trouble, since one slip up from the Fed and a break to Novak and there was no way back.

Whether it's time until the close or a pending announcement, always know where your risk lies, and like a runner doing interval training, know the optimum times to push and times to back off. 



 "Robert Mugabe Says No Whites May Own Land in Zimbabwe":

Zimbabwe president Robert Mugabe has ordered the nation's remaining white farmers to be booted off their farms in order that the land be given to black Zimbabweans.

In the harshest official policy on race and land reform in a country that has been close to bankruptcy, the 90-year old autocrat said Wednesday that whites may no longer own any land in Zimbabwe. Whites would still be allowed to own businesses and urban apartments.

South Africa is Zimbabwe in slow motion.

Last month the ANC proposed in parliament that farmers give half of their farm land to workers. Next step–the ANC will take the other half of the farmer lands by looking to what what Mugabe did but adapt it for South African conditions.

Yesterday the Zulu King put in a land claim over the virtually the whole of the province of Kwa-Zulu Natal including all mining rights.

South Africa is on the brink of a recession, rating agencies have downgraded us to just above junk status and every month a different trade union has a national strike– same old same old!



With respect to recent industry performance, the Newedge Trend Indicator, published daily by the Newedge unit of SocGen, is an earnest attempt to simulate broad-based trendfollowing including transaction costs. Its performance the past 10 years, per data on the Newedge website:

2005 -1.6 %
2006 6.1 %
2007 -1.5 %
2008 31.4 %
2009 2.9 %
2010 7.8 %
2011 1.5 %
2012 -16.0 %
2013 -17.7 %
2014 -4.5 % (through 26 Jun)



Thursday July 3, 2014 the NYC Junto will feature Tyler Cowen, of MarginalRevolutionUniversity.Com and George Mason University. His latest book is Average is Over.

Meeting starts at 7:30pm, speaker at 8:00pm. General Society Library, 20 W 44th St btwn 5th & 6th Aves, New York, NY 10036.

All DailySpec readers are invited.



Within the "dark pool" of the market's ecosystem, there exist top feeders who like to provide bottom dwellers with 'insurance' policies. This "magnanimous" activity manifests itself in the provision of such products as options and more 'complex' structured products.

Clearly, as with all insurance policies, the seller of the policy has no intention to pay out upon the risk if it eventuates.

One noticeable element of these structures is the inability to get out of them in a timely fashion.

An examples should suffice:

In 2008 one was fortunate enough to have bought an AUD Put / JPY Call. As the AUD/JPY cross rate declined (and, for those who remember, Armageddon approached) not only was the 'delta' of the position increasing but the 'Vega' was too! A rare occurrence in option-land for TWO of the 'Greeks' to be in one's favour. At a time when I wanted to cut the position with a reasonable gain, the counter parties in the options market made a volatility spread so wide, that to have sold the structure back would have entailed losing money even though I had bought a low volatility and the spot had moved massively my way. To have simply bought back the delta and ridden it to expiry would have led to massive illusory PL swings because of the way options are revalued by the seller. The upshot is that I was unable to collect on the 'insurance policy'

Even in today's 'it can only go up/ prosaic times', market insurance policies are a scam.

Some things for speculators to consider:

1. Is there a level of volatility at which markets become 'untradable'? On the upside, I believe there is a level - or put differently, there is a quantifiable rate of change in the cost of insurance after which the spreads are impossible to deal at (In the above AUD/JPY example the volatility spread was 30% / 130% !!!!)

2. Is there a certain minimum level of volatility that the ecosystem requires? The answer might be different for different markets but overnight implied volatility in the major currencies hit the lowest in more than 20 years yesterday at circa. 5.5% annualised so who knows.

3. As alluded to above, should one watch the bid/offer spread on insurance as a predictor of bad/good times ahead. The magnitude of the spread in At The Money options markets certainly widens as the underlying approaches the point at which the big sellers might have to pay out thus making it hard or impossible to exit.

4. The amount of inbuilt spread in structured product in the street at the moment is genuinely appalling. But it is selling VERY WELL because large over regulated investors are being required by their 'consultants' to deliver 'stability' at all costs….. Not a single one of these structures is fit for purpose.

Lifting a line from EdSpec - '…..are there any words in the English language that mean 10000 times less than zero..' is a good way to explain the probability of the buyers of these products being made whole if the worst happens.

Jordan Neuman writes: 

It is a fear I share when I buy out of the money puts. I recently corresponded with OCC about their "Doomsday" procedures and found out they don't really have anything concrete. How do you plan for option settlements under total chaos? And I do remember the 30%+ spreads on plain vanilla S&P options in the fall of '08.

I recall in the original Market Wizards Jim Rogers advised shorting Japan but said that while you might be able to get some money out on the initial decline, if you wait until the ultimate collapse you won't.

Ed Stewart writes: 

Awesome post with much food for thought.

For the health of the market I would think that two environments are critical -environments that best feed market makers, and environments that most encourage commercial participation. If a market becomes too stable there is less need for commercial hedging, less transactions for market makers, and the range for speculative profit to profit dries up. I see it as speculators "crossing the bridge" between commercial buyers and sellers - the profit incentives motivate us to find ways of doing this. If the path is too short we can't make any money to cover costs.

A notion that I like is that the best speculative markets are where commercial interests have just been pushed to their uncle point in terms of pricing - at that point there is a very strong need for speculators and certain premiums develop - one can see this dynamic if you read the reports of (for example) commodity processors after a large price move.

Also which side of the trade is weak (buyer or seller) might depend upon who is on which side is the speculator vs. the house, or alternatively which side can take delivery vs. the side that needs to offset over a certain time horizon. The edge to the first party grows as (say) first notice approaches.



 There are hugely important issues concerning firms' culture and overall purpose, management's core responsibilities, and the future of capitalism. Related to this, here is a video of a presentation I have been making to business students at DePaul University titled "Capitalism and Management's Core Responsibilities."

Key Points:

1. We are increasingly following a path of crony capitalism which eventually leads to a social environment like Italy or Greece. In contrast, free-market capitalism enables consumer choice and competition to work to the benefit of all, especially the least well off.

2. There is a wall of miscommunication, with words having strikingly different meanings, between those in favor of maximizing shareholder value and those opposed—better to shift attention to management's core responsibilities.

3. Running their businesses in ways consistent with the recommended five core responsibilities would enable management to both create wealth and earn the moral high ground.

4. Analysis of firms' historical track records provides a lens to understand capitalism from the ground up; i.e., customers, employees, and shareholders have mutual, long-term interests. This is illustrated via three company examples using Credit Suisse/HOLT company data used by worldwide money management firms and by Barron's for the annual Barron's 500 Scorecard.

5. The public's low level of trust in corporations results in a lack of faith in capitalism. Who can lead in moving the corporate world to better deliver on their core responsibilities—one of which is to promote free-market capitalism? Large asset owners (pension funds, sovereign wealth funds, endowment funds, and the like) have a vested interest in the long-term success of free-market capitalism and are in a unique position to reorient how firms are managed to create long-term wealth that benefits all stakeholders.



The stress test failure's are all positioning by the Fed to insure there is a buyer of Treasuries when they depart. Just like Toyota is hit with recalls every time GM's inventories get bloated. The Central Planners are simply using shareholder money for their own public/private purposes. Banks are actually overcapitalized for the current loan volume. Moreover, bank disintermediation is beginning to happen at an increasing rate, as why should a bank be in the middle. The banks will offer safety and buy treasuries– the smart money will leave the banks and lend to entrepreneurs. Watch the LendingClub and Prosper.com etc. as they emerge.



 In a departure from my usual micro market type of post, I have been looking at the 'Fed Taper' issue from the perspective that the Delphic Ones at the Federal Reserve must find (dare I say, coerce) a marginal long term buyer of the securities on its balance sheet to exit the process with reputations intact and without market disruption (remember 1994 anyone?)

This constant litany of impossible to pass 'stress tests' coupled with current and coming regulatory overreach into core banking activities may make the ownership of any type of assets other than Treasuries very difficult for banks as they are currently structured. The evolution of Japanese banks from financiers of global growth in the 1980's to earning a few basis points on the 20 year JGB is a reasonable analogy of what is in store. This has far reaching consequences for the bond market if remotely in the ball park.

The need of governments to create 'stability' in economic systems that thrive when there is instability is an ongoing deleterious influence on banks. It happened in Japan, is happening in Europe and appears to be beginning in the United States.

Without instability/ volatility there is no growth. The banking sector must take risk and be rewarded for it. The above is so full of holes I am almost embarrassed to post it, particularly as it is so far off piste from my usual literary excursions to this site.

It is, however, a potential long term influence on the US bond market so I thought it might be worth hitting send.



I think it would be helpful to have a demarcation, as it were, between holding periods in research studies.

Arguably (perhaps very arguably), there exist repeatable & tradeable phenomena whose holding periods stretch from microseconds to a period approaching 2 days. I would posit that a graphical representation of 'Forecastability' on the vertical axis and Holding Period' on the abscissa would present as a rapidly declining exponential function of some sort.

One would also put forward that if we then started again from a holding period of thirty days or so then once more the chart would show an upward slant (though not exponential)

The puzzle is the part in the middle between about two days and a month. In terms of 'Forecastability' versus 'Holding Period', we are left with a 'U' - ish shape with an extended flat period in the middle.

One further suggests that the Stock Index Futures, Currencies (major not EM), major commodities and Long End Interest rate futures belong at the shorter end of forecasting reliability whereas physical stocks, short end rates and EM ccy's belong at the other end.

It's kind of like a Forecastability Curve (in the same vein as a yield curve). Just like a yield curve there are liquidity preferences et. al.

Something to ponder.



 Within 2 blocks from where my sometimes office is, where the spec party was held, there are the retail outlets, Bed Bath and Beyond, Best Buy, Staples, Whole Foods and Coach. (all within 1 block from Time-Warner building.) One finds that they rank 496, 497, 499, 499, and 500th worst of the 500 companies in the S&P 500 with declines for the year of -25% for Bed Bath, to -38% for Coach.

There are only about 2 establishments that are listed in S&P 500 not in that category I would guess within that 2 block radius. I believe this is not chance. Does it mean I am a hoodoo? Or is it related to the dynamism of the vigorous that are not located in the Time Warner. Or is it related to the poor performance of big box retailers. Or the excellent performance of these companies in the previous 5 years. The average S&P stock is up 6.2 % for the year. One believes there is some deep truth in this geographic excursion.

anoymous writes: 

One recalls that there were at least a few Woolworth's retail stores in that area in the mid 90s. (A big one near 86th and 3rd, I think). I'm unable to draw a parallel to the fact that they have a skyscraper named after them on lower Broadway, but as far as retail disasters were concerned, they left a lot of open space in Manhattan when the last stores finally closed.

Jeff Rollert writes: 

There are buildings with poor traffic characteristics. I keep a list of them in LA. When a retailer moves into one, I sell their stocks. Period. I have found they have either passed the point of scalability for their market or for their real estate staff/advisors.

It 's a variation of "never push a bad position."

A commenter writes: 

This sounds like the skyscraper rule gone retail.



 Symantec's chief operating officer, Stephen Gillett, has an impressive resume that includes executive stints at Starbucks, CNET and Best Buy. He's also a level 70 paladin and priest with a particular focus on healing abilities. If it isn't clear already, we're talking about the online video game World of Warcraft.

"I put my qualifications on my resume when I apply for jobs," Gillett said. "Here's my guild. Here's my ranking. Here's my biggest online achievement. Some people look at it and say, 'What the hell is this?' And others will be like, 'That's exactly what I'm looking for.'" It paid off. It helped him land a job at Corbis, and eventually Starbucks. Starbucks (SBUX)CEO Howard Schultz hired Gillett to be the company's chief information officer when the company was in a rut in 2008.

-"Why I Put World of Warcraft on my Resume"



 I noticed the great Lobagola move in gold of late. What can we learn from it this time?

[A LoBagola, as described in The Education of A Speculator
by Dr. Niederhoffer, is a phenomenon whereby a market makes an
historically large run in one direction, usually up, and then at some
unpredictable point begins an equally extreme run back to where it

1. The pace of the elephants on the way down set the underlying conditions for the reversal. The expectation studies must include the number of failed reversal attempts, as well as the usual measures.

2. In actual migrations, elephants selectively eat trees/plants without killing them, the plants re-grow and the elephants eat them on the reversal (coppicing effect). Hence, elephants are able to use the same migration route because they know that the resources in these areas will be available to them. In markets, the footprint of the move can be observed in the patterns of time and volume and untouched bids and offers.

3. The most difficult part of trading lobagolas is: "nobody knows when they come back". Qualitative observations about the nature of the migration might help. There are two main causes for elephant migration: resources and human intervention, the latter also is known to be able to change the path of the elephants. Some classification studies (not retrospectively) in market moves is appropriate.

4. One of the worst mistakes a speculator can make is to go against the reversal phase of a Lobagola without noticing is part of a sequence. And here, nobody knows if they will come back.

5. Lobagolas in currency markets follow different patterns, these seem to be mostly "resource" driven.

Any other thing specs have learned from trading lobagolas?



Dear Victor,

We discovered your review of our paper [link] and just wanted to address a few of the points you raise and correct some erroneous statements.

a) We do not stitch our time series together, but simulate a standalone P&L equally allocated between the various instruments. The correlations between markets are indeed present but irrelevant to the estimate of the t-stat which is simply estimated using the daily returns of the strategy i.e. signal*next day (or next month) returns, which are for all intents and purposes uncorrelated (even if the signals themselves are obviously not). The resulting t-stat measurement we feel is made more robust by the fact that t-stats are also significant for all sub-periods and all individual asset classes. We therefore don’t understand your comments about overlapping 5 month windows or the correlations between tickers.

b) Your interpretation of our regression results seems strange. We are simply looking how much the market moves on the subsequent day (on average of course), conditional to a certain value of the signal (the normalised five month trend). We find that when the signal is 1 at one sigma (not one percent!), the next day return is three times bigger than its long term average, i.e. the return of the long only strategy. We find difficult not to see this as “economically significant”; besides, the trend following industry has certainly made very significant profits in the last thirty years.

c) Our “armchair explanations” are proposed as possible (plausible) explanations for which we do not have direct statistical evidence. Still, we refer to recent, well documented academic papers based on surveys that pretty convincingly show that most people have “extrapolative expectations”, i.e. they tend to follow trends. See Shiller, Menkhoff, Hommes, Greenwood & Schleifer, etc.

Looking forward, we believe that long term trends will persist, albeit delivering a strategy with a low Sharpe ratio. There is however only our best guess based in part on the results of our paper that shows that trend following has delivered a highly significant Sharpe over a long history.

Sincerely yours — the authors of “Two Centuries of Trend Following”



 This article "scientists find achilles heel of antibiotic resistant bacteria" discusses a potential breakthrough in combatting antibiotic resistant bacteria. Apparently some of these organisms build up a 'wall' that becomes impenetrable to known drugs.

One wonders if a similar phenomenon occurs every day in markets at the low and high price. Considering just the low — perhaps as price goes lower the market builds up more and more resistance to the selling, with the conditionality thus created in the data thus leading to greater and greater future expected returns for a given holding period, say, into the close at which point the market price once again becomes subject to buying and selling pressures.

A touch further down this track and one might consider a 'Palindromic Reflexive' relationship between increasingly ineffective selling and rising market 'antibiotic resistance' to said selling.

One readily accessible test is to use 'risk reversals' as the 'antibiotic resistance' factor and price acceleration/ deceleration as the other factor. If, for example, the risk reversal developed a skew towards put options over call options and the price continued down and the RR skewed more etc in a 'reflexive' fashion…. but then all of a sudden the risk reversal stabilised while the price kept going down then that would be a potential sign of 'resistance' to downward price movement that may signal future reversal….. There may be a potential reversal approach somewhere within.

HDAS Capital writes: 

When looking at the wall building process of price discovery, it's useful to take out the microscope and see (count) what the "bacteria" is doing. Is it canceling orders at greater rate than trades per price level? Does it take longer to trade through the bid or the offer? And what happens to the next price in the sequence?



 You've heard of the Big Mac index. I propose the Cappucino Index. I'm in Tuscany, Italy now. Cappucino and espresso are €1. Spaghetti dinner is €6.5 - €8. Brunello di Montalcino wine is €20-€40. You can't touch a cappucino in Hawaii for less than $5. I saw Brunello di Montalcino wine for $475 in NYC on the way over. The dollar is strong despite the advertised exchange rates. Things do not seem all that depressed here in Italy despite headlines to the contrary. There are fewer Japanese tourists but I did hear Chinese spoken. Italians are friendly relaxed and smile easily. The restaurants are unpretentious. The wine is wonderful, inexpensive and varied. Our villa is a huge abandoned hotel and restaurant. It's a bit odd without any staff. In NYC on the way over there were more new construction and little babies than I've ever seen.



 Below us stretches the Colton yard of San Bernardino. The Pepper Street Bridge shakes like a California earthquake as a mile-long Dirty Face snakes under and east from the Pacific to who knows where. That's one attraction of hoboing.

We wheel and watch the red-blinking FRED at the end of the train disappear about midnight on May 30, 2014. 'The only sure thing about freight hopping is you know where you are, and not where you're going,' I advise 22 year-old MoJo, the strapping son of two journalists who is the political writer for the Mother Jones Washington DC branch. He fancies to get that far the hobo way, but there are no promises.

'The lights seem brighter than my previous time through three years ago, and the tracks twice as busy, with three times as much graffiti, and more colorful,' I wonder aloud. Below us, on the bridge embankment under a willow tree, four tramps including one female boisterously celebrate Horace Greeley's 'Go West, Young Man' and the hobo California dream where one may pick breakfast off an orange tree and sleep under the stars at night.

Anxious to jump into a boxcar, rock-and-roll, and see what lays ahead, we trundle past the bos and into some Eucalyptus. Within fifty paces huff and puff three sets of locomotives heading up under the Pepper Street Bridge. We may choose: A mixed freight with three engines, an Intermodal container train with four locomotives, or a 'Dog' of assorted cars with two rust bucket engines that would side considerable and ditch us 'out on the farm'.

We approach, the blast and clank of the yard cloaking out steps on ballast and the smell of diesel and oil camouflaging our nervous body odor from the RR police, or Bull. The ladder of a freight reaches to three feet above uneven right-of-way and we climb aboard a silver hopper down on its springs with cement for a softer ride and having the trimmings of a front and back 5'x8' porch with a portal of shoulder width that enters a hobo 'hotel room' in the superstructure of the car. MoJo crawls in to try it for size as much as to stay out of sight, as the crunch of ballast under heavy boot drops closer and closer.

'Gentlemen!' booms a baritone, as a yard worker grins up at us. 'You'll need this wherever you're bound.' He passes up a twelve pack of RR bottled water normally reserved for the engineers that you must not lose faith in humanity anywhere.

'This train is due to leave right after we get the F—king Rear End Device fixed, so lay low, good luck, and I never talked to you.'

 In minutes, the orderly process of a train departing a RR yard begins with the hiss of the Westinghouse brake line filling with air, an eerie electrical click in the same direction to test the connection, and, finally, highball! - two long blasts of the locomotive horn, with a staccato beat of couples stretching to our car, and the train leaps off the track for a second.

We clear the Pepper Bridge and in three hundred yards roll over with a clank of Americana the Colton Crossing. Located directly south of Interstate 10, this great steel frog determines the fate of every train tramp who's ever caught out San Bernardino full of juice and hope. The junction is one of the most historic and busiest in the USA where the south-north BNSF rail strikes the west-east Union Pacific. It was the 1882 scene of a bloody war between the lines, but tonight moonlight peacefully streaks the rail as our BNSF train nudges north over the clatter-clatter of the joints and into the star-spangled night.

The juxtaposition of Executives and Kings of the Road along the rails in American history is spectacular. Andrew Jackson was the first president on B&O in 1833 to ride the Iron Horse. President-elect Abraham Lincoln rode his famous Inaugural Train Journey in the winter of 1861 on NY Central trains from Springfield, Illinois in a trip that was considered full of potential dangers. Several Southern States had already withdrawn from the Union, and assassination attempts were possible. For these reasons, the train schedule was tightly controlled with stops as short as possible to coincide with service requirements of fuel and water for the steam locomotive from his hometown to the inauguration in Washington D.C. In Philadelphia Lincoln for first time learned of a plot on his life when his train was scheduled to pass through Baltimore. A hobo cloak and dagger train of events followed. Lincoln opted to smuggle aboard with the famous detective, Allan Pinkerton, through Baltimore and safely into Washington on a separate train that no one else knew about. While Pinkerton stood guard on the porch of the last train car all night Lincoln stayed just inside the last car in a lower booth, and was safely delivered disguised into Washington in the early morning for the Inauguration.

Harry Truman in Plain Speaking makes no bones about his hobo roots:

I was eighteen years old, and I'd just finished high school and knew I wasn't going to get to go to West Point. So I took this job as a timekeeper for Santa Fe RR)… There were about a hundred hoboes in each camp, and I got very well acquainted with them. My job was to keep tabs on them, to keep track of how much time they put in, and then I'd write out their paychecks for them. And they weren't bad fellows… Not in any way. Most of them had backgrounds that caused them to be hoboes. It was one of the best experiences that I ever had because that was when I began to understand who the underdog was and what he thought about the people who were the high hats. They felt just like I did about them. Some of those hoboes had better educations than the president of Ha-vud University.

Meanwhile, rolling over the California salt flats, I explain to the Mother Jones political reporter that the principal tie between Executives and Kings of the road is their grass-is-greener view of the American Dream: The Executives whom I take out want the freedom of independent travel. The tattered Kings I ride with want money and power. There should be a Prince and Pauper Company to please both.

The palm skyline of greater Barstow, California fills the horizon at sunrise. Our hopper is parcel of BNSF Railway, the second-largest railroad network in North America, second only to the great Union Pacific RR. BNSF has three transcontinental routes for high-speed links between the western and eastern United States, and we are riding the only southern link from the Pacific to the Mississippi River. It is safely said BNSF trains travel more rail miles and hobos than any other North American railroad. With a system of 24,000 miles of track, especially in the west, it hauls various commodities, most notably coal and grain, as well as intermodal (container and truck van) freight. The locomotive color is orange, black and dashes of yellow.

 The BNSF Barstow employs over 1000 workers and is a traditional hobo bottleneck. An unseasoned hobo is doomed to aimlessly walk and duck about the yard until he's ticketed for misdemeanor trespassing. I expect many spottings, but not to be collared. The Barstow yard is a major hub for transportation with a 'hump' for classification. Hobos speak of going 'over the hump' in Barstow in order to reach Los Angeles and the Bay area because except for through trains all of the incoming cars are re-sorted here. MoJo nearly jumps out of his overalls at the first crash of a car that has been backed up onto the 20' crest and the couple 'cut loose' so it becomes a 'silent roller' that rolls by gravity for up to a half mile from the hump track onto any of 48 classification tacks. We call this 'shuffling the deck' and it's better to watch than be in a car crashing at 8mph into its brethren string of cars. I was once thrown 15' in such a shuffle and wish never to repeat the experience. Once the cars are sorted into destination strings, locomotives are attached and on they move across America.

Barstow is also the first crew change point on the BNSF for northeast bound trains. Crew change towns are as important to hobos as the old time water tanks where steam engines (that yielded to diesel-electric in the 50s) took on water and hobos. Now train riders board and debark at the crew change divisions that take place 'on the fly' where the crew literally steps on a slow-moving freight as the previous one steps off – and hobos must do the same – or more likely it takes five to twenty minutes to change. And yet, our locomotives a half-mile to the front 'dynamite' releasing a blast of compressed air that is heard for miles, and signifies the train has probably terminated and is going to break up. A yard worker on a quad confirms this, tells us to lie low because the yard is 'hot' with security, and advises us to take a tunnel under the bowl of sorting tracks to the north side yard and look for units heading up eastbound. I'm a cookbook of adventure knowing liberties are given, and taken at risk. Emerging from the far side of the 100-yard cool tunnel another yard worker in a pickup spots us and lifts the mike of his radio.

Hoboing is game theory and the stage is the freight yard. A game consists of freedoms, barriers and purposes. The freedom is the open road, the barriers are the strings of cars, watchful towers, deadly silent rollers, and the sweat in your eye that may lead to a misstep. However, primary among these is the necessity in a game to have an opponent or enemy. There must be a continuum of problems which there are in a freight yard, and to have sufficient individuality to cope with them which is given. Now the game begins.

The Barstow yard is three miles long and a half-mile wide with the typical configuration throughout the USA of two main lines (with traffic in opposite directions) feeding into either end, usually under a highway bridge, that quickly fan into a wide swath of some fifty tracks that are littered with strings of some 500 freight cars on hold, fueling locomotives, yard locomotives pushing segments of trains around, the yardmaster tower, outbuildings, and stacks of RR ties and miscellaneous equipment. Barstow is a hobo blockade to most because it is HOT with a high security presence. Our primary opponent is the Bull, or Cinder Dick.

Oddly, in these days of tightened security since 911, it's still as easy to jump a freight train as it is a jet plane. The railroads in the financial squeeze have farmed the Bull duties out to private security firms which send a young man in a starched uniform driving about the yard in a white truck looking for inclusion and tuned to the radio for tips from yard workers and the towers. MoJo and I had just completed climbing over the 13th string of cars to get to the other side of the yard when that white truck stops ten feet away with only a set of gondola wheels separating our legs from his. I hunker down to peer between the 3' metal wheels and gaze into the eyes of a fresh, crew-cut young man in white with a silver star staring back and grinning. I guffaw, arise to heels, walk around the wheels, and introduce myself.

'Just trying to catch an eastbound and not touching anything.'

'I've been getting reports on you guys all over the yard all day. What's up?'

'Did you ever climb over 13 strings of cars? It takes five minutes per track and it's hot so we welcome you.'

MoJo pipes, 'We know there's an Amtrak at 9:54pm, if that's any help.'

'Just follow the caged center rail for another mile to get to the Amtrak station, and there will be eastbound freights as you walk leaving on both sides of the cage.'

'Thank you,' I settle, and we quickly walk away. The truck backs along the other side of the string of cars following our progress for five minutes, and then leaves. 'What a surprise!' I suggest. 'A sympathetic security who has clued us on how to catch out.'

 We hike to the unstaffed Amtrak station and guzzle icy liquids for thirty minutes in the Harvey House Railroad Museum. Fred Harvey's Harvey Houses are a household name among hobos and Amtrak passengers throughout the west. An innovative restaurateur, Fred Harvey created the first restaurant chain in the US and developed the Harvey House lunch rooms, souvenir shops, and hotels that served passengers on the western gridiron of the early otherwise 'wild' west. The Harvey family continued to run the business until 1965, and now with the closing of most of the depots, many like this one in Barstow have been converted to Amtrak stations and museums. I pop a cold soda and gaze over a collection of dated RR nails of which I have a complete hand-collected set from 1901 to present.

Then we retrace along the perimeter fence for a mile until finding a 'hole'. There is always a break in the fence behind a bush where other hobos have pried it open for yard access, and we scoot under like squirrels to secret in pines to study the busy eastside tracks. Within minutes, two trains roll up, and then a third. The only obstacle is the caged center rail, a dual 4' high chain link fence that protects the workers from the high speed passenger train, and that MoJo takes with a bound as I boost myself standing on a pack. We board a mixed freight for the shade of a lumber car, and catnap on plywood until a nightmare strikes. The train begins to move the opposite direct of our intent, so I shout, 'Your pack - Throw it w-a-y out.' He does, and, 'Now you!' The freight is rattling 5mph and a little faster than an escalator and we haven't had a chance for the lesson on how to disembark on the fly. Rather than step down the ladder, MoJo leaps from the car lip 6' above the ballast and arches as high as a basketball rim before dropping like a sandbag. He alights in an absorbing tumble albeit in the opposite direction of the train, and dusts himself off as I yell, 'Watch me!' and simply step to the bottom rung of the ladder and then another 2' down to the moving ground. 'That's one kitten toward the life of a Catman,' I tell him, and he smiles like one.

The smile drops as the container train on the adjacent rail jolts in the correct direction, and as I move for the ladder express, 'That's how fast things happen in a freight yard.' We board because it's a priority train bound for distant places. Container cars are the 30-40' metal boxes mounted on flatcars that haul merchandise intra-country or overseas. There's usually a narrow well in which to sit at the ends of the container on the flatcar, and it's advisable to take the rear one to avoid a shifting load in an emergency stop. Double-stacks are containers mounted two-high on a flatcar, and our ride taken in a hurry was sounding two long whistle blasts for imminent departure. These are called intermodal trains because the containers are shunted from rail to truck to ship. Intermodal transport is the current wave of transport with 7 of 10 ten trains that we've seen being containers and piggybacks, whereas five years ago it was a third that many.

In our rush to board we selected the front porch of a container flatcar to avoid the scorching sun. This means that if the train emergency stops (happens once every cross country trip) the riders may be thrown forward and off the car. A fast moving train with 100+ cars that emergency brakes takes about a mile-and-half to stop. I was hit in a VW van once by a 20mp freight and carried on the cowcatcher for a quarter-mile down the rail before it halted and I let go the steering wheel and fell through the window. On mean, a train emergency stops every ten hobo travel days usually due to an animal, person or car in the track, or an uncoupled brake hose. I've remained safety conscious of emergency stops, and insist that MoJo and I, with one hand each, grasp a 2" vertical bar on the container door for eight straight hours until Needles, Ca.

 This is not just any container train but a pure JB Hunt 'unit' train. JB Hunt, a Fortune 500 company, since 1961 has been one of the leaders in Intermodal transportation with 12,000 company trucks as well as independent drivers, and 47,000 trailers and containers, with contracts with all the major rail carriers. Let's take a typical unit container train. It consists of 130 cars, each car is about 60 feet long, and it's pulled/pushed by four 65-foot long locomotives. The cars are 7800 feet, the locomotives add 240 feet, for a total of 8040 feet.

Loaded freight cars are designed to weigh close to the same when full, 125 to 145 tons, makes no difference if it is fuel, coal, barley, a container, or scrap iron. A typical modern train runs three units on the point and one pusher at the rear. I would say a good average for a train these days is a mile-and-half and speeding 65mph. 'Intense,' coos MoJo, and I recall my basketball coach drilling, 'You miss 100% of the shots you don't take.'

Our JB Hunt train parallels Interstate 40 for an hour and outraces every vehicle on the road. This stretch from Barstow to Needles twins the famous old west Mojave Road that is now a dirt trail that I walked in one week once, running out of water but sucking it from barrel cactus. The JB Hunt boxes surprisingly have only a thin plastic seal and easily could be broken into, unlike the heavy lock on my container home in the California Sonora that's refurbished with a loft, waterbed, office and library.

Approaching midnight, we roll with still clenched grips into Needles, California. This whistle stop oasis located 100 miles north of my Sand Valley digs often boasts on national weather reports the hottest place in the country, and in the comic strip Peanuts, whose creator Charles Schultz lived in Needles as a boy, Snoopy's brother Spike lived in the desert near where we finally release the vertical bars and heave stiffly over the side. Spike frequently heads to Needles to partake the town's nightlife, which I agree is primarily howling with the coyotes. 'I don't want to be stuck here,' I explain, 'But we must change cars.' We board a few cars aft on the rear porch of a flatcar with a double-stack just as the brakes click, the line hisses, and the freight whooshes into the night. It has taken less than five minutes to change crew. Now we stretch out and sleep while crossing the Colorado River and beyond, for there is no better siesta than on a freight that rocks like a cradle where nothing can disturb you until the next crew change.

We surf the rail out of California and into Winslow, Arizona, with the Eagles Standing on the Corner Statue that is a catchout point for hobos with a catchy line to their song Take it Easy… 'Such a fine sight to see'…' and then the crossing bells clank for the thousandth time and the train pushes on. MoJo admits to quitting coffee for the trip and is well into a full beard. He asks about my shoulder tattoo of a mouse with a smile and teardrop in one eye to which I justify that on the road when you're smiling you'll soon be crying, and when you're crying you'll soon be smiling.

This is our state on striking Belen, New Mexico. Most hobos ride the rails in confusion. They get on a train sober with a bottle of wine or whiskey, and drink it down in the first two hours of the ride so they'll be sober again to debark at the next division town. They pause in one of these junction jungles to clean up, perhaps to work a temp job, panhandle, or visit friends. As long as their stomachs are full and they remain on the move they're happy. However, the boxcar tourists I ride with travel with purpose: to see the nation, to get from one place to another, or to learn of themselves. I believe that to live fully one must have, in addition to a means of support and something to do, a higher purpose. This resolve, to be a goal at all, must have counter-purposes or purposes which prevent it from occurring. There must be individualities which oppose the purpose because if one lacks these it is nearly certain he will invent them.

 We 'plastic people', as the grimy traditional hobos call us for our cards and perhaps appearance, are abetted in our travels by three tools of the trade that most conventional bos will never know about but would give the gold in their teeth to own. The first is the Rand McNally Handy Railroad Atlas of the RR 'interstates' or main rails. I also carry system maps for Amtrak and Greyhound in 'poor man's laminations' of clear sealing tape. But the trump is the Crew Change Guide. Otherwise, you'd face as a green bo entering the rail system a great many pieces of paper whirling about a room that would be confusing until you picked out the one piece of paper by which everything else is in motion. This is the Guide that has replaced the hundreds of sheets of notes and yard sketches that I made on my initial runs in the 80s.

The Guide is shrouded in mystery that I now can clear. The author was a folk hero named Train Doc whom I met at a Dunsmuir RR festival in the 80s. He is a Vietnam vet who became a New England nurse's aide while spending all his free time freight hopping and recording details about the thousands of yards: where to catch out, jungles, supply stores, where the units 'head up', fences, and bulls. Since train hopping is technically illegal, he titled the guide From Birmingham to Wendover: Alternative Travel Guide to Cool Camping Places so that if a law official discovers the text it won't incriminate the rider. The Guide lists no author but in the 80s everyone knew and Train Doc confirmed to me that he wrote it to help others in searching out the freedoms of the open road. Train Doc is an Ed 'Lilywhite' Norton look and talk alike if you remember Jackie Gleason's TV Honeymooners. I tell people the Crew Change Guide is the most laboriously researched book in English literature and the most helpful in a narrow topic range.

Now adrift in the middle of New Mexico, MoJo studies his IPhone Googlemap and Yelp (whenever near an Interstate or bridge) as I compare his data with the Crew Change Guide. My compass is deflected by the metal car and rail to point forever east and is useless. We jump down in late afternoon in Belen, a railroad community that exists because of BNSF, located on I-25 thirty miles south of Albuquerque. The omniscient Guide and IPhone concur that there are a Valero gas station and Blake's Burger a half-mile through a weed patch and west on Reinken Ave, and so we hoof it.

 Hobos own their own Golden Rule in the form of an Ethical Code that was created by Tourist Union #63 at the 1889 National Hobo Convention in St. Louis, Missouri. Sandwiched between Rule #1 ('Decide your own life, don't let another person run or rule you.') and later laws on yard and jungle conduct, tenets #2-10 deal with town behavior, as follows:

2. When in town, always respect the local law and officials, and try to be a gentleman at all times.

3. Don't take advantage of someone who is in a vulnerable situation,

4. Always try to find work, even if temporary.

5. When no employment is available, make your own work by using your added talents at crafts.

6. Do not allow yourself to become a stupid drunk and set a bad example for locals.

7. When jungling in town, respect handouts, do not wear them out.

8. Always respect nature, do not leave garbage where you are jungling.

9. If in a community jungle, always pitch in and help.

10. Try to stay clean, and boil up wherever possible.

In keeping, we wash up at the Valero one at a time, and then gulp great draughts of Gatorade, milk, and juice without burping. A kind lady hands me a bottled water and newspaper, and then returns fifteen minutes later with burgers and fries for my partner and me. A young Hispanic with gang tattoos presses $2 into my hand that I pass to the Valero girl clerk for feeling bad that she overheard me quip that it is odd for someone in a railroad town to never have heard of Amtrak.

Start, charge, and stop. Wait. Start, charge and stop. A repeating cycle of action that MoJo calls 'intensity interrupted by nothingness' is the hobo way. After the long lope back into the Belen yard we face catching out. Each RR yard demands about an hour of taxing multi-tasking in finding and boarding a car, the iron steed breaks the gate, and now we will look at another eight hours of countryside roll by like National Geographic except with the elements of sun, wind, insects and odors. We have chosen a piggyback to ride from Belen. The Piggyback is a flatcar that carries semi-truck trailers. One leans against the big tires and views 270-degrees of flowing scenery from under the trailer belly albeit a few dangling brake cables. The piggyback doors are sealed flimsily like containers and so bulls frown on pig riders, causing hobos to secret between the rear wheels. I've also ridden side-saddle like an old west Indian shielded outside the tires through hot yards. I used to say, things blow around and away on 'pigs', so everything should be roped down. I no longer say that because this is my first ride on a pig with wind blinders that have come into vogue in the past couple of years. The blinders stretch from nearly the tires to the front prong to block the breeze, still allow a view around and under, and screen prying eyes from the outside. A piggyback train such as this is a priority, third only to Amtrak and container trains, that I favor all in accordance with the seagoing adage to admire a small ship, but put your freight in a large one because the larger the load, the faster the voyage and the greater the profit.

Across the Rio Grande flies the blundered pig into the night.

Ft. Worth!' announces MoJo, glancing up from his glowing IPhone, as though neither ever sleeps. This is the BNSF headquarters with spokes east, west, north and south, but we conjecture this train of truck trailers is northbound along the dense Southern Transcon. The Southern Transcon is the main line of the BNSF between Southern California and Chicago. It was completed in its current right-of-way by 1908, and now serves as a mostly double-tracked Intermodal corridor. The route is one of the most heavily trafficked in the western US with an average daily of over 100 trains with each averaging one to 1.5 miles in length, like ours.

It's a fast five minute crew change in Ft. Worth as we hold fast with beef jerky and Gatorade. The 'hobo diet' while stuck on rolling stock day after day is one of the most effective with the fewest hunger pangs because there is so much to watch. Quick in and quick out is the way I like a yard, and before the train picks up speed it glides by the tremendous WalMart distribution facility beneath the setting sun. WalMart, a few months ago, announced the opening of a new online fulfillment center that the train wheels slowly by so that I have time to study the lot. I thought WalMart was big but this nearly 1 million square-foot facility proves it's huge. With 4,100 stores within five miles of two-thirds of the US population, WalMart gains a significant advantage over Amazon.com by positioning this online distribution building in the center of its empire. I estimate 500 parked or rolling company semi-trucks in the building lot before our train whisks us out of sight. Yogi Berra said, 'When you get to a fork in the road, take it,' and we did that.

It's deliciously incongruous how one may pack for the hob life or for the WalMart life. The WalMart life is supported by millions of homes cluttered with items of want and need in a ratio of about 10:1. On the other hand, we have packed streamline to move quickly cross-county like hobo chameleons resembling, as the need arises, the yard workers in freight yards and normal citizens in stopover cities. Our ostensible school daypacks weigh about 30 pounds (sans liquids) and contain little more than earplugs, electronic handhelds including a set of walkie-talkies, credit cards, a hundred dollars in the inseams, flashlight, compass, day's supply of food (beef jerky and trail mix), toothbrush, pen and pad, paperback, 20' length of rope, tarp, and windbreaker. A compressible 40F sleeping bag is toted inside at the top, and the pack is soft to squeeze under fences and into cubby holes, without loose straps to catch on passing machinery. The key to our disguise is a pair of overalls – he has coveralls and I a pair of bib-overalls - that protect our citizen clothes beneath and walk easily into any RR yard.

 We set our course on the ocean of rails to the north. I warn, freight riding in the east is far different from the west with more towns swamped on one another, single tracks, more sidings, and fenced yards with higher security, but, after all, we will see industrial America through the back door. Magnificent! Up through the Texas Panhandle, as MoJo calls out the towns from his IPhone Googlemap, 'Amarillo… Oklahoma City… Wichita!' yells MoJo as if it's a tornado. He's enthused. The metaphors of trains are many. Life is a string of beads, and a train of moods, and as we pass through them they color and enlighten if only we can see our goals.

Kansas stretches on like a mat of grass occasionally rolled into lumps and crisscrossed by a gridiron. This is the heartland of America. In east central Kansas the rail becomes single and our train goes 'in the hole' on sidetracks frequently to allow higher priority intermodals to pass from the same or opposite directions. Our rate is suddenly cut in half to an average 30mph for the next 24 hours. Hundreds of single-horn toots blare day and night at clanging crossings. BNSF serves over 1,500 grain elevators located mostly in the Midwest with Kansas among the leaders. Had we chosen a mixed freight through this grainland the chances of being 'ditched' beside one of these towering silos and having to walk the rail for hours to civilization would have risen.

Train whistles are used to communicate with other railroad workers on a train or in the yard, as well as with the savvy townspeople. Different combinations of long and short whistles – like a Morse code - each has its own meaning. They are used to pass instructions, as a safety signal, and to warn of impending movements of a train. Despite the advent of modern radio communication, we endure many of these whistle signals hourly. A succession of short sounds is used when an emergency exists, or if persons or livestock are on the track. It sounded when a Northwest train I was on once braked for a blow-up dinosaur placed in the rail by a tramp who wanted to board from his favorite fishing spot in the Rockies. The most common signal is one short as the train is approaching a public grade crossing. Highball we've identified as two long blasts, and three shorts while the train is stopped means backup – which notifies the hobo to get off or be ditched.

Kansas City!' is the morning call, to which I frown at the ambiguity until he murmurs, 'Kansas'. I stiffen to an exclamation point. KC, KC is a RR nexus that throws spaghetti tracks out N, S, E, and W. A hobo nightmare. I make lighting compilations in about seven theaters of possibilities as the train bowls past the four story bright red 'Kansas City Southern' barn sign and into the BNSF Argentine Yard. We peak under the blinders barely daring to breathe least they flap. This BNSF classification yard is the largest with 780-acres on the on the system. I see an intermodal hub center, a hump with 60 sorting tracks yonder down the rails, a car repair shop, a large diesel shop, several other outbuildings, the main tower with a cyclopean 360-degree glass, and beneath it dozens of scurrying yard workers in and out of vehicles. I'm reminded of the book 70,000 to 1.
MoJo seems daunted. 'I want out.'


'I've allotted one week away from the political swamp for this trip and this is the fifth day. I have to think about returning to Washington DC.' I see his point, but the timing is poor. The highlight of the Argentine yard is it's hemmed like a prison - has been for miles - by a 8' cyclone fence topped with razor wire.

We visually sweep each side of our flatcar and see nothing but rows and miles of hundreds of other strings of cars, buildings, and an army of workers corralled by the cyclone fence. The crew change will be on a dime here, and we choose to hang tight and look for a break in the fence while rolling. But first, there's a light jar toward the rear as half our train is cut loose, leaving us a half-mile long with four snorting engines. A lone white van stenciled Renzenberger pulls aside the lead unit, and the outgoing crew climbs in as the incoming crew exits and mans the locomotive. Operating a fleet of thousands of such vehicles thought the nation, Renzenberger is the recognized leader in providing crew transportation to and from their call motels. Hobos use them also, and I've hitched rides twice right to the waiting locomotives.

Even as I chuckle in reflection, the hoses snake with turgor, brakes click, here comes the drumbeat, and the car bolts forward with our necks jerking like Jack-in-the-boxes. Nonetheless, we survey the fenceline on both sides for breaks to escape. There are some, and the train does pause, twice in the five miles between KC, KC and KC, MO, and yet I won't let the reporter depart. Both sides of the sewn track between the two KC's are seedy industrial and residential wasteland where those colorful rail riding hobos have been replaced by the bag lady, welfare sponges, gang bangers, and stew bums. We cling to the safety of the flatcar knowing the fence prevents them from getting to us. 'That's ok,' MoJo resigns.

Trapped, I've never been on a faster freight. Four locomotives roar with a half-mile load streaking at 70mph up and down roly-poly Missouri. In a bucking wind we pull our sleeping bags up to our chins falling into an uneasy slumber on a hard crazed vibrating bed. Crack! Crash! The freight is suffused in alternating light and darkness. We've driven into a near tornado and the wind blinders flap wildly dumping buckets of water into the sleeping bags. The metal floor drops to 40F, and MoJo vows dryly though chattering teeth, 'This is the test.'

The best strategy is to fold into a G note and meditate on sunrise until passing out. There's always a morning after. It sounds like something from a Woody Guthrie song, but it's true, This land was made for you and me. One comfort of hoboing that takes some getting used to is if you don't know where you're going you can't get lost. But we've come very far. People travel to wonder at the height of mountains, the waves of the sea, at the long rivers, and the compasses of the ocean, under the circular motion of the stars, and they pass by themselves without wondering who am I that is often discovered on the rails. This is what I hope for MoJo. We've been riveted to the rails for 3000 miles in six straight days from LA via Texas to Chicago, a speed and distance record without a layover for me.

'Chicago!' Situated in a broad valley 17 miles southwest of Chi-town, the Willow Springs Intermodal Yard stretches two miles, yet with about 20 tracks is only one-third of a mile wide. Our flatcar sits smack between two highway bridges that we study around the blinders of the piggyback like Kilroys. Nearby, a 40' truck trailer like ours is being lifted into the air and placed squarely on a nearby railroad flatcar. Another giant crane is removing piggies from a flatcar to a road. The nearly absurd thought arises that an intermodal hobo could remain on board in a hammock lashed under the piggyback and be conveyed up and off the flatcar to the road, a semi hooks on, and he continues to hobo the Interstates sheltered by the wind blinders for as long as one could endure the tire tossed pebbles and dead skunks.

Willow Springs is BNSF's second-busiest intermodal yard, performing about a million lifts a year. Its key customer is United Parcel Service whose mid-west facility located next door handles two million packages daily. Packages bound for UPS distribution facilities less than 400 miles away are trucked. Greater than 400 miles, there's a train ride in that trailer's future… And that's where BNSF comes in. It takes 10 percent of UPS's total domestic ground volume. Like a passenger train, the trailers aren't held until they're full. They depart at assigned pull times scheduled to meet train cutoff times. The packages are read on a conveyor belt three times en route to the proper piggy trailer. It's driven next door to the Intermodal yard, add one hobo if you wish, and it's off to a dozen major destinations.

At Willow Springs, 99 percent of the units handled are trailers rather than containers, and today there are about 3,000 look-alike trailers scattered across the terminal and five loading RR tracks all go where they're supposed to go, followed by computer. It seems the only thing not tracked by computer these days, not counting the GPS in MoJo's IPhone, is the hobo.

Freight riding falls somewhere between chess and war. In chess, there are the same problems and movements but if you lose you pull the pieces out the box and start again. In hoboing, you can get hurt or caught by the big, bad Bull, and it's illegal. But in war, the enemy is trying to shoot you. There are many life lessons from each, and on this trip we have learned much of the recent changes in the rail commerce. The train industry among all has been progressive in America. As a wise man never lies down on the tracks of history to wait for the train of the future to run over him, each year I go out on the rails to see innovations. If there is a recession underway in USA the railways refute it. In the past five years, there are twice as many trains, four times as many intermodals (containers and truck vans on flatcars), yard workers use quads instead of walking the lines, RR bulls have been replaced by private young security, and, attesting for the hobos, far more and colorful boxcar art reflecting more youthful train riders. One change in technology has brought about the greatest hobo evolution in history since steam yielded to diesel-electric in the 50s. It is the addition of wind blinders to semi-truck vans like the one we rode screened in wonderful privacy from KC to Chicago. These piggybacks have always been a favorite with a wide view and shade under the belly, however no more may security pick off bos rolling through yards. The blinders have made us hotshot hobos.

The reporter has gained a universal education from the rails. Have you ever seen a retired man who pined for his desk? MoJo would rather ride the trains to Washington DC, but there's no time. We hunker under the piggyback and don our 'goin' to town' clothes for the first time in nearly a week. For me, it's a blue pinstripe shirt under bib overalls and for him a clean black windbreaker. It always seems impossible until it's done. We hop down - take a minute to relocate our landlubber legs – and shy to the east side of the yard onto a dirt track that meanders as pleasantly as an old English lane through a woods bordering the Des Plaines River to the Willow Springs Bridge. We look like train tramps to train tramps, like yard workers to yard workers, and soon will blend in with regular citizens. A brakeman bathed in sunshine waves like a windmill thinking we are exiting crew, and we greet back. Once down the bridge embankment we walk two blocks north along Willow Springs Road to a Speedway station with a Subway shop. After a meal, a taxi whisks us for twenty minutes to Chicago Midway Airport where he jets to DC and I encounter former President Carter exiting the Miami bound plane I'm about to board. The Secret Service and FBI hardly take note of this hobo or could guess how I got here in the last six days.



 What do you call it when one of your friends pretends that he's criticizing you while really praising and exonerating you. It's not "your own man". It's a variant of "the perfect lie". You pretend you're blaming your friend while really praising him. "We called silver top at 950 but it really went to 10 before cratering so we were wrong." As Harry Browne said, "Well, if this guy considers himself wrong when he misses by just 5%, he must be incredibly accurate. I better sign up now."

Gary Rogan writes:

I have seen Woodward do it a number of times. Some may remember "the threat" to Woodward from the White House a little over a year ago after "Inarguably, Woodward has had greater access to the White House than any other journalist in town."

Kathleen Parker: The Obama White House 'threat' to Bob Woodward matters

Now Woodward is somehow sure (from the Newsmax article) that "Obama didn't intend to do something dumb… He just wanted to do the humanitarian thing and get Bergdahl released, "and then they failed to manage it."

I mean what else can it be? In the olden day the King never knew all the bad things that happened to the simple people, he was always deceived. But he always meant well.

And those who watched last Sunday's Fox's morning program saw how Woodward gently (well OK, snidely) made fun of a conservative talk show host because she just can't forget about Benghazi. What's a man to do if he has to maintain access? Or maybe this is about more than maintaining access. There is no reason to anthropomorphize these animals.

Russ Sears writes:

In track it's called "missing his seeded time". The only thing I have personally experienced that comes close to the lies traders to themselves and others is runners and their training and Personal Record. If you don't believe me talk to some fat person who has been to jogging for over a year and hasn't lost any visible weight, how their training been going.

A PR in most big races that have entry times now must be validated. Often in a race like Boston, the NCAA Track Championships or the Olympic trials, the times are so stringent that the racer often peaks before the race and then race day conditions are never as perfect as they were on PR day.

But in track, in minor races, coaches must give a "seed time" for the race officials to pick the lane and the heat that often are unverified. A seed time is suppose to be from a recent race, but rarely are they verified. The good coach will whittle his best runners times down to give him the best lane/heat. Then of course after his race, when his times are higher than seeded, "it wasn't his day".

Its unspoken but understood if he had the best time on the team, why he missed his seeded time.

George Zachar writes:

This seems like a first cousin of the "humblebrag", which is when you, usually consciously, try to get away with bragging about yourself by couching it in a phony show of humility, like "your inflatable inner-tube is way cooler than my 80-foot yacht. You get to be so much closer to the water and to nature. I envy you, I really do."
Perhaps it should be called "humblepraise".



I found this research paper very interesting:

"Political Extremism is Supported by an Illusion of Understanding"

We found that people have unjustified confidence in their understanding of policies. Attempting to generate a mechanistic explanation undermines this illusion of understanding and leads people to endorse more moderate positions…several psychological factors increase extremism, and attitude polarization is therefore hard to avoid. Explanation generation will by no means eliminate extremism, but our data suggest that it offers a means of counteracting a tendency supported by multiple psychological factors. In that sense, it promises to be an effective debiasing procedure.



You know those days where you make a 1,000 a day for 3 days. Then you drop 10,000. More and more it becomes clear that this pattern crushes the trader because he should have made not 1,000 but 10,000 on each of those first three days, but he got out of his own winning position too early.



Possibly the only way to hold any sort of intensity in a tennis match where the home crowd is against you (I'm watching the French) is to change tack and, as McEnroe did so frequently, control the situation as best as you can. You could try to get the crowd on your side by making them laugh, for example, but this might distract you. It may be like in trading against the cycle or trend and pinpointing your exact entry points, where although you know you're against the tide, you can still win without changing your style. So maybe you can have your cake and eat it too. You just need to know that's exactly what's going on.



For those interested in understanding one's place in the market ecostructure, Kirlenko et al have updated their previous work. They use CFTC trader id data from 2010-2012. Very illustrative of the efficient transfer from the weak to the strong.



Please take time to reflect, this chart tells a very interesting story…

Alex Castaldo comments:

Wow! From 7000 to 35 in five years and four months. That is a rate of return of roughly -63% per year.

***Spoiler Alert***

The identity of this stock will be revealed if you read further.

Kora Reddy wrote:

Send me the prize money. It is this ETN .

Yanki Onen replies:

And the final question is where did all that money go?

Total issued since inception $320,000,000,000. By the way inception date is Jan, 29,2009. Not a century ago.



Do losers average losers?

Averaging down is usually compounding your loss had been my experience.

Boris Simonder writes: 

Or, throwing good money after bad money.

Jonathan Bower writes: 

Averaging in or out looks a lot like hedging/scalping the gamma of an options position. Counter trend if you're short, trend following if your long.

Ralph Vince writes:

How you amend your position with respect to some factor (be it equity, time, what-have-you) is imho the next frontier, and the most productive, to-date, endeavor in portfolio management (and little understood because people had not crafted the tools to study it).

Adding to losing positions is portfolio insurance in reverse. The points bad of portfolio insurance, are points good now in this exercise and vice versa. There is an enormous, fertile, ocean-sized domain to be explored and exploited here, and there is the opportunity to step beyond mere aphorisms in this regard.

Larry Williams writes: 

Ralph, as I understand what he does is the worlds master of averaging positions—but not for short term trades—only trades where he knows the position will show a profit…unlike we short term traders that often buy at all time highs, etc.

Ralph Vince writes: 

I have endured, like Magellan's crew across the Pacific, trying to ignore the fact it was my own urine I was drinking. (Perhaps not fit for dinner conversation at the Captain's table). I did, however, survive intact and repeatedly.

Gary Phillips writes: 

Just because a trade goes against you initially, doesn't mean the trade isn't good. If the conditions that got me into the trade in the first place still exist and I didn't go all in with my full package initially, I'll add to my position. All it means is I was a little early on my initial execution, and when the trade is working, I'll add aggressively.

Ralph Vince writes: 

Yes indeed.

And so I found myself in a hotel room, in November, in Boston, staring at the face of a large margin call, literally seeing stars, that had to be met in a few hours to stay in the game.

With the great Mike Epstein ad my confessor on the phone, I boarded the T in Cambridge to deliver the check downtown and met the call.

It was a defining morning for me. 

Rocky Humbert writes: 

There is always a bit of truth to an aphorism.

For example: The early bird catches the worm.

anonymous writes: 

Rocky, yes, exactly. As a general rule,  averaging down, say, is a good way to get quite buried. What you say about carry, noise, etc. all certainly apply as well as far as I can tell. It IS complicated, hence the reason some sort of framework is required to arrive at conclusions to go about capitalizing on the idea (or, seeking to capitalize on other criteria)

Let's wind the clocks back to early 1987. At that time, there were certain programs pitched that were essentially based on portfolio insurance with a delta calculated assuming a strike at the current index price (in effect, the opposite of an "averaging down"-type of strategy). What was not widely-known of such strategies, is that losses incurred would take extremely long to recoup. The very programs pitched as ideal for retirement accounts, clearly were anything but (i.e. they were not crafted with an eye towards being at equity highs at some specified future point in time).

On he contrary, to be delta=1, 100% invested, is to be at very close to the full-out expected (asymptotic) growth optimal fraction, and endure all the lovely barbs and buds that has to offer — but who is operating based on this? Clearly there are benefits (early-get worm!) but there is far more to it than the aphorism suggests, and I think there is a lot of low-hanging fruit to be had here but, as you point out, many real and serious considerations.



 The chair reminded me of the idea of related markets.

He used oil as an example. That got me thinking.

I understand it can be a fool's errand. Time spent analyzing oil prices beyond 90 days can be time wasted.

However, oil is currently in backwardation. After this summer, prices are in a steep and consistent decline. WTI approaches $80 in 36 months.

This trend suggests strong macroeconomic forces are framing forward prices. I'm not sure I understand all those forces.

Is it oversupply?

Is it Keystone XL or related oil trains?

Is it deflation?

Is it a slowdown in the economy?

Are production costs declining?

Are investors dumping ETFs or index funds?

Isn't it odd that the crude backwardation is almost zero at the time of the expiration? Some body is profiting handsomely from the positive carry each and every month….



 I visited Nitmiluk National Park in the Northern Territory of Australia over the last few days, and in particular Katherine Gorge. One thing that stood out is the absolute calmness of the place. In that lay the strength. This will change of course in the wet season when roaring rivers floods and waterfalls prevail. Much like markets, slow low volatility trends exhibit strength, but with Larry’s seasonals and a shift in the prevailing wind, much may change.



 Whether it is scientists who have worked on a issue for years, a man whose marriage has broken up after 25 years, or an investment manager who is used to pocketing big profits on fees and no matter the fund's performance will always find a way to underpay his staff, so much depends on personality types. Man is not the most flexible of creatures. Ego and bravado no doubt play apart. The setting of one's mind by repetition becomes a formidable force.

Could it be with Manchester United that the players group had mentally prepared for the exit of sir Alex Ferguson and after his tight reign had prepared for a "break"? No matter the coach that followed, the result would have been much the same. I wonder if traders make the same mistakes with profit and loss curves and goal setting, creating the gremlins that brings their trading down.

Jordan Neuman writes: 

In his baseball analysis, Bill James conjured the "Shotten Syndrome," named for mild-mannered Burt Shotten (well played by one of Barney Miller's colleagues in the movie 42). The theory was when a relaxed guy followed a taskmaster, in Shotten's case Leo Durocher, the team would respond positively.

In trading the analogy would be hewing too closely to a fixed idea of one's trading. Whether that is limiting the type of contracts one trades, long or short bias, long or short premium, it tends to eventually narrow the processes of the mind. Of course straying from one's area of competence is a separate problem, but who said this is easy? I have been running my own fund for 16 years, and while I wish I could have more than a few "pitches" back, as the low-level Air Force guy said in War Games, "#@$%, we're still here!"



Granted, es's test and failure failure from last Friday's unemployment-spike-high cannot be ignored, but still, the market has been going sideways for around 3 months (and is still priced in the upper-half of the range); yet, the cognoscenti appears to be convinced there has been a regime change. Methinks everybody is a) a bit TOO bearish, b) believes everything they read, and c) is prone to a multitude of cognitive biases and faulty heuristics.

Let's take a look at comments from zero hedge this a.m.

*It has been a very quiet session so far, and despite the slow-mo levitation in the USDJPY, its impact on US equity futures has been minimal if not negative. In fact, following yesterday's latest late day tumble, which Goldman summarized as follows, "Equities tried and failed again to break 1885, it continues to be the level that we can't escape"… it would appear we are increasingly changing the trading regime, and as Guy Haselmann explained simply, markets are slowly but surely coming to the realization that the Fed's crutches are being taken away (that they may well return following a 20%, 30%, or more drop in the S&P is a different matter entirely) and that the economy will not grow fast enough to make up for this. Perhaps the most notable "event" is the sheer avalanche of banks pushing up their forecasts for an ECB rate cut (and or QE start) to June following Draghi's yesterday comments. And so the 1 month countdown begins until the end of forward guidance, or until the ECB "shatters" its credibility as expained yesterday.*

My thoughts:

1. I wouldn't trust Goldman's "opinion" even if Donald Sterling were to give me all of his money.

2. Guy Hasselman is "assuming" a) the 5 yr equity rally was "entirely" a result of qe, simply based on correlation b) taking that stimulus away will prohibit the market from continuing higher and c) earnings growth will not be able to keep up with the market.

Here are two opinions that essentially meaningless, if not self-serving, but because it is in print on a widely recognized site, they will be taken as gospel by the herd. Indeed, the market looks like crap, largely in part to momentum stocks that got way ahead of the market, and are still in the process of getting re-priced to acceptable levels.

What they fail to take into consideration or fail to say is:

continued low interest rates are:

- improving(shrinking) spx dividend yield/10yr yield ratio
- taking the "pressure" off of earnings growth
- making equities under-valued as risk-free rate drops
- and even more undervalued if equity-risk-premium drops
- helping fund buy-backs

…driving price, and keeping equities undervalued on a relative basis

and, as long as the ten doesn't get back above 3.00%, the bull market may be tougher to derail than most people think

granted these too, are all assumptions

but that's the point…isn't it?

p/c ratios are split, breadth is struggling, $vix is still bullish, the indicators are mixed, and the outlook is neutral, but the bull trend is intact. both the bulls and the bears had their chances to assert their dominance, but at the end-of-the-week, all we are left with is an inside week

key levels look like this:








 I have seen many of your posts finding trading wisdom from so many other disciplines. I think they are valuable. Here is a relevant one relating to Roger Federer. "Roger Federer May be More Machine than Man". It is not current and you may know this piece already, but fyi. All the best, Fred Rickey.

Victor Niederhoffer comments: 

Very interesting consistency stats for Federer. But is it good or bad to be that consistent in trading?

Vince Fulco writes: 

As our august surfers on this site have remarked often, i am coming around to the view that trading is more like surfing. Have to watch a number of opportunities pass by until one is right for you then take the risk and stay flexible for the inherent churn, back and forth, sturm und drang caused by the newer HFT players, news/tape bombs and the over-reactors. The minor undercurrents will push you around for no apparent reason. It is as much knowing and developing one's ability to cope as it is having a strong market opinion.

Richard Owen writes: 

A Fed that never delivers surprises? I guess there's also the question of whether the stats are consistent only for Federer, or if this is typical of pro players?

Ralph Vince writes: 

Consistency, if it is the equivalent of variance = 0, is, to my way of thinking, certainly something beneficial to the trader. Given that variance, contrary to the generally-held notion that it is somehow (at least an aspect of) risk, is actually a diminishment of returns (i.e. variance is negative average return), then clearly you want as little of that as possible.



 I was talking to an old friend of mine yesterday. He was a floor broker for Lehman Bros in the bond pit (he once sold me 500 calendar spreads while standing next to me at a urinal in the men's room). When he first left the floor he attempted to trade electronically and within a relatively short period of time went through all of his money. He had to take a job with the CME working at their help desk, and was eventually promoted to associate director of the Globex control center working the third shift from 3 a.m. to 11 a.m., and is now a senior director at the CME.

He told me an interesting story about his experience trading after he left the CBOT. It was about another ex-denizen from the floor. This individual, however, had worked as a clerk for a mutual friend of ours, who had been a trader. My friend went on to tell me how the ex-clerk had been making $1,000- $1,500 screen trading, per-day, like clockwork — averaging $25,000 per month for quite a period of time.

However, after my friend went through all his capital and stopped trading, he lost touch with this ATM of an ex-clerk. But serendipitously, ran into him the other day when he hopped into a cab. However, the ex-clerk was not another passenger, but the driver. Of course, there are quite a few lessons to take away from this story- not the least of which are:

- markets change and if a trader doesn't adapt, he'll be driving a cab
- becoming a successful trader is not easy, even if you're experienced
- core competency in one endeavor, does not guarantee competency in another
- working for a living sucks
- always be prepared to trade
- markets aren't the only thing that reverts to the mean
- not every cab driver in Chicago is from Pakistan or the Middle East

- never turn down an edge, no matter where you are, or what you have in your hand
- always wash your hands after making a bathroom trade

- success is fleeting, losing is forever

Leo Jia writes: 

Thanks Gary, for the interesting post.

I found your title (or the last lesson on your list) quite intriguing: "success is fleeting, losing is forever". Seems apparent in a lot of cases. But why and how is that true? Especially when we consider your other lesson: "markets aren't the only thing that reverts to the mean".

Anatoly Veltman writes: 

Isn't it true: even having made 5,000% on your money, once you lose only 100% - you got no money left. That is more like self-sabotage.

Leo Jia writes: 

Normally, if one wins/loses in percentage terms, one nearly never loses 100% - sure one may lose so much as to have not enough fund to continue trading.

Let's assume that he wins/loses 5% on each bet. To make 5000% in the fastest way, he needs 175 consecutive wins. From here, to lose all he has made and get back to his original amount (which is still enough for him to continue trading), he needs to go through 166 consecutive loses. If his wins/loses do not happen consecutively, which is normally the case, it might have taken him over thousands of trades on each way.

So in this process, even though losing takes fewer times than winning (166 vs. 175), winning and losing both take a long time. So the other lesson "markets aren't the only thing that reverts to the mean" could apply here: after losing some, one starts to win. I am not sure how one can conclude "success is fleeting, losing is forever".

In the worst god-given case where he has no edge at all and trades simply based on flips of a fair coin, he has equal chances of winning and losing.

The only case where "success is fleeting, losing is forever" is possible is when he always strives so hard to create a very large negative edge for himself.

J. Hughes comments:

 Interesting, but the distinction needs to be made, "he was a floorbroker", quite a different occupation than that of floor trader. It's easy to trade against an order deck.

Having done both job's, cabdriver, and trader, though for different reasons, I can state unequivocally, yes markets change and if traders don't adapt, they perish. But the bigger insights lie in how much cab driving is similar to trading. Both position risk capital upfront, the 3 G's, gates, gas and graft. Then there is risk control, it takes skill to size up an individual when one is traveling at 35 MPH and trying to cover the costs of the 3 G's. Then there is return on capital, I can say first hand, my return on capital as a cabbie, on a nightly basis, was far superior on a percentage basis and more consistent as a hack, than a trader. Although I am back to driving a computer once again, and there are times I wish I was back pushing a hack. Both positions are very much traders. It's a natural fit. The lesson is, "life is replete with vicissitudes."

Ed Stewart writes: 

The problem with making $ 1,000-2,000 a day is it is enough to provide a salve and decent quality of life that makes one feel like a professional, but this is not dentistry or a job at a federal regulator. IMHO the correct target is to get rich and become a real capitalist. How one does that, via trading, a service business, or a money manger (combining the two) does not matter so much as actually doing it by any means that is legal and ethical. Going for crumbs doesn't cut it.



 People generally cannot understand or have difficulty understanding or picturing exponential growth. There is a story about the inventor of chess when the King condescendingly asked him what he wanted for a reward, the inventor replied that he would like the number of grains of rice, which when starting with only one grain, doubled in amount for each square on the chess board. The King laughed and thought he got off so easy. This same inability to picture compounding growth interferes with a long compounding hold of financial assets.
The same lack of ability to see compounding growth applies to study of past growth. People understand linear growth more easily.

Vince Fulco writes: 

The inability to see compounding growth interferes with the study of nearly everything I might add. We tend to think that evolution is responsible for much if not all of the world that we see, a function of random mutations that have a selective advantage. Consider, after all, the universe is about 18 billion years old. In seconds, this is 60 x 60 x 24 x 365.2425 x 18 x 1,000,000,000 = 5.68e17.

"Random mutations with a selective advantage." Yes indeed. A thousand monkeys wailing away on typewriters will eventually happen upon Hamlet.

So let's examine that (it provides an insight into the astounding character of exponential growth James writes about here). Only considering the line "To be or not to be," which comprise 18 characters. We will consider the space a character, and make no distinction between upper case and lower case, require no punctuation, but rather a keyboard for the little apes having only 27 keys. The probability of any one monkey typing only this line is 27 ^ 18 = 5.81e25

To put the relative differences into perspective, if I could take a thousand monkeys, 18 billion years ago, and permit them 5,000 keystrokes per second, we would have about an even money bet that, without regard to case or punctuation they might, with a probability of about .5, come up with something like "to be or not to be" and much less all of Hamlet.

Natural selection, whereas I do not contest its existence, does not explain a whole lot as clearly not enough time has elapsed since the big bang.

I'm wrestling constantly these days with allocation structures based on similar matters, where a copula of discrete outcomes (say, the copula of rolling a pair of dice) posses 21 possible, distinct outcomes such that the branch out across elapsed consecutive trials gets unfathomably large quite rapidly. Even with parallel processing (more monkeys, more typewriters) the problem reduces, but the scale remains too enormous still as a result of astounding nature exponential growth.

Henry Gifford writes: 

The relatively new field of epigenetics has some very interesting answers to the astute observation that random mutation alone would have taken too long.

Stefan Jovanovich writes:

So, one starts with a "known" fact that is not a fact at all — monkeys sitting at a typewriter writing Hamlet. Then, one proves mathematically that the fact is not probable; and that, in turn, raises a question about the validity of the current best hypothesis for explaining the organic world around us — namely, that through natural competition fortunate mutations win.

It seems to me that we are all saddled with two very stupid terms and our minds wear them like blinders - Marx's word for the results of enterprise ("capitalism") and the Darwin's unfortunate choice of the word "selection" for his title. "Evolution", especially in the eyes of its admirers who try to turn its theory into a fact, somehow takes on the certainty of religious moral authority; it "explains" everything just as Marxism does. No, it doesn't; but Darwin's theory does withstand the Shakespeare test. For one thing, there is no evidence that any monkey of sense would go near a typewriter.

If Marx fudged the data wherever possible to make history say what did not, in fact, happen, Darwin did the very opposite. He thought there could never be enough data to "prove" his hypothesis; but he did take heart that there was, at least not yet, no data that proved it wrong. He does seem to have realized that he had been proven wrong in his choice for the title for his first edition. But he deserves a pass for that.

In choosing On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life, he was not endorsing the Southern way of life or Dickens, Carlisle, Kingsley and Ruskin's defense of Governor Eyre. Hardly. Darwin was one of the very few people who had the courage to speak up, along with Huxley, John Bright, and John Stuart Mill. In using the words "race" and "species" Darwin was using the biologist's definition - could male and females produce offspring. In the rare times when he was asked about human "races" Darwin was genuinely bewildered by the question; there was, in his view, demonstrably only one human species/race.

That leaves the point HG notes. Useful mutations may have had their randomness accelerated.

"Timescales of Genetic and Epigenetic Inheritance":

"According to classical evolutionary theory, phenotypic variation originates from random mutations that are independent of selective pressure. However, recent findings suggest that organisms have evolved mechanisms to influence the timing or genomic location of heritable variability. Hypervariable contingency loci and epigenetic switches increase the variability of specific phenotypes; error-prone DNA replicases produce bursts of variability in times of stress. Interestingly, these mechanisms seem to tune the variability of a given phenotype to match the variability of the acting selective pressure. Although these observations do not undermine Darwin's theory, they suggest that selection and variability are less independent than once thought." 

Jeff Watson writes: 

We should revisit the Second Law of Thermodynamics, and how some scientists speculate that it enables the formation of life itself. There is some very good peer reviewed literature regarding the second law and life.

Anyways, there are some very interesting challenges to Stanley Miller's glass jar filled with water, methane, ammonia, and hydrogen.(I believe he got his PhD from the same place as the Chair). In Miller's experiment, he blasted it with an electric arc for a long time, and out of this primordial soup arose half the amino acids required for life.

Fifty years later and biochemists and physicists today are on the verge of creating an artificial organism that meets all the criteria of life.

Mr. Krisrock asks:

In evolution it's the survival of the fittest, so how come so many species still exist?

Gary Rogan writes:

There are multiple niches in the environment, so species specialize.  The famous Darwin finches were shown to adapt their overall size and beak size to different sub-environment both geographically and on the same island.  It's the same reason why Toyota doesn't operate supermarkets or Procter and Gamble doesn't own any airlines.  It's easier with conglomerates: at least they can get specialized departments, but imagine a lion competing with heat-loving microorganisms in under-water vulcanoes.

Now the jumps: just because not all species that died out left any identifiable remains, doesn't mean they didn't exist.  The absence of evidence is not evidence of absence.

Bruno Ombreux writes:

Why is it hard to believe that matter will organize itself into a more
complex form when a very high temperature source of energy is in the

Matter will organize itself when it is in an open system subjected to an energy gradient. See Prigogine's principle.



 I have been thinking about what could be a good set of criteria to measure trading (strategy) performance for individual traders.

The criterion of average return divided by the variance of the returns seems to have its shortcomings. One reason is that some large positive returns can cause the variance to go up resulting in an indication by the criterion that the performance deteriorates. But some large positive returns are good to have.

Other criteria like Sharpe ratio seem more suitable for institutions.

I think using properties of the linear regression line of the cumulative return curve might be a better choice.

Two useful properties are the slope and the "width" of the linear regression line. By "width" I mean the deviation of the cumulative return curve around the linear regression line.

A good performance should have high slope on the one hand. And if we do not consider reinvesting profits, it should have narrow "width" around the linear line.

So then the value of slope/width seems meaningful.

If we take the linear regression line as a risk free benchmark, then this value may be very similar to the definition of Sharpe ratio, but practical for individuals.

Would anyone please comment on the pros and cons of this, or any other better ways to measure performance.

Alexander Good writes: 

Great post!

I think it makes sense to measure linearity of PNL and convexity separately so I agree with you that R sq is a good one to employ. I am curious how width differs from the strategy's std though…

One thing that you can do as a cheap proxy is median return * sqrt(252)/std return and then for skew then have a (rolling max peak to trough draw down)/(rolling max peak to trough draw up).

You can benchmark your strategy vs. bonds, the S&P and a traditional 60-40 mix or your other strategies. It's very hard to beat a vol weighted portfolio of stocks and bonds so it's a good benchmark in my humble opinion assuming you're trading your PA and you don't have large retirement holdings. I assign different weights to skew and median return depending on my portfolio construction.

In portfolio construction you'll often find things with strongly positive skew have good inverse correlation to market PNL series and are typically 'long vol' (idea ripped off AQR's value and momentum everywhere).

Trending strategies frequently have very positive skew (momentum) whereas mean reversion tend to have skew that looks like the S&P (value). So if I'm net long beta my marginal utility of doing trending models is higher whereas if I'm net short I tend to size up mean reversion strategies.

Would be curious to know what other people are using/ how other people think about this/ if they have good papers on the subject. 

Leo Jia writes: 

Aren't they different?

std of returns has this term: (Ri - mu)^2, where mu is the same for all i's.

The width has this term instead: (CRi - Vi)^2 where Vi is the value on the linear regression line at time i and is all different across all i's.

Alex Castaldo writes: 

Personally I just like to look at the equity curve visually, and it is not difficult to store large numbers of graphic files in a folder and quickly "flip" through them by hitting a key on the computer.

But for automated evaluation Leo's two criteria (slope of regression, and "width around the regression" (which is also called the SEE or standard error of estimate.in regression textbooks) make sense to me.

However I know there are many other criteria that have been proposed. There is one with a foreign name that I think starts with "v" but that I can't remember. I am sure some people here know what I am talking about, it was much blogged about 2 or 3 years ago.

In looking for it I accidentally googled another measure of equity quality, the k-ratio , that believe it or not has 3 different versions.

Any other ways to measure equity curve "quality"?

anonymous writes: 

As with many things involving non linear information, my experience suggests that one must mix, blend or combine different 'quantities' to form a unique and proprietary time series.

For example, some form of 3D 'curve' that combined the three quantities return, AUM & volatility that gets thicker as AUM in the strategy grows and changes colour as volatility of returns increases perhaps… 

Ralph Vince writes: 

percent of 6 month periods underwater
percent of 1 year periods underwater
percent of 2 year periods underwater

percent of time at equity highs
percent of time within 1% of equity highs
percent of time within 5% of equity highs
percent of time within 10% of equity highs
percent of time within 20% of equity highs

I have all of these programmed up in javascript which you can peruse at lspindexes.com and click the "compare" tab. 



 It always struck me that trading was a lot like a video game with the world's worst user interface (perhaps deliberately so according to some, who think that knowing obscure Bloomberg functions leads to job security). With the advent of Robinhood.io and potentially commission free equity trading, one of the major hurdles to gamification is removed (i.e. you bleed to death if you don't know what you're doing).

I wonder what would happen if you hired some very strong video game developers off Bioware or Nintendo (or even outright did a merger). Then mixed it with a trading platform.

I feel like you might hit an unexpected audience in Asia - see: Activision's Starcraft had near permanent cultural impact on South Korea.

Interactive Brokers is an awesome trading platform if you know what you're doing but the UI feels like it was made in 1995. In the meanwhile Nintendo is not adapting to the times. Totally impractical and probably would happen more as a start up than M&A but just a thought that could bring speculation to the masses.

Hernan Avella writes: 

Your idea seems an iteration of an old process, the transition of markets from the pit to the screen and from manual to automated trading. A certain trading firm I know used to hire young man with video game skills, namely being fast with the mouse and being able to do fast basic arithmetic. The fittest players also had a deeper understanding of deception…"fainting", a sequence based process for looking X amount of moves ahead.

The last 8 years could be described as the industrialization of gaming, fast computers, fragmented markets, cheaper commissions, explosion of quotes. It would be interesting to know what new games are being played now, or will be played in the future. Will they be just iterations of the old games (running stops, spoofing, layering) like the so called "momentum ignition"? Or as you hypothesize, will there be new games driven by new technologies and different ways to interact with data.



 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

keep looking »


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