If one could imagine a band of brothers on the spec-list seeing the coming dynamism of Apple, and investing in it, like the Rothschilds did in Italy and Austria and Germany with the railroads and other industries they financed, and profiting from their close ties with the agrarians and the republicans, and flexions of all kinds, and lending them money personally when they needed it and had to disguise themselves to hide from the authorities, all the while doing this with the utmost of integrity, one would get a picture of the Rothschild's during the 19th century.

anonymous comments:

Except that they missed out on the US, though the reasons remain controversial.

anonymous writes:

In reading the book The Rise of the House of Rothschild, by E.C. Corti (which focuses on the Frankfurt, Vienna branches of the family) I was amazed that the business of the continental Rothschilds consisted almost entirely of arranging large state loans. There is never any mention of any financing to the private sector, at least in this book (perhaps due to some bias by the author, I don't know). Even when they make a personal loan, it is always to some prince or prime minister, never to an entrepreneur. In the beginning of course they financed international trade via bills of exchange etc., but in this business they competed against many others and it seems (again according to this book) to have faded in importance as time went on. During the time of the industrial revolution, they seem to have done no industrial financing and not to have participated in the financial innovations (e.g. the large quoted company) of the era.



I believe that one might consider ALL price movement to be a result of two 'forces' referenced by 'Round Numbers'.

Force 1 can be thought of as a type of 'ionic bonding' where there is attraction between (say) negatively charged round numbers and positively charged prices. So, force 1 describes the 'constructual' path of prices to round numbers.

Force 2 might be when the polarity of the price action changes to match that of the round (as the round number has been 'achieved'). In this case, two similarly charged phenomena repel from each other.

Thus the total sum of price action might be considered as something approximating:

Total = Constructural + Repulsion.

I'm interested in testing this:

One may find better results from testing DIRECTIONAL strategies in the Constructural piece as prices approach the round.

Interestingly, I believe testing 'volatility' (not directional ) strategies for the Repulsion force part is likely a better option as there appears more volatility in the 'sign' of the repulsion move than 'normal'.

So, which is stronger,  Constructural or Repulsive?

I do not know. Depending on how you set up your test you likely could 'prove' both.

Given the way chains of relationships develop in cross market price action, my null hypothesis is that Constructural wins more often but Repulsion wins more.

anonymous writes:

Rather than a "Force 1" of ionic bonding, electronegativity might offer a more complete insight. 



There are lots of perspectives attending the oil bust, including the costs of the hedges, the losses associated with the accumulated debt, the write downs in equity values, the decline in asset values associated with the decline in the price of oil (thought this will likely go up in the future at some point) and so on. In the interim, companies are doing what they can to stay afloat.

"The chilling thing Blackstone said about the oil bust



 Yesterday was the anniversary of the tragic 1906 San Francisco Earthquake (Mag: 7.8 EQ)

Dr. Lucy Jones, a USGS Seismologist (@DrLucyJones) tweeted an interesting fact surrounding the aftermath: "The greatest growth [earthquakes] in Los Angeles was the ten year period after the 1906, while San Francisco shrank"

This has my mind racing on trading ideas for testing. If you figure Earthquakes as single financial instrument and SF & LA as two separate markets with similar securities and something like security volatility as earthquake magnitude (my first guess approximation, there are probably better indicators, perhaps security liquidity.) Which of these would you think are worth testing for similar outcomes:

Various Central Banks maneuvers- Perhaps we're seeing it now as the US Fed unwinds and ECB picks up QE.

WTI vs. Brent

S&P vs Dax or UK or Asia

Currencies- take your pick.

Not a commodity expert so hard to decide there. I would consider gold but it seems universal.

Would love to hear of your thoughts and please feel free to call me out for Ballyhoo.

Enjoy your weekends.



anonymous writes: 

 On or about the 8th March this year I posted a piece on the site that may help clarify your initial thinking on what to test.  ( if you want it sent direct to you please advise ).

Amongst much else, there are two types of waves involved.  So called P -  and S - waves.  ( Wikipedia has a reasonable description of both ).

They P waves travel in the direction of the energy propagation whereas the S waves ( or shear waves) travel in a perpendicular fashion.

One starting point is to consider P wave as movements within and between the same type of markets ( SPU, DAX, NIKKEI) and S Waves as subsequent/coincident moves into unrelated markets. 

The key is that P waves show up first on the seismograph. There is no Mount St. Helens eruption without a P wave but there are plenty of P waves without Mount St. Helens eruptions.

One reads much about the precursors to major things/ events/ phenomena.  They almost invariably focus on only one side of the distribution (ie the crash scenario in markets). I believe the trifling ( yet cumulative /additive) information available in research papers should be used for predictions of melt- ups AND melt downs, not merely the downside.

Paul Marino replies: 

Thanks for the quick response, will certainly track down your post. I totally agree with you at the one-sidedness of looking for the crash as opposed to the melt up and its ramifications elsewhere in the system.

I'm looking at it from the SF side where things stabilized and grew and the calling signs for fut growth there were reinforced by the "event" moving along to the other markets. As Vic says a forrest fire clears the underbrush for future growth and a firmer ground.

I see it as a value with growth opportunity in the initially affected area, SF, and not so much looking for future crashes although you could hedge/pair against the trade by going against whomever is along the fault line thereafter as an idea. 

anonymous writes: 

What grew in the 10 years after the San Francisco earthquake (God's work) and fire (largely the work of the stupid U.S. Army) was construction, development and population in Los Angeles, not "earthquakes". Los Angeles largely owes its pre-eminence in California to the effects of that boom and San Francisco's literal downfall. 

Pitt T. Maner III writes: 

Related to the San Francisco discussion, I wonder how the recent dramatic changes in depth to groundwater in some areas of California might change the odds over time.


"Researchers proved that the Hayward Fault, which stretches through largely populated areas in the East Bay as far south as Fremont and as far north as San Pablo Bay at Richmond, actually touches the Calaveras Fault, which runs east of San Jose. There is an estimated 14.3 percent likelihood of a 6.7 magnitude or greater earthquake along the Hayward Fault in the next 30 years and a 7.4 percent chance on the Calaveras Fault, according to the U.S. Geological Survey. "The smooth connection between the two faults means that an earthquake could quite easily break both faults at the same time, making for a substantially bigger and more destructive event," said Roland Burgmann, campus professor of earth and planetary science and co-author of the study. "Deeper in the Earth, we find small earthquakes that clearly define where the connecting fault is.""

2. Average time between ruptures

A interesting list of earthquakes in California



In the GE conference call yesterday, the word "organic" was used 28 times.

anonymous writes:

The plant is a complex organism, the fruit of biological evolution occurred over hundreds of millions of years. Each genetic modification caused by man in it, however small, will still produce irreparable damage that often can not be recognized, because we know with certainty only a few dozen vitamins and pro-vitamin substances. There are tens of thousands of vitamins and other substances contained in plants which are the responsible for the proper functioning of the complex biochemistry human and the human genome (DNA).



 One of the frustrating things about going against price action is sitting there watching the various markets' movements align to eventually produce a constantly changing level to buy or sell at. It's like a dog-fight between two state of the art fighter jets.

A really good analogy is the pilot looking through the HUD (Head up display) in which he can see at least three variables operating in more than one dimension all working to get the red dot on the target that is then augmented by a beeping sound (more multidimensional input).

Getting back to markets then, whilst all this is happening the reversalist is watching the price action move towards the zone… Waiting, waiting…The thought that eats away at me is this–why aren't I 'on' this move that is occurring NOW (as we approach my zone of interest).

Today is a perfect example. The market mistress allowed me to sell GBP USD at a much less worse than usual moment. However, I watched it climb in a straight line for 3 1/2 hours from the London open before it got there.

For the life of me, I cannot find repeatable techniques that will allow me to trade both sides of the market (using the same model) over the day. (I am excluding My high frequency activity here).

I know it is greedy, but I don't see why I can't have the cake and eat it.

Another tidbit that reversal types will identify with: During winning periods isn't it horrible that the moves that lead up to your taking risk are relatively more smooth and pleasant than those subsequent….

Which leads me to this:

I speculate that market moves which, after the fact, look beautiful, calm and smooth are relatively substantially more difficult to predict than subsequent horrible messy volatile reversals.

principiis obsta (et respice finem)

And the reverse.

anonymous writes: 

All 100% true in my limited experience. Its feels like a great irony that you wait for key moments, and then your key moments in a sense seem more difficult vs. what you had just witnessed… If you think it is going to "get there" why the hell is one not already long (or short)?

Consider a military ambush. The enemy might be in field of vision for a shot for quite a while before they enter the "kill zone". In fact the shot might be more clear as they (the prey) are in the open. They wonder about predictably, or so it seems, strutting or driving forward in a linear fashion. So why wait for "the kill zone" to make a shot? The difference is when they are in the kill zone, they are cornered and their reactions to that first shot are predictable - they are trapped and you can gun them all down much more reliably. I see waiting for the key moments as identifying points where the competition is off balance or trapped vs. just having a guess at market direction. It seems like it should be the same, but maybe it isn't.

By the way If my analogy is off-base I apologize to anyone with actual knowledge of how military ambushes are constructed. 



Some time ago someone posted a link related to backtesting strategies. I believe the idea was that prior familiarity with the data can cause one to over-assess the signifigance of a strategy, as one can very easily tweak a strategy or come come up with a rule set already knowing how it will turn out. Statistically (and I'm sure I described the issue poorly) I'm sure that this critique makes all the sense in the world. I have seen similar critiques in other places, all suggested that prior familiarity with the data is a bad thing.

The problem i have with the above is that in actual application it seems to suggest that having zero knowledge of how markets function might is an advantage, as then our tests would not be using our prior knowledge of what has already been discovered.

In practice I have found the opposite. In my experience, the more new strategy fits into one of my learned or pre-existing conceptual frameworks, the more likely it is to work in real application. In other words it is more signifigant vs. a random rule that might also test well statistically.

I wonder if the purely statistical critique of such things misses the fact that some regularities or price behavior have tended to persist over time and are related to other rules - meaning it is not just a grab bag of unrelated "ineffeciencies" one is looking for. Rather than being a disadvantage, knowledge of these things is actually a significant advantage, in my opinion. I'm considering if a classification system similar to what is used for the animal kingdom might be a useful way to classify relationships between strategies, and clear up some of the confusion (Perhaps only mine!). Then a test for significance could be done against this smaller subset, vs. (say) the average for all 24 hour periods. Judged this way it might be found that so many different "strategies" (what quantitative hedge fund does not employ at claimed 100,000 or more?) are basically all the same thing.

anonymous writes: 

I concur with what Ed said, and also found that critique confusing. Lately I come to think that it is more meant for data scientists who research on data but don't actually trade. Scientists chew the data hard and can find all kinds of regularities (I have been just through that route). And actually many of these regularities can be due to chance only leading to the situation where one can not tell which are valid and which are not. But I don't think the critique poses as a solution. I think the solution lies in bridging the mentality of scientists and that of traders in a nice and delicate way. One should start from a pure trader's mind and then proceed on to a scientist's way but doesn't get carried away. 

anonymous writes: 

I am agnostic (or given the hyperbole, that should be atheistic) as to the past returns of strategies that seek to position themselves for large, lower probability outcomes over extended periods and those that seek to profit from fleeting latency dependent methodologies.

By the nature of markets that I have studied including the early grain markets of the 19th century up to the new 'Crypto-currency' phenomenon of recent years (Are you reading this Satoshi?), the prospective probabilities of large or small moves keep changing and so must those that manage money.

Here are a few thoughts:

1. It is very instructive to start ones millisecond, second, minute, hour, day, week, month, quarter, year or decade with a view of what strategies worked well and what didn't and think of why that may continue or not. In terms of markets I would refer SpecListers to EdSpec pp (94 - 100) & pp (316 - 319). There is another email from the chair not in this thread re: Trend.

2. In terms of strategy returns (and only looking at the Survivors obviously ) the returns are HUGELY reversionary. It is quite stunning to see the names at the top and bottom of the performance tables over 12 and especially 18 months.

3. It is fully right that some firms in the self declared trend following space have made high double digit returns given the straight line moves experienced in many of the assets in their universe. I leave it to the reader to consider that whether or not these moves (or rather the internal 'structure' of these moves) will continue. Maybe they will!

4. Anyone on this site who thinks testing a set of trend following factors, applying a backtest, going live and then trading things unchanged for the next 20 years has a different view of reality than I.

5. A note from the trainers stable. Over 1/2 the returns from many trend strategies come from the choice of the volatility target and the 'sector weightings'. Whilst there is science behind the volatility target piece, the sector weightings thing is a pot luck gamble–which is just fine–but it should be noted that if a fund continues to apply a 60% weighting to the commodity space (for example) after it has experienced a massive straight line trend then, well, read the disclaimer.

6. If it is about making money and surviving well… Put it this way, three consecutive losing years until the second half of last year for some of the brand names in the space… One wonders how many investors were there left standing for the last 12 months' spectacular returns.

7. Given the above the pro-cyclical nature of flows into alternative investment strategies continues to astonish me. Gotta keep backing those winners…. right?

8. Taking a reasonably long time frame one believes that most of the time the markets behave like a casino and then there are spectacular periods that capture the imagination like recently that skew the thinking. The best combination is the two together but usually what happens is that the guy who had done well recently gets all the assets from his manager despite the negative correlation so the effect is not allowed to work.



The markets have a plethora of different structures and associations with numbers. Some examples are:

1. Round numbers

2. Opening & closing times

3. Limits

4. Constantly changing magnitudes and significance placed thereupon (for example there were extended periods last summer when the SPU futures had daily ranges in the mid single digits and now it's a score (20) per day).

Much work is done splicing and dicing numbers and looking for statistically significant positive expectations based on various past conditionality.

As another part of that, I wonder whether or not the first, or second or third instance of some stimuli is more or less predictive than the other or others.

This has been brought up in my mind by the recent dance of the seven veils of many markets with many round numbers.

As a start, how about this:

1. Is the first break of a round more or less predictive than the second (assuming the market has reversed intermediately)?

2. Are moves of the same magnitude in the same or opposite directions of interest within a given timeframe?

3. More qualitatively, when a market breaks some predefined barrier (a round, a magnitude, a correlation coefficient et al) and subsequently does so again later, is this last move more likely to have the same sign/ opposite sign and will the magnitude be greater or lesser?

One might start today with a live test case to think over.

Gold Futures traded 1199.7 earlier after opening above the 1200 round in Asia… The market rallied up to 1208.8. If we break the round again we may start observing things like those set out above that may lead to a testable heuristic.



 I do not look for one dimensional geometric shapes in visual manifestations of historical data. Not because there is nothing there but because I have no edge in doing so against the market.

However, it is fascinating how, occasionally, a market puts in an act of such beautiful symmetry that one is moved to ask further questions about multidimensional geometrical solutions to market forecasting.

Yesterday is a case in point. I will use New York time for the following and I refer to the S&P 500 futures (June).

The market at 3am opened the hour at 2093. Soon after the floor opening it topped out at 2101.25, an 8.25 point rally. Next the market declined to 2085.25, a 7.75 point decline from the 3am rate. The rate at 3 am this morning was 2092.50.

The flow and symmetry was beautiful and the old adage "The bookie always wins" comes to mind.

I do not know quite what–but there is something to be gleaned from the referenced 24 hour period.



 I was with a commercial real estate broker for several hours today looking at office space for my business. He said that Commercial Real Estate is really moving well and inventory is coming way down. It's a sellers market. Rents are going up.

He said that in 2014 in the St. Louis area they leased more commercial real estate than they had in the previous 3 years combined.

David Lillienfeld writes: 

In Silicon Valley, commercial real estate (CR) is almost non-existent, and the same is true for residential. Sunset Publishing maintains a beautiful garden at its headquarters in Menlo Park. After decades during which the garden was built, it will be plowed over for housing starting Jan 1 next year. Google and Facebook are both within 2 miles.

However, the situation in Tracy, on the East Bay, is a different story entirely. CR over there isn't nearly as in demand as in the Valley, and there's still reasonably-priced apartments (read: those earning under 100K can still afford them). (See this article from yesterday for a nice summary of the state of the valley economy.)

As an index of CR in the valley, though, consider: there is real estate speculation starting along the CA-92 and 17 corridors, and there are whispers of the valley extending its reach into Half Moon Bay and perhaps even Santa Cruz in the next one-to-two decades. HMB seems more likely, though, should it happen at all.

There are now two impediments to further growth in the central valley: open space (marsh lands are being looked at for construction) and infrastructure. In the AM, 101 rivals the LIE as a parking lot. East Palo Alto could be developed but it has almost no available water supply (not just water, but the infrastructure to distribute it).

So while CR is now strong out here (and residential too—as of yesterday, there are a total of 10 houses for sale on the peninsula. There are many for lease, though even then you're only talking about 50-55 or so), it's also strained—there's a limit to how many customers can get to it, there's an understanding that the valley business environment is frothy, and while there is household formation, it's anyone's guess as to how long it persists. Things change quickly when you cross to the East Bay. Strong in the valley (including the peninsula extension) and so-so in the East Bay. Everyone "knows" a downturn is coming, but no one it seems is much prepared for it. Go to the Stanford or Santana Row shopping centers, and you get the sense the area is floating on a cloud of money. (I think of it as the fleecing of Wall Street.) One sign of this state of affairs is the abundance of Teslas on I280, I680, and the 101. The Ferrari dealership in the west valley isn't hurting, but it's nothing like it was in San Diego near the QCOM and biotech ridge locales. Teslas are now seen as the new "chick magnets."

The big imponderable in California right now (and the other constraint on RE demand of any sort) is water. One story making the rounds had Facebook and Google considering moves of some of their admin functions to Reno, until they realized Reno was as short of water as California.

If there's another year or two of drought, I think much of the money now going into CR will be written off—there won't be the growth to sustain it. Not without a war between the San Joaquin Valley and the coast over water. With 10 percent of the state's water going to almond trees versus 12 percent for all human use, it seems likely that the almond trees will lose, but not before a battle



Good trading is a mixture of quick reaction times and having no 'intellectual baggage'.

Intellectual baggage holds one back from making good trading decisions.

Amongst much else, intellectual baggage contains memes similar to (and the opposite of):

1. stocks have to go down because rates are going up.

2. the Euro & Gold always move together

3. the EURO has to go down because they have a lot of debt & unemployment.

4. Oil has to decline because inventories are higher.

5. Bonds have to go lower because of a very strong run of pay rolls numbers.

6. The Russian Ruble can't possibly be the strongest emerging market currency against the USD in 2015 because oil has collapsed and the US have imposed sanctions against Russia.

7. The EURO can't possibly rally because the U.S. may be raising rates this year.

This short list was made from a cursory perusal of the front pages of a few sell-side 'research' publications.

I seriously do not know whether to laugh or cry.



 Basic Relativity theory tells us that the further away from and the greater the velocity of travel that one gets from a fixed observer at one's point of origin then the greater the effect of 'Time Dilation'. The effects are not really noticeable until you reach approximately 40% of the speed of light.

The theoretical effects of time dilation can be 'calculated' (perhaps approximated is a better term) using something like this;

Dilated time = stationary time multiplied by the square root of (1 minus [velocity squared divided by the speed of light squared])

For the purposes of this post I shall not complicate matters by introducing a proximate gravitational mass.

Something quite different is happening in markets in my opinion. I believe that the further away from a reference point ( let's say the 'open' ) we are and the faster that the price is travelling, then, in contradiction to Relativity in the SpaceTime world– time SPEEDS UP, relative to the price action at the open.

Often, a large proportion of the magnitude of a move from (say) the open to the subsequent low (say) of the session occurs in the culminating few minutes of the time elapsed from the open to the time of the low. So, for example, the SPU may open at 2077.75, spend 4 hours working its way to a low at 2069.75 but 4 of the 8 point decline might occur in the final 3 (for eg.) minutes of the decline.

It is in that sense that it feels, to me, that time speeds up in these final few minutes relative to the minutes after the open. There is absolutely no reason why relativity should hold in this context so perhaps my perception of time is not at all unusual. (Author's note - all this talk of 'feelings' is making me queasy. Ha!)

Next time you are watching a market pull away from its opening price in an accelerating fashion then watch a minute by minute chart and if the price develops as I set out above ( with most of the move occurring in the last few minutes of the swing ) then I think you will also experience this idea of the 'blowoff' price action that concludes the move in the last few minutes happening more quickly than quiet price action around the open or whatever reference price you like.

Relativity joins a long list of concepts (exogenous to the mechanics of the markets themselves) that must be adapted in some way if one wants to apply some facet of it to distributions of prices of assets and liabilities in the financial and other markets.

Sushil Kedia writes: 

By the definition of Dilated Time cited here, its values can range from zero to stationery time, when respectively velocity is equal to that of light or the velocity is zero.

In other words there is no time dilation if any thing is traveling at the speed of light and the dilation of time is the same value as the stationery time if any object is stationery.

Time, it has been discussed variously on the list(s) before is an entity undefinable without involving self-referential terms. I have argued in the past that time is an entity that provides a measurement of the separatedness of events and objects.

Blackholes do not have any separatedness and therefore there is no time either in that non-space. The universe on the other hand is an unending expanse still growing and there is time as well as space in it.

The Theory of Relativity, to my "mind", is as much a powerful leap in the Cognitive Sciences as much as in Physics. The so called bends of the space-time-continuum and the endless related ideas of time dilation are cognitive constructs and also explain the cognitive limitations of "intelligent design", "intelligence" & even "intellect".

Having laid these few simplified working terms, I return back to the core of this post. Is the trading pit outside the realm of this universe and if indeed there is anything happening that is not part of the universe, as postulated by James? I strongly doubt, since the universe or anything else that a human mind can observe, including the trading pit, is what our individual cognitions are. The reality is only what each is perceiving it to be! The example of the star 4 light years apart I placed in a recent post illustrates this point.

For a moment, think of it another way, what are Lobogalas? If a sharp quick ephemeral (time frames are a matter of choice and time is most fungible construct apart from being the most illusive construct human mind knows) move happens as described by James, that seems to be outside and in fact the opposite of how things happen in the universe, then is it a regularity or an irregularity?

I would like to shoot that it is an irregularity, there is money to be made by fading it and those who count & test do make money from such moves in this manner. 

anonymous writes: 

I know nothing about the theory of relativity, but it seems to me that when the Greeks began to wonder about the forces of nature (physics), Greeks wanted to study exactly the natural forces.

(The Greeks who now they want out of the euro– the style now used by 'ISIS in erasing the traces of other civilizations).

These markets are anything but natural, are totally and deliberately manipulated. in this sense, trying the accused, a reference point, I would observe only the liquidity injections, foreign body (by central banks) and rates.

Financial markets would be simple… but you can't control a system designed on purpose to move the perception of risk. This has nothing to do with the natural forces. Without considering HFT that subtracts wealth like a leech on the pretext of providing liquidity to the system.



 I just saw this on twitter today: "Stanley Druckenmiller Lost Tree Club Speech".  I had never seen it before and found it fairly worthwhile to read.  Thoughts on finding situations to "bet big" on and also some interesting admissions on "biggest mistake" as well as biggest successes. I think that idea applies to bid qualitative ideas as well as quantitative or systematic ideas–viewing the strategy as what one is betting big on, vs. "the trade".

The strategy I have been developing that is new to me (within past 5 years) is using long term options to frame out these types of bets. Sometimes the leverage is extraordinarily cheap (in the way that I figure it).   

The mistake he discusses is interesting as he admits he had a compulsion that he felt was irrational, but could not resist it (lost 3B on tech stocks). Also some interesting thoughts on the economy and potential distortions created by government intervention. Very long intro that is easy to scan past if you dislike such things. Lastly I was amazed to find Dunavant Enterprises mentioned in the intro– it seems like the same "inner circles" alwasy resurface. 



 If anyone needed reminding that incentives work, look no further than the recent 'What is a Trader' competition on this website.

There was a monetary prize attached for the victor/s and, perhaps even better, canes for other notable entries.

It is quite noteworthy that the ratio of competition entrants to regular contributors to the SpecList was very high. (Even allowing for the fact that the two samples are not exactly homogenous). Evidently, incentives matter!

Given that many of the hopefuls were likely traders from varying markets, backgrounds and experience levels–might not some of you consider sharing potentially quantifiable thoughts with the list from time to time as the mood arises.

There really is nothing like this list anywhere. Whilst this is mainly due to the Chair there are others who have very deep cutting edge front line in the trenches experience who learn new things from this list if not every day then certainly every other week.

Back to incentives… The REAL incentive is the cross fertilization of potentially quantifiable and testable thought from strong to weak, inexperienced to experienced, expert to expert in different fields.

Perhaps this defines what a trader is–someone who believes in incentive driven exchange of information that can be utilized in markets using his or her own comparative advantage.



 It's May 6th 2010. Its lunch time and you're ready take a lunch break at your house from your high school up the block. You turn on your TV and turn to channel 724, CNBC. On the TV is a massive mob outside the Greek Parliament Building, which is surrounded by police in riot gear. There is this one gutsy guy who walks up to a police officer's riot shield and starts shouting. You open up your laptop and see that the little money left over from a string of losses earlier that year could be put to work by going short for a quick profit. The Dow is already down by at least 200, and then all hell breaks loose. The protesters and the police clash. That man taunting the police officer earlier is hit with a baton on the back of his legs and is seemingly flipped by the impact, and is swiftly hand-cuffed. The Dow, S&P 500 and NASDAQ all drop in unison. The ticker tape on the screen keeps showing lower and lower prices. You get this crazy idea to buy a far-out and cheap $115 put option on Apple, which is trading at around $140. You buy two contracts for .40 each, confident that Apple will tumble, hard; and it does. In an instant, those two contracts are worth well over $900, which makes up for the year's loss. As quick as the stock drops it rises, and by the time you go to close your positions the contracts are worth next to nothing.

A trader learns from mistakes like the one above, which is day-trading an option contract based on very little to no information other than a hunch. A trader learns to go by a system of rules with some elasticity. He knows his time scale for trading and has a plan-B for when things do not play out as they were supposed to. He is aware of other factors, such as changes in commodity prices or changes in foreign exchange rates which might affect his position. And last but not least, a trader knows when to take a break from trading.



The "What is a Trader?" entries were so good, we have some additional winners that deserve a cane. Numbers 14, 19, 26, 42, 47, 48. Kindly send your physical address to lap@mantr.com and we'll send you a cane for hobbling down to wall street during periods of panic.



 It is interesting to consider if, in addition to the statistics, one should consider the environments in which it makes relatively more or less sense to lay traps for certain types of prey.

For example, up until just a short time ago, it made eminent sense to lay traps for lumbering momentum strategies close to opens and closes as these firms were forced to use the (very well known) volume distribution to get set (you can accept it or you can reject it but these firms are too large by an order of magnitude). Nowadays many of these strategies have started using either bank provided or internal 'execution algorithms'… The seeds of destruction are planted. N.B. For the purposes of this post the efficacy or otherwise of these strategies is not under discussion.

Things keep changing. So here are are few thoughts:

1. Note the restrictions (notably integer time and linear volume accumulation restrictions of many bank/broker supplied execution Algos)

2. Note the distribution of quotes sent from HFT versus actual trades transacted and how this changes during the day.

3. Note the unusual behavior for the 2-3 weeks a year when London and NYC have a 4 hour time difference rather than the usual 5.

4. Note the several 'openings' in the FX markets each day.

5. Note the more 'persistent' price action in relevant markets ahead of governmental debt management and issuance.

6. Note the lack of a zero bound in some markets and very high Kurtosis for higher frequency data in some markets.

7. Note short term counter trend strategies buying sharp moves down almost every day in stuff……🆘

These may all be helpful in big game hunting.

All the different beasts roaming the market jungle all have a habitat. Now, they do try to change things but the camouflage is never perfect ( large players need to get volume done ).



 The book Fundamentals of Modern Statistical Methods by Rand Wilcox describes many situations where slight departures from normality create large distortions in the usual methods of statistical analysis. It recommends more robust procedures such as using the median, the trimmed median, bootstrap simulation, absolute deviations, running correlations, likelihoods, and something I hadn't seen before, M-estimators, to overcome what seem like trivial departures from normality like mixed normal distributions rather than single such.

The book is self contained and doesn't require a high level of previous mathematical or statistical background. It contains summaries of each chapter in five easy steps. It's a good primer and spark for improved methods of looking at data.



What Is A Trader?
 I ask the man.
He looks at me.
A trader is not a bystander, nor a mindless member.
 Neither is he a selfless servant. No,
A trader is an ecosystem,
 Refusing to be categorized or labeled,
 Branded or defined.
Not one role,
 Not one task,
 Not a tool or production line,
 Not one idea or small man. No,
A trader is an ecosystem,
 Challenging all else
 To survive and thrive, evolve and change, or
 Sink and die. Extinct.
A trader knows existing today is not tomorrow.
 Buttons pushed, research tested, markets predicted.
A trader lives for certainty in self and tomorrow’s unknown.
 Adapting to survive, evolving to advance, competing to learn.
A trader creates a pulse that connects and propels
 An ecosystem he designed to challenge our own.
So the trader returns back to the question,
 What am I and who are we?
Consistent, curious, and connected,
 Accurate, authentic, and adaptable,
 I strive to be.
 I am an ecosystem within this unknown we.
Know Thyself,
 He says to me.



 It is difficult for me to fathom why a now struggling toy company would pick a Greenwich, CT based 64 year old, classic corporate guy (who ran Pepsi for a few years) to be its CEO. Maybe he has grandchildren? Or great-grandchildren?

anonymous writes: 

They must think their problems are organizational.

But it got me thinking about how a modern toy company needs to focus on what kids want now, which made me think that AAPL should produce something like the iKidPhone, which would be a less-expensive, limited cell phone for little kids, with game and learning apps, and the ability for the adults to let the kids have just a specific set of numbers for friends and family that they can call. Might work. I know, I know, "it's called the iPhone 4". But AAPL might be able to create a specific product that would sell nicely and maybe cannibalize some of that hand-me-down business.



 All are welcome at the Junto tonight

Date: Thursday, April 2, 2015

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

Free admission, no RSVP required

Location: 20 West 44th St., ground floor New York City

Jason Riley will speak on the topic of "PLEASE STOP HELPING US: How Liberals Make It Harder for Blacks to Succeed"

Here is a Barron's Review of his book:

Reviewed by Gene Epstein

In this courageous and clearheaded polemic, Jason Riley recalls the racial profiling he suffered as a young black man attending college. Living off campus, he was stopped so often by police while driving to his classes in the morning, that he "started taking a different route to campus, even though it added 10 to 15 minutes to the trip."

Moving to New York after college, Riley kept encountering indignities, like being avoided by cab drivers or being asked to prepay for a meal after ordering in a restaurant. But while he recalls these experiences as frustrating — "I was getting hassled for the past behavior of other blacks" — he recounts them without anger.

Riley also recalls that he himself practiced racial profiling as an undergraduate working the night shift at a gas station with a mini-mart. Since "the people I caught stealing were almost always black," he writes, "when people who looked like me entered the store my antenna went up." He points out that, given "the reality of high black crime rates," most ordinary people, black or white, practice racial profiling because they are "acting on probability." He admits to crossing to the other side of the street at night when young black men approach, not because he is "judging them as individuals," but because he does not want to "take the risk."

As part of the author's plea that liberals "stop helping us," he argues that it is no help for liberals to blame racial profiling on racism, or to deny that society must be tough on crime. Since "90% of black murder victims are killed by other blacks," liberals' general indifference to effective crime prevention comes down to caring "more about black criminals than their black victims."

A member of the editorial board at The Wall Street Journal (published by Dow Jones, which also publishes Barron's), Riley would surely call himself a conservative. But he pays homage to liberalism's achievements on behalf of blacks. "The civil rights struggles of the mid-20th century," he declares, "were liberalism at its best." He hails the Civil Rights Act of 1964 and the Voting Rights Act of 1965, and includes in his honor roll "Rosa Parks, Martin Luther King Jr., the Freedom Riders, the NAACP, and others who helped to destroy significant barriers to black progress and make America more just."

But Riley believes that liberalism has long since become a part of the problem rather than part of the solution — and especially the liberalism of today's black leaders. "The civil rights movement of King has become an industry that does little more than monetize white guilt," he observes. By contrast, "King and his contemporaries demanded black self-improvement despite the abundant and overt racism of his day. King's successors . . . nevertheless insist that blacks cannot be held responsible for their plight so long as someone somewhere in white America is still using the n-word."

Liberals portray young black students as victims of school systems run according to "European American" values, a judgment that exempts the students from responsibility for poor performance. One reason this view is dubious, the author points out, is that black students from African countries generally perform better in school than their American counterparts, even though English is not their first language.

Another reason: Black American students show much-improved performance in charter schools — public schools run by independent organizations according to the same European-American values. The success of charter schools, he notes, is "one reason why they are so popular with black people." These are black people — as distinct from black civil rights leaders — who refuse to succumb to liberalism's destructive delusions about the proper schooling of their children.

"*Please Stop Helping Us*" is written in a clear but understated style that gains power from understatement. Not once, for example, does the author use emphatic words like "hypocrite" or "hypocrisy." But he does expose liberal hypocrisy in some of its blatant forms.

Speaking of the achievements of the school-choice movement via charter schools and vouchers, he points out that, while liberals "urge poor people to sit tight until . . . bad schools are fixed, they themselves typically show no such patience." Among liberal champions of public schools who nonetheless rejected these schools for their own children, he includes in the hypocrisy hall of shame Bill Clinton, Barack Obama, and Ted Kennedy.

The author quotes the bracing tough-talk of entertainer Bill Cosby, which he much prefers to the liberal rhetoric of President Obama. "We, as black folks, have to do a better job," Cosby declared in a speech for which he was vilified by the black intelligentsia. "No longer is a person embarrassed because [she is] pregnant without a husband. No longer is a boy considered an embarrassment if he tries to run away from being the father."

Or as Riley puts it, "Having a black man in the Oval Office is less important than having one in the home."



 Franklynn Phan writes:

Dear Mr. Niederhoffer,

Thank you again for the "What Is A Trader" challenge. I thoroughly enjoyed reading the varied submissions.

Recently, I was listening to a radio show from the CBC that reminded me of "The Education Of A Speculator". The broadcast (Wire Tap - Forgotten History) describes a Brighton Beach/Coney Island environ as vivid as the one that you describe. I have taken the liberty of attaching a link, not only because I think that you might enjoy it, but also as a thank you for the many eclectic show tune classic that you post (the most recent one being a fav).

(It starts at 3:26)

Best regards

Victor Niederhoffer replies:

Thanks for those resonant memories. Now I'll tell you one.

Joseph Heller was born in Coney Island and always went to steeplechase where the clown blew up the skirts. You got a 50 ticket card for 25 cents there. As you went through the rides the 50 holes were punched. Joseph couldn't afford the 25 cents but it was no problem. They'd wait for the old men to come out, and then say, "mister can I have your ticket." The old men would give it to him, usually with 40 holes left and the kids could enjoy the rest of steeple chase for free. About 50 years later in '64 right before steeple chase was closing, as a blast, to recap the old, Heller brought Puzo and Mailer to steeplechase. They bought the tickets, but when Puzo when through the roller, he fell, being somewhat rotund (by the way Puzo never met a mafioso but did the whole thing on library research). Okay, the three of them sat on a bench and cursed their agents, and talked about the declining sale of hard back, and the problems with their royalties et al for the rest of the day. As they got up to leave at 4 pm, some kids approached them: " Mr., Can I have your ticket". They looked at their tickets 49 left on each of them.



Speed Traders Make Peanuts in Profits From Economic Data Plays - Bloomberg News Item

Vic Niederhoffer:

Excellent academic paper with many fascinating facts, e.g. the human reaction time is 200 ms. vic

Paolo Pezzutti adds:

It is called:

"Do High Frequency Traders Need to be Regulated? Evidence from Algorithmic Trading on Macro News" by Tarun Chordia, T. Clifton Green, and Badrinath Kottimukkalur

The link:

http://www.bus.emory.edu/cgreen/docs/Chordia,Green,Kottimukkalur_WP2015.pdf [38 page pdf]

Burgess Humbert comments:

Taking the paper at face value, and Ceteris Paribus, the elimination of excess profit down to a 'utility' rate of return is a natural phenomenon in a field whose technological advance has resembled an arms race of late.

Unfortunately - ( and this does not denigrate the thrust of the paper or its authors ) - a call to ex colleagues in the field just now led to them falling off their chairs laughing at the idea that the marginal returns are ( or are beginning to ) decline.

As to the other part of the paper about the need for regulations etc. Let me answer this way -

Execution via High Frequency execution has both improved and decimated 'liquidity'. ( Here , I refer exclusively to spot FX, commodity futures, long end interest rate futures and stock index futures )

It has improved liquidity for transacting small parcels that are small enough to be executed within the first two levels of the bid/offer depth order book. I find the improvement stunning - particularly FX.

In terms of dealing in size - well, just a year ago, one could call a counterparty and get a stunning bid and or offer in say 75 mio GBP/ USD Spot FX. No more…. a combination of regulatory change and HFT execution has worsened fills by about 0.00015 in this amount. ( please let's not even start with discussion about using market maker provided execution 'algorithms'…. )

A real life example to put some meat on the table ; The last time I sold 50 mio GBP USD the rate going in was 1.4987/89… the following 'fill profile' is typical of a market order of this size nowadays-




Worse case fill at 86 when dealing with senior professionals just a year ago.

There are ways to improve on this, but I wanted to demonstrate how HFT has both improved and decimated liquidity at the same time.

Andrew Goodwin is skeptical:

What is the cost to every resting limit order in every correlated asset? Think of all assets including options, stocks, futures and derivatives or combos. Isn't is a fool's errand to look at profit from S&P 500 futures to generate the conclusion that HFT does not make much money on news breaks?

Burgess Humbert agrees:

Indeed. Let's call it 30 billion a year with a Sharpe of something approaching infinity.

stef says:

The real problems with HFT are the rules and how they protect the manipulators

See "Direct vs SIP Data Feed" http://www.nanex.net/aqck2/4599.html

Burgess Humbert adds:

There are indeed some very nasty yet very legal order types. The description of some of the orders extends to 20 pages ( yes twenty pages ).

But, there are ways to minimise and work with it some of the time.

I encourage all to regularly read;


One particularly amusing story on that site ( that caused a change in Federal Reserve data release policy !!!!) is called something like '… Einstein and the great Fed robbery …'

Look it up- it will change your world.

Surely a candidate to be made into a film one day.



Positioning for relatively low probability outcomes ( in terms of both magnitude & runs of consecutive similarly signed trading periods ) has been the optimal thing to do for the last several months in CL, Currencies, Bonds and DAX. ( ex- post profitability from momentum strategies likely in the order of that list also ). Contemporary returns from the HF world up until last Friday support all of this.

This post does not seek to challenge or discuss the wisdom of these moves or the disturbing future ramifications.

In dealing with the market's regular shifts between rewarding either;

* positioning for low probability scenarios


* positioning for high probability outcomes

It is difficult to assess how the market has done because the practitioners keep changing, survivors bias comes into play (in addition to all the other factors that are common in these types of studies)

One approach that has been fruitful has been to run theoretical portfolios of naïve trend following strategies and portfolios of naïve reversionary approaches. The aim is not to trade them but rather to have an objective measure of what strategies the market is rewarding with outsized gains and looking, quantitatively, at conditions that indicate a change in regime.

To those of this list who care - I believe a substantial change of fortune is at hand based on the above.

For the avoidance of doubt - Further out than the next 36 hours I have very little idea as to the direction of any of the major markets so I most clearly am NOT calling the end of any major 'Trend' ( whatever that is - Sorry, couldn't help myself). What I am saying is that the mistress is likely to be much more discriminating in sharing her pleasures than she has been in the last several months per unit of risk taken.



P.S. One of the gravest errors in the area of testing and counting is the assumption that if something is statistically significant in one period it will be predictive in the next (in markets or life). 

My market views:

Europe UP as long as Ukraine and Greece do not worsen.

USA with strong $ has lost competitiveness vs rest of the world, revenues do not justify present stock prices.

The tax burden is increasing in America. It is likely that markets remain flat (fall on worsening data).

Before Europe solves the problem of Greece … and EU proceeds with the QE, before skies are blue again [much time will pass]

The world central banks all involved to bring rates into negative territory, didn't they learn anything from the competitive devaluations of 1930's.

Summers advised Janet to NOT raise rates (and so the $) …maybe bring about negative rates?

All these Trillions printed in anticipation of future earnings… in a global economy that will not restart… and not one billion flows to the underlying… the real economy. Consumers are to be listed in the WWF web site as endangered species.

There seems to be an inflation of red pills:
Blue pill, the strange vision ends, tomorrow you wake up in your bed and believe whatever you want.
Red pill, you stay in Wonderland (rates negative and QE when needed), and they show you how deep is the white rabbit hole.

What are they waiting for? A miracle? Or the restart of the Chinese economy in April…

From 2009 to end 2014:
1514 total days, 27.53% of them "red 10 day" [positive 10 day momentum]

In 2008 it was only 11.81% (I am using S&P500 index, not futures).



When planning a research agenda, I believe that it is fruitful to start with a modicum of thought about the ways in which markets try to misdirect our focus.

In extremis everything available to the modern trader that is supplied to him by the providers of the market infrastructure ( exchanges, banks, government et. al.) provides a picture or 'information/data' that in some way attempts to generate 'business' for the provider ( commissions, taxes, subservient behaviour etc. )

Whilst the above borders on tin hat conspiracy ( after all, we need SOMETHING to analyse! ) it makes one think about what factors affect prices that are not readily available.

Some are:

# True bid/ask volume and depth. Nowadays, this information as shown on DMA platforms arguably does not represent the intentions of the buyers and sellers in the market given all the different order types & not to mention HFT. So, one should research into whether magnitudes and changes in it have anything to do with future price changes in and of themselves.

# The price formation process. One has seen live trading evidence that there are very high levels of mathematics- applied to reasonably high frequency data ( not so high frequency that latency or hardware is the true 'edge') - that there exist relationships between numbers that are very predictable for short holding periods ( interestingly this type of predictive analysis descends into randomness with holding periods longer than about 36 hours - it may be of interest that the best trading firm since we left behind the primordial slime trades within this time frame) So, at the meta-level is there a price formation process that ( whilst not necessarily available to all, might in some way reveal itself )

# Changes in regime. Whilst not wanting to enter into a discussion here about things like hidden Markov switching et. al. It is very interesting to consider how, when & why the markets shift regime. This may be from Trending to non trending, from relatively low to relatively high levels of Volatility.

# Markets' varying responses to the same stimuli. An example shall suffice -yesterday morning, one was fortunate to sell GBP USD at a very good level based on one of my approaches. The market declined sharply subsequently. The same trade idea applied later in the day would have been the exact wrong thing to do. Now, I know why in terms of my trading approach but the bigger question is still there - it's all just data isn't it. Of all the four points listed in this post, this last is most reasonably addressed by an understanding of non linearity- but that for another day.

Just as I concluded the above it strikes me that perhaps 'comparative advantage' can be made to work in trading - I am certain that I have a 'closed form' answer to research that others have spent two decades on and I am sure others might look at some of my strategies' short comings and have improvements that would be very helpful to assisting one become a Rothschild.

Good day ahead all.

Ed Stewart replies:

Great post.

My working hypothesis is that markets "advertise" to draw in the maximum amount of resources to the system. Price action and "fast action" seems to entice the basic urges the way i fishing lure does for the fish. Much of the "stuff" out there, is to draw in new participants and their $$, like blinking lights at the casino. And it is not a "conspiracy" but rather spontaneous order of the market do to competing profit incentives.

Of course the above is not my idea, i learned it (expressed much more eloquently and accurately) from Victor's books. It is only "mine" in the sense that the more I trade, the more i see the applications, and the more certain I am that it is true. I would say it took me about 5 years to get the point, so I am a slow learner.

Mike Caro the poker author had an article recently that said something like "you should be happy when your opponent draws out on you". ( http://www.poker1.com/archives/12809 ) Of course, because it keeps them playing and taking shots. Same is true with trading, i think.

What the market does is advertise the "drawing out" situations and then entice people to make those plays, which are not percentage plays. Anyone who looks at a chart naturally picks out those "drawing out" situations and says, "I would have bought here and sold here" etc.

Even investors, traders, or hedgers who do not officially use charts or market-based signals can still be influenced by them, because they have psychological impact or pull that does not require conscious articulation.

Jim Sogi adds:

Big orders used to mean something in the depth, but deception is the rule of the day now. Some of the traders or market participants at CME get info on who is making the orders. That might mean something in a deceptive environment. When also seems to be important. How long seems to be a regulatory and legal grey area now as well.

Gary Phillips writes:

Deception is nothing new, and the market's micro-structure is nothing new. back in the pit, it was always my belief that the market would trade to size. floor traders would inevitably be lured into stepping in front of large orders, only to race one another as their lean got hit/taken and disappeared. the exchanges have since struck a faustian bargain to provide the same benefits to hfts, (including front-running, etc.) in exchange for the provision of market liquidity; something that was once the provenance of the floor trader. the new micro-structure, doesn't appear to have changed things much. back in the day, when we wanted to "pull liquidity" we simply put our hands down, and like the hfts, we would do the same things, at the same time.

Hernan Avella adds:

Gary observes: "and the market's micro-structure is nothing new"

When talking about the stock market, this is certainly not true. Here's a good reference Fox, Glosten,Rauterberg: The New Stock Market . When taking about futures markets, the differences are also profound. Electronic trading is a continuous auction that features an order book, because of this you add another dimension to the game: the priority in the book. You also have different types of orders that affect liquidity and risk transfer. The meta-principles of deception and whatnot might be the same in life, pits or servers, however, an observation relevant to practice has to take into account the enabling mechanisms . Hernan.

Paolo Pezzutti argues:

Overnight when trading is lighter the book may provide some " true" indications (although this should be tested…). Algos are less active, hft is not there and the slow trading pace sometimes looks more driven by arbitrageurs more than anything else. This might give an edge in an environment that has different characteristics and competitors than during regular hours.



I have come to like these posts which ask us to examine in depth the nature of trading. Today I think and write of very successful traders (speculators, if you like) who do not seem to ever be excited about their profession. This brief comment (from a few years back) by Sir Vic started me in this direction:

"Jim Lorie was one of the most successful speculators I ever knew. He passed away with a vast estate and he did it mainly on a teacher's salary, which was very modest in those days. His method was always to ask his friends for a good stock, buy and hold it, letting go only when it was bought out."

Sounds boring; really boring.

For some reason Jim Lorie reminds me of one of the most successful commodity traders of his day, back-in-the-day. I won't speak his name since his privacy was important to him and he may still be with us. He had a small office on "the street" and visited a nearby deli, where he would have lunch and take the rest of the day off - the rest of every day off. This is where I made his acquaintance. I think he liked me because I did not know everything and did not act like I did.

He shared his trades with me. Very rarely did he have a loser; his winners were usually big winners. He traded in size for himself and he had a small, but very wealthy, client base. He was never excited about a trade. Mainly, he thought about his garden and fly fishing. He had one simple approach:

"Let the technicals confirm the fundamentals."

A book about folks like this would be a snoozer. The general impression about the successful speculator is that he is on the edge of stress every day in an exciting world of near misses.




Everything was ready [for Eurozone economic recovery] but now Greece's blackmail threatens to blow up the party.

The situation with Greece seems about to escalate, at first I thought it was a way to buy time until after the May election, but the level of confrontation continues to rise day after day, both from European countries and from outside ( even from warren buffet and his dog, when warren will be food for worms .. Greece will still be there ), now there are hints of the exit of Greece from the euro. The substance is that they do not trust Tsipras, whose blackmail if followed by victory would be a negative signal, a bad example. EU will try to worsen the situation in Greece until new elections in Greece (…?) and replacement of Tsipras with politicians more willing to impoverish the Greek people at any cost . It seems another Lehman and it seems that Europe is willing to risk this poker hand.

So Greece will be "saved" despite everyone knowing the country can never repay their debts. The Russian or Chinese threat is something far worse than $ 300 billion of Greek debt. Which says a lot … about the debt of nations!

 Andrea Ravano replies:

I don't think the World's Nations are supposed to repay their debt, but to roll it on; the European  liquidity crisis which arose after the Lehman collapse is a clear example of lack of re-financing of existing debt. I think we must examine the problem of debt in these terms, not in terms of repayment.



Here is an excerpt from my session in Japan. [You Tube, 0:58].



  Dollar at the round 100 and a 0.00 gain today according to Finviz


Hello all,

I'm Paul Marino, have written a very few times on DailySpec over the years and am a tremendous admirer of many of you and your insights for years.

Hope all is well with you and happy St. Pat's.

I'm half Italian/Irish if the last name and theme don't seem to match. :-)

Best of trading to you all.




 Nodding assent is important so the speaker and group you are in know that you are in agreement and are with them. Japanese want to have group consensus and they want to know everyone is on the same page which nodding indicates. If you don't nod and acknowledge verbally every sentence some one speaks they might feel you don't agree or are looking down on them. So nod and say "yes", "I see", "is that so" after every sentence, even if you don't agree or don't understand. They will be very happy. You can then disagree with everything they say in argument or questioning and its fine. Nodding is also part of the greeting, and social etiquette of bowing and establishing social rank. A nod is a very low bow. Most of them will bow lower to you as you are the respected sensei of trading but a nod will complete the greeting. They don't really want to shake hands, so don't stick out your hand in greeting.

Things are much much more different in Japan now than 10 or 20 and 30 years ago. Many young people speak English. Hotel staff, rental car counters, trains have some English to accommodate tourists. The trains announce in English. People are much more cosmopolitan than before. They don't stare at foreigners and allow handicapped people out and about. This is changed from before.

Japan is clean. There is no rubbish at all in the street. The bathrooms are spotless. The toilets have little water jets.

Out of 100,000 people I saw during a recent trip there, I saw 2 fat people. The rest were thin or skinny. On return to the US, I counted loosely 75% of people were overweight by at least 10 pounds, 50% by over 20 pounds, and a 25% 30 pounds or grossly obese. It was very shocking and will have economic and health repercussions as time goes by for the US.



 A very belligerent moderator of the Junto invited the nutritional equivalent of a chartist to debate John Mackey, and tried to debunk scientific findings. Somehow she believed that a double blind study of say 100 selected subjects (they are all from a pool) might be more indicative than the millions in these meta studies.

A good study in this area is "Does low meat consumption increase life expectancy in humans?".



 I write this from personal experience and in step with a recurrent and important theme here: "know thyself."

Some people trade with the hope that they will accumulate enough wealth to provide for all foreseeable financial needs. What about those of us who, through luck or skill, have reached that goal. The questions then become: "why more?", "isn't the journey over now?", and "why ever take large positions again?".

The answer that comes to mind is that we have acquired an addiction. If that is true, we need to face it and manage it: "know thyself."

Perhaps there is another reason. When trading we are "in the eternal moment." When trading we are so very "in the eternal moment" that we do not hear the triumphal slave, always riding at out shoulder, who incessantly reminds us of our mortality, whispering: "Respice post te! Hominem te memento!"

In that case we trade to block out the "know thyself." Knowing thyself is a reminder of our mortality and that we briefly dance between the two eternities, past and future. And in that case, there is no cure.

Why do you trade?

To "be" a trader is to have had your butt kicked and then gotten back up. Before that you are nothing. To "be" a trader is to know how to manage or avoid those "terrible and typical" things and that only comes with knowledge and experience. They are all different.

The Delphian was speaking to the trader when she said: "γνῶθι σεαυτόν." A trader knows thyself and uses that knowledge to avoid the next knockout. Learning the rules of the market you are trading is easy. Don't be fooled into thinking that knowing the rules makes you a trader.

Trading is ultimately about you.

The market is always probing for your weaknesses. Only you know them; yes, you do know them, don't you? The one weakness you are most vulnerable to is the one the market is always– ALWAYS– after.

That's the one which will kill you.

Thus this existential imperative: γνῶθι σεαυτόν. "Being" a trader is a true Sartrean experience.

Kipling knew: "If"



 Time to reflect on the market as we are at the anniversary of the 6 year bull market.

I hardly know anyone who was bullish at S&P 666 in March 2009, then the market tripled. Think back, who was bullish, maybe that person is worth listening to.

Over the past 8 years whenever I speak to a new [Scandinavian] hedge fund they are short the same stocks, Kone, H&M, Novo, throw in SHB and Autoliv and you have a basket of the highest quality stocks in Scandinavia (and the best performing companies over the past decades). Therein, I believe, lies the value of local research and knowledge.

Even though every fund is said to be 'contrarian' there are always the current fashionable ideas that everyone gravitates to. Currently, in Scandinavia it is short ICA SS (on the thesis that Sweden will be hit with hard discounters like the UK. ICA's margin was hit in Q4 which reinforces the short sellers thesis independently of the reason) and long AKA NO (oil is said to be 'contrarian', couple that with a divestment case and you have powerful story for the analysts to pitch to their PMs).

Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this can't possibly be 'good' news. Couple this with valuations close to ATH [all time high] and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything.

The ones who were bearish during the past 6 years blamed  QE, the Fed, [for how things turned out]. 'My model couldn't possibly predict the government distorting the market like this'. Now the thesis is 'money is free, the only place to invest is the stock market', 'yields will stay at zero forever', 'buy high yielding stocks'. Peter Thiel argues that high dividend stocks are the most bond-like, so isn't that the biggest bubble around. And at the end of the day isn't Peter Thiel smarter than all of us?



 The link below, and perhaps more importantly, the links referenced, provide an up to date review of the literature on the long held wish of the academic community to define and parameterise models (ahem) that describe 'herding'. There is enough in there, in my opinion, for one to finally say "it's a bunch of non predictive claptrap" or "huh!, I might test that":

Herd Behavior in Financial Markets:

Over the last twenty-five years, there has been a lot of interest in herd behavior in financial markets—that is, a trader's decision to disregard her private information to follow the behavior of the crowd. A large theoretical literature has identified abstract mechanisms through which herding can arise, even in a world where people are fully rational. Until now, however, the empirical work on herding has been completely disconnected from this theoretical analysis; it simply looked for statistical evidence of trade clustering and, when that evidence was present, interpreted the clustering as herd behavior. However, since decision clustering may be the result of something other than herding—such as the common reaction to public announcements—the existing empirical literature cannot distinguish "spurious" herding from "true" herd behavior. 

In this post, we describe a novel approach to measuring herding in financial markets, which we employed in a recently published paper. We develop a theoretical model of herd behavior that, in contrast to the existing theoretical literature, can be brought to the data, and we show how to estimate it using financial markets transaction data. The estimation strategy allows us to distinguish "real" herding from "spurious herding," or the simple clustering of trading behavior. Our approach allows researchers to gauge the importance of herding in a financial market and to assess the inefficiency in the process of price discovery that herding causes.

Link Here.



 Nothing highlights the effect of currency moves like foreign travel. The dollar had a major upmove this past year against major currencies. A 20% discount on everything is notable when traveling.

I'm in Japan now where everything is cheap to begin with (I guess due to deflation) and subtracting another 5th is amazing. The big currency moves are important looking forward and are signaling something just what I don't know.



 I thought this was a very good paper with market parallels.


Because members of the public have difficulty understanding risk presented in terms of odds ratios (e.g., 1 in 1000) and in comparing odds ratios from different hazards, we examined the use of time intervals between expected harmful events to communicate risk. Perceptions of the risk from a hypothetical instance of naturally-occurring, cancer-causing arsenic in drinking water supplies was examined with a sample of 705 homeowners. The risk was described as either 1 in 1000 or 1 in 100,000 and as present in a town of 2000 people or a city of 200,000 people. With these parameters, the time intervals ranged from 1 expected death in 3500 years (1 in 100,000 risk, small town) to 1 death every 4 months (1 in 1000 risk, city). The addition of time intervals to the odds ratios significantly decreased perceived threat and perceived need for action in the small town but did not affect response for the city. These framing effects were nearly as large as a 100-fold difference in actual risk. Instances when this communication approach may be useful are discussed….'

Isomorphisms writes:

David Spiegelhalter did a video on millimorts and micromorts. These are useful units in communicating the risk of death. Bicycling 250 miles = 25 micromorts, whereas driving 250 miles = 1 micromort (approximately). Hang gliding once costs 8 micromorts.

Of course, accumulating 1,000, 000 micromorts personally is neither necessary nor sufficient for dying. Those who accumulate the most probably lived best.



 "Ten key things to help you succeed in business, according to real estate legend Peter Thomas"

In 1968, he left to start a real estate investment business. The West in the '70s was an era of go-go growth, and by 1980 Thomas says he was worth $150 million. Soon after, his net worth was negative $70 million. It took years to work his way out from under that crash, but it taught him patience and discipline — and a sense of irony. "I was as close to being depressed as can be," he says. "I asked my wife Rita, 'If I lose everything, will you still love me?' She said, 'I'll always love you. But I'll miss you.'

Scott Brooks writes: 

Great article, Vince. Thanks for posting it. Lots of meals for a lifetime in this article.



 One of the main lessons learned from this website is to look for reasonably quantifiable concepts from other fields to try and apply them to time series of market prices.

The general problem is that the many other fields are dealing with physical phenomena with much greater certainty than the vicissitudes of price variation.

The two enduring things I continue to research ( in vain thus far ) are the measurement of Earthquakes (magnitude, duration, distribution et.al.) and the concept of Allometry, in particular as it relates to tree & branch growth ( non linear horizontal versus vertical growth of two quantities with ever changing influences surely is a reasonable basis for time and magnitude studies in markets)

It is the first that will be mentioned thus forth in this post. I mention here just one subset of the studies, some similarities between the study of Earthquakes and markets:

1. The time of the day that an Earthquake occurs in relatively built up population centres is very important ( more will die at 10 am in a given office building than at 9 pm). There is merit in studying the after effects of market moves at different times of the day. (ensuring that one focuses on the entire distribution- not just big or small)

2. Magnitude and duration of Earthquakes. The mathematical brigade has started now to formularise relationships between magnitude and duration of very large samples of smaller quakes - the current leading edge seeks to parametrises formulae in a recursive manner to best fit previous data - obviously, the out of sample is poor.

There is some modicum of value in time and magnitude studies in prices. The world of price change though is best approached, in my experience, with the use of blunt tools ( market is up or down by an amount more or less than some reference point then add non linearity for forecasting).

3. Distance from the Earthquakes centre - the further away the better! In markets, are moves of a given magnitude and/or time more or less predictive a given amount of time from the open.

4. Geology of ground and quality of building construction: Poorly constructed structures built on mud come down easier. In markets - well two streams here; the first being the Chair's often mentioned 'base of operations' and the second related to some quantifiable measure of stability in the market - perhaps something to do with its 'state' vis-a-vis bonds et al. This link is instructive.



 This article on "the hot hand" uses sports betting rather than basketball or baseball to look into the effect:

"After winning, gamblers selected safer odds. After losing, they selected riskier odds. After winning or losing, they expected the trend to reverse: they believed the gamblers' fallacy. However, by believing in the gamblers' fallacy, people created their own luck. The result is ironic: Winners worried their good luck was not going to continue, so they selected safer odds. By doing so, they became more likely to win. The losers expected the luck to turn, so they took riskier odds. However, this made them even more likely to lose. The gamblers' fallacy created the hot hand."

This seems consistent with real life. From the day trader that makes money early in the morning and winds down participation to the big money managers that early in their career achieve 50-100% return, it creates the illusion of skill, increases AUM, shifts risk preferences and focus on the fees.



Despite the lack of any real value in doing so nowadays as part of the research function, I read one 'scholarly' research paper each day. Mainly these are directly related to the study of price action. Given the incentives these days for researchers to keep 'the good stuff' to themselves (indeed I can think of one or two erudite gentlemen who started this process in the 1960s and 70s to their and their family's benefits), it is no wonder that compelling lines of research do not make it through the process.

If I read one more article involving parameter estimation (aaarrgghhhh)….. I am, however, overjoyed when I find something of note that, whilst still mainly descriptive, has within it some directions towards genuine alpha.

The overall conclusions are not necessarily ground-breaking but his way of getting there is interesting. This is just such a paper: "The Financial Market Effect of FOMC Minutes"

A year in a trading environment for the author, and learning some simple lessons therefrom, could push this work towards the asymptotic goal of greatness. One highly recommends also some of the references sited by Mr. Rosa.

Further, and begrudgingly, I bow down before various of the Laureates at the Federal Reserve and, perhaps even more so, to the team at the Swiss National Bank. Perhaps somewhat surprisingly, the FED team do good work on agriculture, a potentially fruitful, tangential pathway for us on this site.



 In honor of #WorldBookDay, here are my 10 must reads from a blog I wrote long ago.

‎#10. Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

"Trading and Exchanges demystifies the complex world of trading. It is a must for anyone interested in investing in the public markets" –Maria Bartiromo, CNBC News Anchor

"My goodness, if only I had known this, or hadn't let it happen to me!" or, "never again, the b##tards!" - Victor Niederhoffer

‎#9. The Art of War by Sun Tzu

The classical Chinese War Manual written 2500 years ago that is a must read at every Military Academy in the world still! Why do we need to understand war? Begin to think in the context of the markets, should I take this trade, should I not the type of conflict present in everyday trading life. ‎

#8. Statistics Without Tears: A Primer for Non-Mathematicians by Derek Rowntree

This primer without any of the mathematical formula and equations uses words and diagrams to help readers understand what statistics is and how think statistically. ‎

 #7. Twenty-Eight Years in Wall Street by Henry Clews

Author Henry Clews was a giant figure in finance during the late nineteenth century, and his firsthand account brings this colorful era to life like never before. This abridged version of an investment classic touches on a wide range of important financial issues, including:

-The causes and consequences of Wall Street panics

-The influence of Wall Street on national politics

-How individuals made their fortunes

-The characteristics of winning and losing speculators

–How operators attempted to corner the markets for individual stocks ‎

#6 Investment Fables: Exposing the Myths of "Can't Miss" Investment Strategies by Aswath Damodaran

A no-nonsense book by Professor Aswath Damodaran in which he debunks many myths, and he shoots at all styles: value, growth. No investing style is spared. This is a very accessible overview of finance research on most major investing strategies/or themes. The book introduces each chapter with a short story and then builds the case around each investing theme. The bottom line is that there is no investing "silver bullet" – which is probably intuitive, but often neglected in the search for a magical investing potion.

 #5 Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh and Mike Staunton

There's plenty of reasons every day to assume the world is going to end. The media is constantly speculating about immediate financial collapse, the forthcoming mother of all recession, hyperinflation, debtflation, imminent stock market crash, pandemics, terrorism, etc… You might also find specialist #permabear, gloom & doom blog sites dedicated to each such topics "Triumph of the Optimists," is must read which shows the success of the equity markets over the past century. By far the most important investment book in years…It is the best and most complete source of data yet available…If you spend an hour with it and don't learn anything worth the price then you're truly lousy at learning about markets…Right now, buying this book makes more sense than buying stocks. (Ken Fisher Bloomberg Money )

"This will become the definitive empirical basis for analysis of the world's capital markets over the twentieth century. It is an important work of scholarship; no one else has calculated the equity premium of a large number of countries over the long term. In doing so, the book contributes to the very lively debate on the magnitude of the equity premium and will make a splash."

–William Goetzmann, Yale University

‎#4 Day Trading With Short Term Price Patterns and Opening Range Breakout by Toby Crabel

One of its great strengths in this book is that it is an attempt to statistically test the efficacy of price patterns. Instead of merely asserting that a chart formation is bullish or bearish, Crabel actively searches for evidence. With his empirical approach, you will be filled with 'Wow!' and 'Unbelievable!' with startling regularity over the course of reading the book. Test, test, test. Test everything you can. A person who doesn't test will lose money. Data is available for almost anything you can imagine.

#3 The Education of a Speculator by Victor Niederhoffer

"with an original mind and an eclectic approach, Victor Niederhoffer takes the reader from Brighton Beach to Wall Street, visiting all stops of interest along the way. What emerges is a book full of insights, useful to the professional and layman alike" – Palindrome Victor Niederhoffer gives us page after page of distilled investment wisdom. Taken together, this is pure nectar to those who aim for consistently superior stock market performance." -Barron's ‎

 #2 Secrets of Professional Turf Betting by Robert L. Bacon

It is best book on professional speculation around! While reading, just replace the words 'race' 'racing' with stock markets. What is a 'race', a day of trading? How rare is the man that understands mass psychology and how to "copper" the public. The horses are the companies. The day's trading session is the race. Different issues maneuver for position. The trainers at the racetrack are like the corporate executives, receiving prizes for winning and fees for getting their horses in shape. The bookies are the brokers. And the punters in the stands… they're like us… the guys who pay all the fees and commissions. "People who know the facts of life have called racing "the poor man's opportunity". An opportunity, because it is always possible for a poor man, or a man who has failed at every other profession or business, to get started at race betting with mere "peanuts". It is always possible for him to go on and "run it up" into a sizeable fortune. Any race any day any track can lay the foundation of betting success! It is possible for any man (or woman) who has the required even temperament for turf operations to "get off to the races" with small capital. Perhaps with capital as small as a day's pay! THAT IS TO SAY, IT IS POSSIBLE….." [from the book of chapter one, page one , & first one and half paragraph] ‎

#1 Introduction to Objectivist Epistemology by Ayn Rand

from Doc Brett Steenbarger's blog:

Introduction to Objectivist Epistemology is an attempt to explain how the human mind is able to grasp reality. (Epistemology is the philosophy of knowledge). Central to Rand's account is the role of concept formation. "The ability to regard entities as units is man's distinctive method of cognition," Rand wrote (p. 7). This ability opens the door to both mathematical and conceptual reasoning. Rand defines a concept as "a mental integration of two or more units which are isolated according to a specific characteristic(s) and united by a specific definition" (p. 11). The formation of concepts requires abstraction–isolating certain attributes from others–but also integration: combining concretes into a larger category. When we form the concept of a "trend", we are isolating certain aspects of price and volume and integrating these on the basis of a definition. Through ever-widening efforts at abstraction and integration, we expand our conceptual universe and extend our grasp of the world. Ayn Rand understood that philosophy is the most practical of disciplines. Without a solid epistemological foundation, what assurance do we have that we're trading anything other than randomness?

p.s: I'm really sorry if you have found me to be disrespectful for not including books from such minor deities like Edward and Maggie, John Murphy, Ben Graham, Peter Lynch, boy plunger a.k.a Jesse Lauriston Livermore so on & so forth.



 Join us for a special junto event this Thursday.

It will be an Oxford Style Debate between Whole Foods co-CEO John Mackey and investigative reporter Nina Teicholz.


Date: Thursday, March 5, 2015

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

Free admission, no RSVP required

Hosted by Victor Niederhoffer's "Junto"

Moderated by Barron's Economics Editor Gene Epstein

A before-and-after vote will be taken in the audience to declare the "winner" of the debate.


20 West 44th St., ground floor

New York City

 March 5, 2015 - Debate: Nina Teicholz vs. John Mackey

"An animal foods/low-carb centered diet is unhealthy compared with a 90+% plant-based diet that excludes sugar and refined grain products."

Mackey takes the Affirmative and Teicholz the Negative.

 Teicholz, an investigative reporter, spent nine years researching nutrition science for her book "The Big Fat Surprise: Why butter, meat & cheese belong in a healthy diet," a NY Times bestseller. A "Best Book" of 2014 by the Economist, Wall Street Journal, Mother Jones, Kirkus Reviews and Library Journal, also "The Most Memorable Healthcare Book of 2014" by Forbes. It's received rave reviews.

Mackey is working on a book about healthy diet. He's co-CEO of Whole Foods Market. His stores often have Dr. Fuhrman's Nutrient Density numbers on items on the salad bar. Fuhrman says 90% of the daily diet should be nutrient rich plant foods.

Whole Food Market's healthy eating.



 What does a good trade look like?

Continuing in my vein of only speaking about areas in which I possess a modicum of understanding of and experience in, I shall stick with the shorter term end of the holding period spectrum, say minutes to 36 hours.

There isn't anything necessarily predictive about any of the following, but it certainly opens areas of research. After an enumeration of a large sample of recent transactions I think the 'feel' and visual manifestation of a 'good trade' includes the following:

1. Imagine a car hitting a very thick wall. The energy of the car flows into the wall and is 'reflected' back into the car which then jumps back away from the wall. Rather like hitting a ball on the half-volley. Buying into mini Armageddons and selling into mini Elysiums can have this 'feel'.

2. There is almost no 'shown' liquidity (Ha!) on the depth screens of the DMA access point.

3. As one is not a silicone based life-form (Yet! Just waiting for the compulsory cybernetic transformation over coming decades in the name of 'security') an analysis of ones thoughts as a dealing level approaches is interesting. Although the effect in me personally is much less than two decades ago, I still note my thoughts and I find the following:

- If the decline or rally leading to my execution level is caused by news or the ramblings of a politician, then one tends to magnify its importance.

- If there is a round near then that may also increase anxiety.

- I bet Kovner and Druckenmiller are the other way around… All three mental phenomenon are nonsensical, distracting and negatively correlated to trade success.

Another related matter is the battle between trying for perfect execution of strategies or just getting them on. On balance, and in the context of high numbers of transactions, I think it pays to go for something very close to perfection (self/ strategy defined) Even though this sometimes leads to periods of noticeable inactivity as I personally experienced last summer.



 Periodically, financial markets will become divorced from reality – you can count on that. More Jimmy Lings will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will fight for their business. What they are saying will recently have "worked." Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is– zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices….

The bad news is that Berkshire's long-term gains – measured by percentages, not by dollars – cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won't be great.

Ed Stewart writes: 

Some time ago I began to consider to what degree the inheritance tax as we know it is actually a round about, but understood rule to unduly force private businesses into large corporations or financial owners. Ive tried to find related material but no luck so far. It seems highly likely that a similar scheme has been used before, say in Europe or more ancient times. It would be very amusing if the measure to supposedly prevent great wealth consolidation was in fact one of its largest causes yet in a way most people can't recognize.



 We're talking about watch sales around here. Rolex apparently sells 650 million in watches each year. Susan says that wearing a watch these days is like jewelry for men, and that it's useless since everyone has a smart phone. We're thinking about Apple's watches. They'll have to compete with all the other watches. Supposedly they forecast it to use up 1/2 of all the gold production in the world. I wonder when Apple will stumble and launch a product that doesn't set the world on fire. Samsung wearable watches apparently didn't do that great. What do you think, and how will it affect the price of Apple. We just bought some on the news that they had to pay 600 million out of 150 billion in cash on a patent suit, which will probably be reduced to 10 or 30 million.

Stefan Martinek writes: 

I agree with the view that watches = jewelry, but then it is more about IWC Portuguese watches in platinum having an unassuming steel look and simple elegant design. Apple is not a competition here. Apple watch will need a phone for core applications + daily charging. Some people probably like to carry two devices when one is enough. Some people probably disagree with Diogenes "who wanted to be free of all earthly attachments — on seeing a boy drinking with his hands from a stream he threw away his drinking bowl, his last remaining possession".

Pitt T. Maner III writes: 

Given the popularity of the "Quantified Self" and Fitbit, why not a watch that monitors all your physiological parameters (via implanted sensors) and provides feedback on the optimal things to do next.

An early example might look something like this: "a new digital wellness and telemedicine platform which helps patients live a healthier lifestyle and connects healthcare providers to patients using telemedicine and wearable mobile technologies, today announced that its platform will be fully integrated with Apple Watch products. Or this: "Apple Watch wearers with diabetes will be able to use an app to monitor their glucose levels."

Carder Dimitroff writes: 

I believe the iWatch will be an ongoing success. Like they've done with the iPhone, Apple will convert the old watch into amazing and useful technologies. As such, the iWatch will likely become less of a watch and more of something else.
In my family, we seldom call each other. It's either an email, text or FaceTime. Phone calls are the last option. Our iPhones are not used much for phoning home.

Like the iPhone, each iWatch upgrade will pack in more technologies on less real estate. We will likely learn new tricks, become mindful of health issues and live a better life.

You can sign me,

Dick Tracy

anonymous writes: 

My son asked me why he has to go to school? "Why can't all this learning simply be uploaded into my brain?", he asks.

anonymous writes: 

The question becomes:

1. Will it ever have a cam?

2. Will it ever be independent of an iPhone?

3. What body sensors can be built into it?

4. Perhaps it will be the base for iHome?

Just some questions.

Duncan Coker writes: 

A watch is a perfect accoutrement for a man as it is rooted in a practical function. The form and design however vary greatly. They can be showy and expensive or simple, like the Timex my father had. Men like things that have a purpose. Watches are handed down from fathers to sons or daughters for generations. The Tank watch is one of my favorites though I don't own one. Fountain pens are in the same category as would be certain sporting gear like classic hunting rifles, bamboo fly rods, Hardy reels, or Swiss pocket knives that every man used to carry. For Apple I know design is very important along with function which is a good start for continuing this tradition.

Jim Sogi writes: 

A Swiss army pocket knife with can opener, screw driver, wine bottle opener and blade, a simple model, is the most handy camping tool. I love mine. I also have a pocket tool with pliers, knife, screwdriver with multiple tips. It's very handy for many things like sports, camping, and skiing. 

anonymous writes: 

I got a very nice waterproof sport watch used at the Salvation Army for $6. The guy at the jewelry store laughed when he saw the price tag and the battery was $15. You can get a real nice casio waterproof sport watch for $20 with alarms, date, stopwatch. I just don't understand some guys desire for expensive watches or computer watches. If the watch were small, had a phone and music and alarm, and GPS and the battery lasted… maybe.



"Irving Kahn, Investor, Who Profitted in '29 Crash, Dies at 109":

Mr. Kahn was a value investing icon who served as a teaching assistant for Ben Graham and worked on the classic tome Security Analysis and the original edition of The Intelligent Investor.

He was still working a few days a week at 109 years old at the firm he founded back in 1978.



 Your biggest opponent in trading is yourself. Has anyone heard this statement? It seems incredibly naive to me. Not surprisingly, I just read something like it posted on twitter. When I put in an order and get 3 shares filled, it is clear to me that someone is gaming the order. They get the info and then I don't get a real fill. On the other hand when I develop a strategy that qualitatively seems to anticipate stop or momentum buying, my buying is part of the force that pushes price to that level–releasing potential energy, one of the most useful concepts in trading. Everything has an impact. To think it is all just a "mental game against yourself" suggests that the market is mechanistic process vs. a competitive process, which is entirely wrong.

anonymous writes: 

This (not well documented) jab at mom and pop retail investors comes to mind: "Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious".

Ed Stewart writes: 

It reminds me of something I read in a poker book about one of the top cash game players (I'm not a poker player). He would supposedly call out to people considering a game, saying, "hey, come on over, we are playing all of your best games, imagine what a little luck could bring" very friendly, etc. I could see in a similar situation someone calling out, "Hey, if you master the mental game against yourself, the rest of us will hand you our money, we are just bystanders". 

anonymous writes: 

I believe that there is nothing inherently wrong or detrimental to a successful trading process from some form of self-awareness.

The problem is that it is very rarely quantified. This list has/had a resource in this regard, the esteemed Dr. Steenbarger.

One has had occasion to work through both of his main texts in isolation & in a more institutional setting. Regardless of ones view about this stuff, I would encourage all to read and think about their market approaches in the context of both books. He is a serious guy and performed some intense experimental tests upon himself in real time.

It is reasonable to assume that such help would be more suited to fundamental discretionary traders, but a more in depth thought process may expand that.

One whole heartily agrees that throwaway lines are useless ( much more so when transmitted through what may prove to be one of the Four Horsemen of the Apocalypse- i.e TWTR.)

Leo Jia writes: 

I think ultimately the biggest hindrance if not the biggest opponent in anything is oneself or one's own mind. As you suggested that someone thinking that trading is all just a mental game against himself is wrong, you actually suggested that his thinking is his own opponent.

Is market mechanistic or competitive? I think it depends on the situation.

I tend to view market has the following participants in any day: a) bulls and bears, and b) primates. The former are big and have their decided views for that day or the following period. They mostly fight fiercely. The latter are small and are simply ready to join either the bulls' camp or the bears' camp at anytime depending on their own views of which side is stronger.

The fight between the bulls and the bears are competitive. But for the primates in this case, it is not competitive (or at least not in the same sense). To them, it is simply making a choice.

The bulls and bears both understand the nature and tendencies of these primates, so they try to take advantage of the latter whenever possible. So in this case, the primates have to compete with the big ones. This might only be possible when the two big sides are not fighting fiercely between themselves.

The primates are controlled by their innate nature of fear and greed (let's just say that the bulls and bears are less prone to fear and greed), so their combined behavior is quite predictable. So when either the bulls or the bears (when one side is absent or subdued) attack the primates, it is quite mechanistic.



 Mattel showed up on one of my screens yesterday because it's stock price is at a 3+-sigma (long term) divergence versus competitor, Hasbro.

This is an interesting company for a variety of reasons. But a key question facing a contrarian buyer is whether the franchise value/moat built on key brands (e.g. Barbie, Fisher-Price, American Girl) is in secular decline. The company currently has no CEO and a key Disney licensing deal expires next year. They reported a truly dismal fourth quarter. All of this is in the stock price. The stock yields 6% which tells us that Mr Market believes it will be cut. They announced a new product with Google and the market yawned. Presumably the stock will pop on the appointment of a solid new CEO who will then take kitchen-sink writeoffs, cut the dividend, restructure, and start anew. But as always, timing is everything and the stock could be a lot higher (or lower) by the time all of this new news is digested.

Mattel is also facing macro/demographic headwinds (but presumably so is Hasbro which is doing quite well). Remember also that Jill Barad made a dismal acquisition of LeapFrog years ago and there were aborted takeover talks when they tried a ?hostile? acquisition of Hasbro. Mattel and Hasbro dominate this industry.

Is this a value trap or opportunity? And if MAT is a value trap, does that mean HAS is a short too? I'm not expressing any opinion except that there is no obvious reason why MAT should outperform the SPX over the next ____ days unless they announce a new CEO that Mr. Market loves. Would be interested in other insights and especially from Tim and the other "value" folks.

Here are the comparative valuations from Bloomberg:


P/E=16 (on distressed earnings)
Yield: 6.0%
P/S= 1.4
EV/T12Ebitda= 7.1
Ebit/Tot Int Exp= 8.2
Mkt cap= 8.6B
EV = 9.7B

Ebit/Tot int exp=6.8
Mkt cap=7.8B

anonymous writes: 

My daughter wanted a new doll, so we went to Toys-R-Us. The Barbies were on sale for $6. But she wanted the $30 Frozen doll. I offered her 5 barbies but she declined. The no-brand dolls were going for $2. Clearly, offering for a discount doesn't change demand much — and perhaps the same for the stock price.

She is a 3 year old educated consumer too — I asked her why, and she said the head turns and the eyes are hypnotic. She can't read the package, but she has already watched the commercials.





"How a Painting from 1925 Inspired Ford's Customer Focused Future":

In 2007, Mulally tells Fast Company, "I was looking for a compelling vision, a comprehensive statement to deliver that strategy." He found the company's mission for the foreseeable future in a 1925 advertisement in the Saturday Evening Post. It featured a painting commissioned by Ford's ad agency called "Visions of Tomorrow."

I strongly suggest readers of this Mulally puff piece take a look at the real financials and not be swayed by the Art Deco-esque graphics that are reminiscent of the covers of Ayn Rand's books.

Ford had gross profit in 2005 of 26 billion and EBITDA of $14B. Mulally was named President and CEO in Sept 2006. In 2006 gross profit dropped to 3.4 billion. But just a few months after he joined, in 2007 (before the recession), gross profit bounced back to 21 Billion. Most notable, except for one quarter in 2010 (which was a post recession bounced), he never achieved annual EBITDA greater than when he became CEO.

Mulally was a very good CEO. But anyone who knows anything about running a company with $170 Billion in revenues and 190,000+ employees knows that it takes more than a few months to turn around a company; that auto sales are cyclical; and that his major achievement was preventing Ford from following GM into government-controlled bankruptcy — primarily by shrinking the company — not by growing the company.



 I am finding it harder to disagree with some of these young kids about their disillusionment. When they observe, as is the case of Target Corp., a CEO meet almost none of his multi-year goals, then be fired walking away with tens of millions of $$$ in compensation and $125MM in total wealth while 600 line workers are let go due to his failings, the game is badly fixed. And the young and less well off get the joke.



Back in 2011, I noted how quality corporate bond yields had disconnected from sovereign yields– and was undermining the shibboleth that the "risk free rate" is the sovereign rate.

Today, a related thing is happening that may well create an interesting challenge for both the fed and investors.

It's well known that sovereign yields have gone negative in the Eurozone. The second order effect of this is that corporate bonds of GE, Philip Morris, McDonalds, and other A+ corporates are moving towards negative nominal yields too. For example, short term GE paper in Switzerland (Swiss Franc denominated) is now yielding below zero. Yes — that's right. People are giving GE money with the understanding that they will get back less in the future.

This phenomenon has never been seen before in the annals of capitalism. It begs the question of "What is an investment?" Or perhaps even "what is capitalism?"

If GE can issue debt at a negative nominal yield, what does this mean for the valuation of their equity (which is denominated in US$)?

What does this mean for the Fed model?

There are so many questions here that are not addressed in economics text books. For example, how can equity drift be positive when nominal interest rate drift is negative?

Will the answer will ultimately be found in the currency markets? Is this the essence of a liquidity trap? A roach motel for capital?

anonymous writes: 

Seems like it opens up an opportunity for currency storage. Although the highest denomination US currency is the $100 "benjamin", there exists a 1000 CHF note. I'll estimate that you can store about 200,000 notes in 1 cubic meter. With each note worth 1000 CHF, a 0.1% negative interest rate would earn GE 200,000 CHF per cubic meter of storage. For reference, Manhattan apartments rent for something like $1,000 per square meter. Each square meter in a pre-war building with high ceilings could get you about 3 cubic meters of storage. So GE could rent for $1,000 per square meter and earn 200,000 CHF in negative interest.

anonymous writes: 

Again, from the cheap seats: It seems that we're seeing all sorts of strange things because players are looking for safety with some hope of capital/forex appreciation, so they accept negative yield. And since some of the CBs and other banks are pushing negative yields anyway, what's not to like? But is anybody looking at GE's swissie bonds and thinking that the situation represents some underlying economic reality unmediated by CB action? (That's not a rhetorical question, btw.)

When they actually implemented the €Mark, I was skeptical because I thought, "Either the Italians are going to have to become a lot more like the Germans, or the Germans are going to have to become a lot more like the Italians." Now we are seeing the crucial period of the experiment, when we find out whether they can get through this to the other side. I remain skeptical.

Peter Grieve writes: 

There's the rub. There really is no such thing as Europe, just a recently cobbled-together collection of disparate nations with long histories as separate cultures (indeed, some of those nations are themselves rather recently cobbled together!).



In their quiet way (as grandpa Martin would say), bonds have Lobagolad up and down by 6 point since year end 2014.

Gary Phillips writes: 

If one thing is to be gleaned from from last week, it was there were no real signs of systemic risk or true market stress; only the perception thereof. The dissemination of public information forced the movement of common knowledge. The media's voice became the context of the market and the market's negative sentiment made for the healthiest of market environments. The time to get really worried is when the market is priced to perfection and everyone is overly bullish. Therefore, true trading ability is not determined by how well someone can interpret an illusory chart; but by the ability to identify the message's ambiguity, and by the conviction to become a non-conforming player. This is what separates the successful trader from the herd. 

Bill Rafter writes: 

We've had a significant overweight in the bullish sentiment for quite a while now. The market has rallied against that along with the classic wall-of-worry. True trading ability is whichever tool you use that can generate superior relative returns, including charts with various inputs.



 The Triumphal Trio Times 2015 is out. Writing an one line summary is always difficult, but anyway…

1 USD in 1900 in US market is worth 38K as of today, but if invested in tobacco stocks it's worth 6.2 mil and some change of 80K!

anonymous writes: 

Roughly 80% of overestimate has been reduced. In the new data, the past is locked in. Inflation adjustments are to blame for people not realizing just how well off they are and are a constant source or "eat the rich" and "we're no better off" myth that has permeated through all corners of society. Real returns are much better, and explains much of the wealth shock, and real wages are much better too. I'll stop there before I go off on a huge rant.



 1949 Born a common man in Schenectady, NY.

1972 Doctor of Veterinary Medicine from MSU.

1973 First of seven Paddleball National Singles Titles.

1972-8 Top touring racquetball professional … Canadian National Champion … First clinic tour of Central and South America.

1974 Bicycled San Diego to Detroit, and Canada to Mexico.

1974-7 Featured in Sports Illustrated 'He Found His Racquet' and other publications.

1978 Owner of Service Press, small publisher of It's a Racquet and The Kill & Rekill Gang in one day.

1975-85 Author of six books and over 100 magazine articles on sports and travel.

1985 Taught sociology class 'Hobo Life in America' at Lansing community College, MI … Psych Technician Certificate from LCC … Worked in psych wards and old folks homes … Lived three months with 'psychic' James Hydrick.

1985-98 Traveled 95 countries of the world under a backpack.

1998 Commodities advisor on a solo 13-country tour made CNN News, Barron's, Wall Street Journal.

1995-9 Hiked the lengths of Florida, Colorado, Vermont and Baja.

1999-2006 Sub school teacher and college tutor in Blythe, CA … Conduct Executive Hobo trips throughout America.

2000-06 Homestead and living as a desert recluse in the Sonora while working on the One-Ton Autobiography of Catman Keeley. 2007-09 Adventure guide in southwest USA and Baja.

2007 First California substitute teacher fired for stopping a playground war … Hit the rails, and foreign travel.

2008-12 Become an itinerant expatriate writing from select Shangri-las including Iquitos, Peru, San Felipe, Baja and Lake Toba, Sumatra.

2008 Three month bus tour of Central America … Caught up in an armed Mexican marijuana smuggling mule train through Copper Canyon. 2009 Buy a seasonal retirement home in the Peruvian Amazon … Continued adventure posts at Daily Speculations, International Man, and Swans Commentary.

2010 Write a biography Kill Richard of an FBI agent who fled murdering CIA agents to San Felipe, Baja … Publish Keeley's Kures while detained by a Sumatra immigration mixup.

2011 Tour Vietnam, Laos and Cambodia … Hobo ride-along with London Times reporter Joe Wobey from Sacramento toward Britt National Hobo Convention written up in 'Twilight on the Rails' … Freight with Central American immigrants from Guatemala through Mexico to USA … Publish Executive Hobo: Riding the American Dream.

2012 Read my obituary, articles, embassy report, memorial service and Art Shay's 'The Legend of Bo Keeley Grows' … Faceoff with bear in scratch contest in NM mountains … Complete a two-month walking and dirt bike reconnoiter of Baja for the Baja 1000 Hiking Trail … Wikipedia 'Steven Bo Keeley' is top rated.

2013 Gilbert Keeley, father dies, and scrap the Chocolate Mt. Gunnery Range for fare to attend his funeral … Fourth attempt through the Darien Gap is foiled by Colombian rebels … 'Last Sail of El Gato' near death sailing from Panama to Cartagena … Three months hoboing Peru rivers in banana boats … Launch the first bilingual tourist newspaper The Amazon Times of Iquitos … Publish five books from Miami including Charlie Brumfield: King of Racquetball, Women Racquetball Pioneers, Basic English One-Page, The Longest Walk, and The Longest Walk Companion… 'Elvis and the Memphis Racquetball Mafia' is syndicated … Founder and curator of Facebook US Racquetball Museum with 5000 friends.

2014 Hobo ride-along with Mother Jones journalist Tim Murphy from Los Angeles via Texas to Chicago and profiled in Jan.

2015 'The Amazing, Possibly True Adventures of Catman Keeley' … Worst case of anemia with 50% normal hemoglobin in the history of Iquitos … Seven months in Peru publishing Stories from Iquitos, Greatest Photos Around the World, Chess and Sport, and Racquetball's Best: Pros Speak from the Box … Asked to a hold rare set of CIA medals by a Miami agent who commits suicide… Inducted into the NPA Paddleball Hall of Fame … Decline induction for the 15th straight year into the USAR Racquetball Hall of Fame.

2015 Publish from Miami Elvis's Humor: Girls, Guns & Guitars, Bill Schultz: Ringmaster of Sport, Book of Bo: Gems of My Life … scuttle a 825 page, 40-year in the making Advanced Racquetball from amazon.com and the public for 'inappropriate conduct' and quoting Atlas Shrugged … Consultant for documentary 'James Hydrick: Fifteen Minute Messiah' … Read stories to Runes 'Dusting and Sweeping' audio series for the William Buchanan Spoken Word Project … Return to the life of a wandering hermit.



 dear vicnied,

I wrote down the following years ago summarizing my first meeting with Stan Mason. It was the first thing I saw while visiting his invention factory, but think it's an appropriate response to your own ruthlessly honest self-assessment in response to one of your website's readers (included below). Your response smacks with the brutal honesty required to lead the field in an endeavor, and is possibly the most inspirational note I've read of yours. Deepest thanks for reminding me, again, of the almost savage forces one must both confront and unleash in order to move ahead at the highest levels.

Best wishes.

Your friend,


p.s. I wrote Keeley once, a quote from "Beethoven Lives Upstairs": "to be great, you must have the spirit of a gypsy and the discipline of a soldier." Which is true. But I always thought that, additionally, you must have the overwhelming confidence of a megalomaniac and the all-consuming self-doubt of an acute neurotic.

p.p.s it reminds me of the early days of racquetball and the two camps that evolved. First, the leach crew took the prizes, they were the rebels, the pioneers, winning through creating new strokes, shots, strategies. Next, the ektelon gang, essentially the middle of the road statisticians who took the best of the leach crew, threw out the chancy stuff, and played the odds all the way to ho-hum victory. Politics, of course, played a great role in the game's decline. So too, however, did it's developing lack of color and character. (Of course, a ball speed change that reduced the average rally from 12.3 shots long to 2.9, and, of course, the parallel reduction in power versus control, didn't help either.)

p.p.p.s with innovation, as you know, it is almost always second in line who reaps the rewards. First in line is usually busy nursing the wounds of discovery, failure, recovery….

The First Sign You See When Visiting Stan Mason's Invention Factory:

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, and comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat."

Theodore Roosevelt, the Sorbonne, 1910




The key point here is not "check" to Merkel, or who blinks first in the short term. The key point is that the gap between the two sides is so large there is unlikely to be a mutually agreed medium term solution, meaning the next 1-3 months. 



 "An Instant of Nut-Fueled Rage Draws a Year in Korean Jail":

SEOUL, South Korea — A former Korean Air vice president who ordered a plane back to its gate in a fit of anger over how she had been served macadamia nuts was convicted Thursday of violating aviation safety law and sentenced to a year in prison.

The executive, Cho Hyun-ah, whose father is the airline's chairman, became an object of international ridicule after the Dec. 5 episode, in which she forced a Korean Air plane taxiing at Kennedy International Airport in New York to return to the gate so the chief steward could be removed. She was said to have been angry that a first-class flight attendant had served the nuts without first asking her, then in an unopened package rather than on a plate.




The question is much simpler; do they intend to try yet again to promise that they can repay debts that they cannot possibly repay or do they tell all the creditors — internal and external — that there will have to be an insolvency proceeding. The hotels and taxis and restaurants and tavernas can still take Euros in payment; and the French, German and Greek banks will all be happy to do the credit card processing for them. The Eurozone financial backing — like the Dawes Plan — only works as long as all the money lent is returned immediately to the foreign creditors; the Greeks, like the Germans before them, have begun to wonder what they lose by simply defaulting. There is one great difference, though; the German pension plans had already been blown up by the hyperinflation. No one in Germany in the 1920s was still receiving a check from the government that was worth anything. I don't know (or care enough to learn) how important the constituency of the receivers of transfer is to the newly-elected government. They may think that a Young Plan is better than default for right now; and, for them, it will be. For the creditors it makes no difference; they will end up with much the same result the Germans got at Lausanne in 1932 (unless, of course, the ECB wants to ask NATO to be the debt collector and have its nearest member send troops to enforce an attachment).

Charles Pennington writes: 

The Greece situation could be analogous to Argentina, which defaulted at around year-end 2001.

I don't have a source for the US dollar performance of Argentinian stocks, except there is Telecom Argentina, TEO.

TEO was at $6.52 on 12/31/2001. It got as low as $0.60 mid-year 2002, for a ~90% drop. But it was at $10.96 on 12/31/2004, giving you a 68% gain over 3 years.


If you want to make that trade, you'd turn off your Bloomberg for a few years so you don't get stopped out!

anonymous writes: 

Another comparable:

Russia defaulted on August 17, 1998.

If you had bought $100 of the open-end Russia mutual fund ticker LETRX, here are some future values of your $100 (with all distributions re-invested):

8/17/1998   $100
10/5/1998   $56  (the low)
8/17/1999   $120
8/17/2000   $235
8/17/2001   $210

So in that case there was only a 44% maximum drawdown, and after 3 years you made 110%.  (S&P total return was around 20% over the same window.)



 For those of you interested in the infrastructure that keeps all of these modern balls juggling in the air, I would highly recommend checking out Brian Hayes' Infrastructure: A Guide to the Industrial Landscape.

It is basically a How Stuff Works for the technological infrastructure that supports modern society. It's a great look at the works of the industrial Ozymandias, and what it takes to keep it all in motion.

Topics include Mining, Power Grid, Tunnels, Waterworks, Communications, Aviation, Food and Farming, Roads, Shipping, Oil and Gas, Railroads, Wastes, Power Plants, Bridges, and Recycling.

It's a beautiful, oversized, soft cover with tons of color photos and info. I love it!

From Amazon:

Replete with the author's striking photographs, the revised and expanded edition of Infrastructure is a unique and spectacular guide to all the major "ecosystems" of our modern industrial world. In exploring railroad tracks, antenna towers, highway overpasses, power lines, coal mines, nuclear power plants, grain elevators, oil refineries, steel mills, and more, Brian Hayes reveals how our familiar and often-overlooked industrial environment can be as dazzling as nature. With a new chapter reflecting on recent natural and technological disasters—from Hurricane Katrina to the meltdown of the Fukushima Daiichi reactors— Infrastructure is a compelling and clear guide for those who want to explore and understand this mysterious world we've made for ourselves.



The Brian Williams story seems to be a manufactured one, or might as well be, to supplant the significant with the trivial. Who cares if he exaggerated his bravery or made up an "eye witness" account of a dead body floating by during the Katrina sh*tstorm.

The sad fact might be that most people don't realize he is just an actor playing a part - an entertainer like the ones my kids just met at Disney Word. The fact that so much of the "critical" info we supposedly receive on matters of grave significance is outed as fraudulent after the fact, that we are routinely given bogus narratives on matters of national security, then it is never addressed with accountability assigned, has a way of fading to the background. Instead we worry about if a dead body floated by Brian's hotel room or if he personally dodged a heat seeking missile.

Stefan Jovanovich writes: 

Ed misses the point about the show Mr. Williams is putting on. His act is to be a truth teller — to be factually accurate. The decline in the profitability of newspapers has come from their failure to do what had been their act — to be the town criers of the facts of current gossip, not an extension class in proper opinion. The problem for Mr. Williams has been for a while that it is a bad show; the problem for the Times, both NY and LA, is that neither Gay Talese or Jody Jacobs or anyone remotely like them works there any more.



 "Caterpillar appears as a snake for camouflage"

It's not a snake, I swear…



 Treasury Secretary Lew's comments yesterday:

'While the recovery in the US economy has helped to drive global growth, the rest of the world cannot depend on the U.S. to be the sole engine of growth….'

I am reminded of one of Mr. Lew's predecessors, a certain Mr. Baker– whose mischevious words on a chat show one Sunday morning, in that instance chastising the Germans and Japanese for not trying hard enough and threatening (kind of) to let the Dollar go (whatever that means) in 1987 led to a somewhat statistically noticeable day in the Stock Market on Monday.

I know, I know, one thing has nothing to do with the other. I'm just saying….



 1. The January barometer has become a Judas goat for the weak to be slaughtered having failed big when down the last 3 times, in 2009, 2010, and 2014 with average subsequent rises in double digits each time (after holding in 2008) but failing in 2005 and 2003.

The stock markets swoon in last few hours on Friday, Jan 30 was 10th worst in last 15 years.

3. Some constructal numbers of the week: gold below 1300, SPU below 2000, and wheat below 5.00, and vix above 20.

4. The best book on science I have read is Michael Munowitz Principles of Chemistry. Some other great books I am reading is Paco Underhill Why We Buy (does for buying what we should do for the market in terms of scientific analysis), Russ Roberts How Adam Smith Can Change Your Life (applies the theory of moral sentiments to how to live happily in current days), Paul Moskowitz and Jon Wertheim Scorecasting (applies sabermetrics and counting to our favorite sports shibboleths), Michael Begon, Townsend, and Harper Ecology 4th edition (the best selling standard ecology book these days) and William Esterly The Tyranny of Experts (how planning leads to poverty compared to the invisible hand), Chris Lewit The Secrets of Spanish Tennis (gives some great footwork drills the Spanish use to rise to top), Lamar Underhood The Duck Hunter's Book (the most beautiful writing about fauna I have ever read and reread that makes you long for the beauty and poetry of bygone pastimes) Uri Gneezy and John List The Why Axis (uses pseudo experiments in real life and contrived anthropogical settings to attempt to prove liberal shibboleths like why genetics and incentives don't matter), David Hand The Improbability Principle (why miracles are likely by chance). That's enough.

5. The service rate paid by the world's most sanctimonious billionaire has risen from 2.5% to 9.5% on quarterly ebit this last reported quarter.

6. The ratio of stocks to bonds is at a 1 year low.

7. Gold is playing footsie with 1300 and SPU with 2000

8. Crude broke a string of 15 consecutive weekly declines with a 7.5% rise this week finally showing that futures moves to telescope reductions in supply the way Heyne elegantly shows they do.

9. The pythagorean theory of baseball runs scored for and against is a statistical due to random numbers, completely consistent with chance and has nothing to do with any recurring tendencies or baseball tendencies.

10. When my kids and relations start calling me worrying about how far the stock market is likely to fall, it's bullish. Conversely when they all start apps, it's time to wonder whether that goose has been plucked.

anonymous writes:

As to point 1.

I posit that all 'indicators', techniques and strategies in the public domain are worse than useless as presented. Within this I include everything preprogrammed into trading software like Bloomberg or Tradestation, the 'January effect', every indicator written about in Futures magazine etc… There are a few public strategies that some firms have made money from but the volatility is enormous and no note is made of survivor bias of others who used the strategy. There are then the preprogrammed techniques available that can be very useful but only as part of a bigger trading process. These last are probably less pernicious than claptrap like the RSI.

It belittles us all to discuss these things.

Consider it this way– everything that makes its way into a magazine or gets programmed into trading software is detritus from the core of truly predictive strategies.

If there is anything to be gained from this it is that you have to do your own homework. 

Larry Williams writes: 

With all due respect you are way off base on this issue; you mean to say OBV is useless, that seasonals have no value that volatility breakouts are worthless, that Bollinger bands are junk and select price patterns have no value? COT is just a joke, that watching spreads and premiums is the same as an Ouija board? Delivery intentions tell us nothing and advancing stocks, volume and Open Interest reflect nothing?

There are lots of great tools in public domain, just as there are good saws and hammers but it takes a good carpenter to make them work.

Anatoly Veltman writes:

Paragraph 1 falls apart on many levels: so what that "it" failed in 2009 and 2010 at price levels triple and double the 2015 level? So what that "it" failed in 2014 - then via principle of alternating years, "it" better work in 2015! But most of all: in day and age of still ZIRP manipulation, what historical market stats? The 2009-2010 were onset of QE, and 2015 is sunset!

Ed Stewart writes:

Taking into account changing cycles, I tend to disagree. I think there is quite a bit of stuff in the public domain that is very worthwhile.

For starters, a careful reading of Victor's book revealed many more specific ideas than it seemed on a casual reading, which I'm sure many/most here know. I have actually made more than decent money with a few ideas (gasp!) I found in the first market wizards book. Larry's book is a bit of a brain dump (which I always like, no offense there), but once again I found some good ideas in it.

I made (for me, not relative to a big fund manager) very significant profits in 2012-2013 using concepts that I first learned about (If I recall) on Falkenstien's blog, and for a time I tried to get a fund started to trade that market. My thought is that sometimes the market is rich for a particular approach do to a counterparty paying a massive premium, consequently sometimes these things go on even when everyone doubts them (which is why they might keep working).

I think the key to public domain stuff is that if one gets the concept behind a good rule-set there might be 1000 other rules related, waiting to be discovered that might be more attuned to the current cycle of market behavior.

Another is in combining ideas. For example in my way of seeing things there are environments were "naive" strategies are very effective - it is a matter of if u can catagolize that environment and then if there is some persistence to it in the next period (My finding is that there often is), though never perfect.

One last thing I learned is (perhaps contradicting the above) Don't ever write anything and assume that no one will reverse engineer and map out every qualitative thing you write. I had a trading blog that admittedly was mostly goofy stuff i wrote to draw free traffic from google, but also some pretty good core ideas I have made good hay with. Then one week I got emails from two different guys (one a big algo firm, the other an execution algo guy at MS) basically saying, "hey, I mapped out these ideas ideas, they really work - thanks!". The next week I took the blog down. So my conclusion is while some good stuff is in the public domain, don't put anything of value in the public domain yourself, even in vague terms not intended to attract a sophisticated audience. 

Stefan Martinek writes:

From whatever I tested, +90% does not hold or does not improve the base case. Few areas are fine despite being in public domain. They can be further developed. It also helps to start PC at least 250-350 times per year, and make tests before forming opinions. There are so many people with beliefs but when you ask them "show me the codes", there is nothing to show. Sometimes an argument goes that you can take anything and make it working, making the dog fly; I agree but I do not think it is a good use of time.



 In Italy most of the reforms much applauded as usual by Merkel are just privatizations that the government Renzi will have to do.

What is the best way to rob a nation of its jewelery? Answer: Indebt with money…printed (which costs nothing) and when the nation will be cooked to perfection and will no longer be able to pay back the interest, claim payment in assets.

I thought that this practice was limited to Latin America, the hunting grounds of the IMF, (see Argentine rejection and consequent restructuring) but after Cyprus and Greece quickly realized the wind was blowing in EU, in the sky were a lot of vulture's license plates named IMF.

Now it is the turn of Greece, after having sold the islands as well, on its last legs, it seems that "Greece is awake."

Note the atrocities operated by major European nations against Greece are at the limits of decency (euphemism)…

The last example: it seems that the government was forced, due to the continued payment of maturing debt + interest, to privatize ROSCO, the company of Greek rail services. Who was presented to detect it? Siemens (Germany) and Alstom (France) + a Greek society (contour), 3 companies to carve a greek piece of PIIGS. And this is just one of countless stories happened to the detriment of Greece, supported by the Greek political parties that have just lost the election (rightly, and have sold the nation). Possible? Draghi continues to talk about the transfer of sovereignty… but to me it seems to be giving more.

Our ancestors who died in the war to protect the nation would turn in their graves to see what is happening.
Europe now only a feast for vultures. And finished with Greece they will continue with others… those (politicians) who are preparing the sale of national assets under the name of privatization,



 Please join us at the Junto on  Thursday, Feb. 5, 2015.

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

Free admission, no RSVP required.

Location: 20 West 44th St., ground floor, New York City

Ben Powell, Director of the Free Market Institute at Texas Tech Univ., will be speaking about his book, Out of Poverty: Sweatshops in the Global Economy

From a review on Amazon by Greg Rehmke:

Ben Powell's Out of Poverty examines today's textile factories in the developing world and their role as a pathway out of poverty. Migrants from rural villages only gradually acquire skills valuable in modern factories. But as poor people learn how to work with textile and other light industry machinery, their earning power and wages rise. Critics of sweatshops wish there was a better, faster way, wish wages and working conditions could be better faster.Ben Powell is a critic of sweatshop critics, and he examines the many claimed shortcuts to prosperity that wishful thinkers say should be adopted (and mandated if not adopted voluntarily). These alleged shortcuts turn out to cause long delays. Ideally, the unskilled of the developing world could migrate to better-paying jobs. And ideally machinery and infrastructure could more quickly "migrate" to developing countries. Sweatshops are a compromise in today's imperfect world that lacks the freedom of movement and investment taken for granted in the decades before World War I.



 Well, everything is going to hell. Russia is still a problem, Greece seems to be turning into a trojan horse, the European QE, if confirmed by the data, will be fuel to the fire otherwise wasted money. The real QE for Europe would be fiscal union, it is not clear which masochism perverse wants to continue to kick the can despite all that is happening. They are destroying, structurally and industrially, European nations.

I think the Euro should yield against the $ next 2/3 months if will follow positive data, so I expect what happened from 15gen (hammer on European indices). Otherwise the $ will continue to parity, EUR$ 0.80/0.75 worst case. I think that pears are ripe in the US, so maybe sell the tops and put into treasury waiting for the second part of the year when better occasions are a possibility. Oil will rise in second part of 2015 (if not before).

I think Macro decision are faster than fact, but there is nothing worse than to inject money in an economy unable to recover because it was managed by opportunistic nations (politician/bureaucrats) not willing to cooperate.

Structurally, the QE will not have any improvement. It makes no sense to do austerity while the EU industrial system collapses and then six years later, they realized the error, try to revive the fortunes of the economy printing. The system to indebt nations and then manage them better, so loved by the IMF, seems to have become ingrained in Europe. My grandmother used to say, it was better when it was worse, and we were unaware of that, but she was right.



The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.

Ed Stewart writes: 

I can't see how spoofers are bad for anyone but the momentum front runners, as you suggest. There must be a "god given" right to jump in front of slower moving participants that we are not aware of. I'd love to know how the spoofing practice developed. My guess is it started as a counter-strategy to neutralize front-running before it became a source of profit?

Vinh Tu writes: 

And "they" destroyed limit orders when they busted the trades during the flash crash. I guess front-running is the only virtuous and god-favoured strategy?

Hernan Avella writes: 

Vinh, I think the case with the limit orders is simply adaptation forced by the hft boys techniques. They have raised everybody's game. What do ppl gain by advertising their intention in the order book?. What it's remarkable, is how long it took for other participants to start randomizing, splitting and using hidden orders in a more widespread fashion.

But to your point, yes, speed is expensive and 'they' try to recover those costs.

anonymous writes: 

Famous energy trader John Arnold says:

"Front-running is profitable against traditional orders entered by humans. But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money. The HFT's front-running algorithm can't easily distinguish between legitimate orders and spoofs. Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running. In short, spoofing poses the risk of making front-running unprofitable. Because spoofing is only profitable if front-running exists, allowing both would ensure that neither is widespread."

The basic ideas are very similar to Hernan's market ecology post.



Here are my results. Stay safe everyone!



 It's during bizzards moreso than other storms that people suffer severe injuries. Orthopedic surgeons are usually quite busy after historic storms. Whether this one will meet the forecast remains to be seen.

When I was on call at Shock-Trauma during the 1983 blizzard, we a sustained of blizzard condition—whiteout and wind. Some fellow in Frederick County (I was in Baltimore City) decided it would be a great time to take his snowmobile out for a romp through the storm. He missed seeing the tree that his snowmobile took on and lost—and he suffered multiple system injuries—lacerated liver (it was half off the vena cava, and the surgeons were amazed he survived the helicopter trip), broken pelvis, broken femur, collapsed lung, brain hemorrhage, skull fracture, broken cheek and eye socket, 4 or 5 broken ribs, a broken knee cap, a broken wrist, a bunch of broken toes. and bilateral dislocated shoulders, not to mention extensive bruising. he received something like 25 or 30 units of blood. It was pretty bad. He walked out of the hospital 6 weeks later.

Blizzards are dangerous. They're not just big storms.



 Something today reminded me of a mentor (English teacher, older guy retired a few years later) that I had in high school. One of the key things he told me was, "Never get serious with a girl whose mother you would not want to have relations with, if given the chance". I think more than a few times that thought flashed before my eyes and it saved me from serious error, partly because it was memorable. I'm trying to think of any similar rules of thumb that might help us to avoid those trades or strategies that can severely set back profits, create anguish, and otherwise make things worse than they should be. Any ideas?

Leo Jia writes: 

Hi Ed,

"Never get serious with a girl whose mother you would not want to have relations with, if given the chance"– I thought that was only my words!

There can be many similar things for trading. Here are some for critique.

1. If you don't like someone's way of life, don't trade like him.

2. If you don't like the dominant players of a market, don't trade that market.

3. If you don't like the rule makers of a market, don't trade that market.

4. (I learned this one from Scott Brooks) If there is already a professional at the table, go somewhere else.

5. If you don't like a country's tax code, don't trade in that country.

6. If a market hasn't shown a lot of opportunities in the past, don't trade that market.



 I always thought dogs were angels too, and trained hard many years in veterinary school to heal them.

However, certain dogs in certain countries, depending on the people that influence them, in one month turn from angels to snarling demons. I learned a lot in the past seven months fighting about eight dog packs of 5-10 animals each by being surrounded by them all snapping within four feet – front, back, and either side.

The best thing to do is to back into a corner. Otherwise the fastest alpha will sprint around and try to hamstring you by biting in the rear. It's impossible to watch 360 degrees, so if one is encircled without any plan or mental rehearsal, blood is sure to flow. Yours.

It's exactly the same technique I watched on a National Geographic film of packs of 6-10 wolves each taking down caribou, deer, elk or even bison in Alaska. Unless the prey can outrun the predators (not me any more), or back into a corner so there is no real side or rear attack, or grab a weapon, then one is at the mercy of the canines.

This never happened to me, though I was bitten biweekly by the Peru Amazon street dogs in various haunts where I walk. The two primary fighting techniques were to pick out the alpha (usually the biggest male), and charge it ignoring the attempted nips from the rest. Once you kick the alpha in the teeth and he whines, the rest retreat. In the common case of the fastest dog running around end to get behind you, I always turn and immediately chase it trying to kick it. You need to get to it fast because as you turn to face it the rest of the pack rushes your heels. That dog is the fastest, usually the bravest, and once it zips off the rest will follow its lead away from your body.

Once I got these strategies down, I actually looked forward to the afternoon or night workouts of fighting off the packs after a long stint at the 'office', and it was restful before going to bed.

Sad to say for a veterinarian, I resorted to psychological warfare to turn the tide to keep from going psychologically rabid myself. I knew the dog alpha of each of the eight packs in a blink at a block's distance; it was usually the biggest male, but nearly as often the stupidest which is to say most fearless, like pit bulls and bulldogs. My psych warfare was to stalk them during their sleep, especially during a night rainstorm, and kick them directly in the cranium. If you kick in the eye, ear, nose or teeth it can cause permanent damage, but I only wanted to establish myself as their dominant. My foot made hard contact about twenty times over the months with the various sleeping alphas, as hard as football punts, but their heads are so hard that it was like kicking a 8" diameter rock. I alternated feet over the weeks waiting for the soreness to go away. I have no toenails left on either of my big toes from this.

Then the psychological part comes into play – a hard head kicked sleeping dog awakes instantly and instinctively turns and bites at the foot. There's a split second to kick a second time with the same, or better, the opposite foot, and about one second after your first kick the animal registers pain, the eyes dull, and it withers off yelping in pain with a tucked tail. Now is the time to follow it through the rain for blocks, not letting it lie down, rest or sleep for about thirty minutes. It's easier than you think because every alpha returns to the same spot after a few minutes, so I just lay in wait, as they have done with me, and keep them awake and moving. It's a combination of pain and sleep deprivation, and after a few nights of this, without fail, the alpha will no longer lead the pack in attack. Instead, when it sees me coming, it lowers the head in a cowering gesture and sulks off, followed by the rest.

That's the time to be on the alert for attacks from street people, who live like them, and empathize in bands. I know this from hundreds of encounters with the same packs in the past few months in the Amazon where the dogs have turned nasty with a sudden rise in consciousness of the people who now treat the dogs like second, instead of equal, citizens.

These are the techniques to beat fallen canine angels. And they worked on people too.

Pitt T. Maner III suggests: 

These high frequency deterrents called zappers work fairly well and could be easily shipped to Peru.  At least it would make an interesting study.

Marion Dreyfus writes: 

When I rented a house on a hilltop at End of The World, Zimbabwe, baboons made increasingly aggressive encroachments toward me and the house. I remember saying to the park ranger, who came and shot the baboons dead: "Once they are no longer afraid of people, they will rip your face off. We must kill them to keep that from happening."

Andy writes: 

A recent study on Montana and Wyoming data indicates that killing wolves leads to increased depredation of farm livestock.

One theory proposed is that shooting the alpha breaks the discipline of the pack and leads to more independent wolf breeding pairs. These rogue lone attackers are more likely to predate livestock than an alpha led pack.

The researchers did not find a drop in the depredation until >25% of them were destroyed, which corresponds to their population's rate of increase.

The idea for a rancher is to avoid killing the alpha unless he can and will take out more than 25% of the population of the wolves.



 Thank you for passing along the Constructal Law of Design paper by Adrian Bejan.

Bejan's basic premise is that everything in nature is a flow. There are the obvious flows of things like water (rivers, blood) or air (lungs, air distributions systems), etc. In addition, he discusses flows of stress, for example, in the arrangement of the limbs on a tree, or the flow of animate mass, e.g., when a herd of animals runs or school of fish swims. His premise is that living systems are continuously changing and adapting their configuration to maximize the "currents that flow through" them. Even the building of the Egyptian pyramids, he argues, represents the flow of stones from a broad area to a single point (the pyramid). Here "living" systems (both animate and inanimate, such as rivers or pyramids being built) are constantly evolving and changing their configuration. When a system stops reconfiguring its flows, it dies: a dried-out river bead, dead animal, or completed pyramid receives no further maintenance, i.e., there is no more reconfiguration when something is dead.

Here is a Q & A on the concept of Constructal Design by a Forbes reporter and Bejan that has things described in less technical terms than his paper.

In terms of applying these concepts to trading, it seems to me that the obvious entity that flows is money.

One concern that I have, however, in adapting Bejan's ideas to a trading model is that, in the flows that he is describing, there is always a driving force from high to low: gravity pulls water down a landscape, a pressure differential drives air in and out of the lungs, a disturbance or threat forces animals to run in the opposite direction. As a result, all of the flows that he is describing are one-way, or unidirectional. This central to his entire theory, as the opposite behavior is prohibited from the Second Law of Thermodynamics: heat does not move from cold objects to hot on its own, rivers do not flow uphill, air does not come out of the lungs when the diaphragm expands to reduce the pressure in the lungs to draw air in, dropping the broken pieces of a coffee cup on the floor will never result in re-assembled cup, etc.

Thus it would seem that a critical element in adapting Bejan's ideas for trading will revolve around describing a driving force for the flow of money. This is really your expertise far more than mine, but let me start the dialog by suggesting that the driving force for money is the perceived potential for money growth (PPMG). 'Perceived Potential' here implies that there is an opportunity to make a profit from an investment, but that the outcome is not necessarily guaranteed (think of Enron and Bernie Madoff). Reconfiguration, also a key tenant to Bejan's ideas, happens with the flow of money from one instrument to the next. If we now draw the analog of a river basin, and that high PPMG is analogous to a low point in the flow of water over a landscape, then it can be seen that money will flow from regions of low potential (elevated areas, mountainsides) to regions of high potential (low areas, valleys). The lower the elevation, the more rapidly money will flow into it.

What complicates the analysis is that PPMG is a dynamic quantity. A company can be very profitable at one point in time (Kodak, General Motors, Blackberry), and thus have considerable growth potential, but over time, its growth potential can change. This is analogous to the river basin landscape changing constantly in elevation, and having the flow adjust accordingly. This does happen in nature as well, of course, both slowly (Colorado River/Grand Canyon) or quickly (earthquake/volcano). Such a time-varying landscape would be important to include in a trading model.

I think that the above would be a bare minimum to implement the ideas that Bejan is putting forth. I did do a quick search to see if people were using these ideas for trading (in particular) or finance/economics, but I did not find much. This is not a surprise: Bejan's ideas are new and different and thus will take some time to permeate to other areas. This, in itself, is an opportunity to seize the advantage. The risk, is, of course, that the ideas may not have significant utility in trading to upset the state-of-the-art now in place, and thus will not pay off after time spent trying to integrate them. This is the risk of adopting any new technology/idea, I suppose.

Anyway, there you have it: my rather disjointed ideas on the matter. I would be interested to see if Bejan's ideas could prove to be of utility for trading.

Jon Longtin, Ph.D., P.E. Professor Department of Mechanical Engineering 159 Light Engineering Bldg. State University of New York at Stony Brook Stony Brook, NY 11794-2300



"How Do You Quantify Panic":

In a paper recently published in the journal Interface, researchers from the Massachusetts Institute of Technology, the Draper Laboratory, and the disease-forecasting company Ascel Bio say they've found a way to predict overreaction to outbreaks.



Lumber is worth a close study and possible long position here…

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