Sep

21

 This is a short video about quantum computing. I was drawn to the simple explanation of a complex idea and there seemed to be many potential market lessons or at least gaining a new vantage point.

1. There is more than one complimentary way to view something.

2. If you participate you can't know what would have happened if you didn't and vice versa, particularly relevant for size.

3. Intrinsic randomness of superposition allows observations without a probability distribution. Still wrapping my brain around this. An example of ever changing cycles? Or something else entirely? If there is no probability distribution how do you define outcomes of events?

4. Quantum correlations are richer in describing interactions. This idea seems ripe for trying to understand the complexity of market interactions.

5. Attaining perfection is hard, maintaining it is impossible.

6. Viewing quantum computing affects the results, perhaps in the same way talking a position does.

7. How did you get that result? I don't know is the right answer in quantum computing. Do it yourself so you can understand. Don't trade what you don't understand. don't blindly follow someone else's "system" perhaps there are others…

anonymous writes: 

I agree that the quantum-collapse idea has broader applications to life in general. Danilov & Mogiliansky, many years ago now, used the collapse concept to talk about Tversky's famous quotation, "Preferences are not read off of a master list, but are constructed in the elicitation process." QM discussions have a tendency to go off the rails very quickly, and to attract sophists & cranks. But superposition and measurement-disturbances are, in my opinion, relevant and common to quotidian life.

1 = duality

2 = contravariance (the math.DG kind, not the math.CT kind), on trees

3 = I don't understand what this means either, but we can clearly reason about the unknown without attaching PRECISE probability numbers to it.

4 = I would guess no. Quantum correlations can have negative intersections. But someone here could find out: just allow your covariance matrices to take on complex values.

5 = set of measure zero

6 = talking or taking a position?

P.S. If someone finds complex numbers arcane or silly, I'm happy to share a few bits of perspective.

Mr. Isomorphisms writes:

Just checked the video and revised on Wikipedia and a little googling. I don't think 3 is an accurate statement. Quantum states are expressed as waves which can be added together. Lots of things in the normal world can also be expressed as finite-energy functional spaces. But I don't see where the video said there is no probability distribution. Nor is superposition "intrinsically random". Superposition is just adding things together.

If you check the Wikipedia page for quantum probability it says that outcomes of events are basically defined in the normal way, except since it's a complex space the i=-i equivalence shows up and screws with things.

OK, someone asked for my ideas on clarifying complex numbers. Here's my attempt for those interested:

- First the physical intuition. Electricity travels along power lines. If the transmission efficiency is 1 then the consumer gets 100% of the power produced at the generating station. If the transmission efficiency is sqrt(-1) then all of the energy from the station goes to heating the power line and does no useful work.

Now the maths.

- The usual numbers are annoying because signs "jump" from + to - with nothing in between. google.com/search?q=klein+j+invariant+whirling+upon the top video shows something else with only very specific points matching up, but instead of showing us only the actually equivalent points it shows us the whole movement, as it were — which is only posible in a smooth space. Complex numbers let us watch what's happening "in between" negative and positive.

- That's why e^i pi = -1. Nothing more special than that pi is halfway around a circle that goes from positive to negative, circling back to positive.

- View the complex line as a line and an angle ⟳. The angle replaces the usual concept of sign. All of the arithmetic on complex numbers works basically the same as regular arithmetic, except that you also take the "angle" (the "amount negative or positive") into account. If you multiply two numbers you need to add their "angles". (In finance, "angle" means "correlation".)

- So I generally think of the complex multiplication happening just on the unit disc, i.e. everything is equal magnitude but has different signs (and fractions of signs). Then I do regular multiplication second.

- However it's impossible to tell -i from +i. (-i)^3 == (—)i == -i So that has to be taken into account.

- Complex numbers don't require any changes to your metaphysical worldview, because they can be represented with real numbers. The matrix representation is on Wikipedia and it looks just as "half-negative" as (num)*(num)=-1 does.

- You can derive trigonometry from complex numbers. In other words the arithmetic induced by adding sqrt(-1) to a number system, matches what people figured out from plane triangles.

- For those who can use R (or don't mind logging into cloud.sagemath.org, opening a cloud terminal and typing R), run the functions in https://gist.github.com/5a30e61fb305ee52cff . That instantiates a "plat" function, basically like python mpmath's cplot except Cielab colours are psychologically superior to RGB.

You can "plat" polynomials like this: plat( Z, function(x) (x^2+1) * (x-2.3) )

Then red is positive, green is negative, and other colours are somewhere in between. Size is indicated with brightness, but there's nothing special going on here that you can't see in a regular plot.

I believe playing around with simple (and not-simple, if you can think of any) functions in these "plats" will give anyone (a) a better understanding of those functions, and (b) the feeling that the complex numbers are not scary or weird.

tl;dr. The complex numbers just let us look in-between positive and negative. More advanced: if you want to envisage a complex variety, then an idea I had recently is to animate the plat with a parameter that traces around the unit circle (all possible "signs" fed into the function).

The "worse" version of a parabola moving from +1 to -1 to +1 would be it "flaps its wings" with in-between being a flatline at 0–not very parabola-like.

Jonathan Bowers writes: 

I'll agree that I may not have articulated my understanding of superposition very well. In the video they show a coin flip since it also has two outcomes, but emphasized that while the coin flip has a probability distribution quantum computing does not. Perhaps that means that the distribution is always changing or unstable or when or how you measure it changes it.

Mr. Isomorphisms writes: 

I think it's just a superposition (convex combination) of 0 and 1. Same concept as a screwdriver if it could be any mixture of orange juice and vodka. You probably have a small range that you consider "screwdriver" but what if there was a word that meant "anything that's 100% orange juice, 100% vodka, or anything in between". That's a convex combination of oj and v.

Sep

17

The Betfair Sportsbook is paying out a substantial six figure sum on the NO vote three days before the market closes, fully confident that the Exchange will once again be the most accurate barometer of a political vote…

The moves comes as the £8.6m Exchange market remains vehemently in favour of a NO vote at 1.27 (1/4 and a 79% likelihood), despite opinion polls predicting a much closer result after the votes have been counted on Friday. Over 85% of the total volume traded is in favour of a NO vote.

Several big individual trades continue to come on NO, with one customer staking £55,000 and another backing it for £27,000 on Sunday alone.

There has been little sign of the YES vote gaining any traction with political bettors, trading at 4.5 (7/2), and the average size of bet placed on this outcome under £80, in comparison to the £465 average bet for the NO vote.

Betfair's Naomi Totten said: "Political bettors have often favoured the Exchange as their choice of betting platform and it has historically provided an accurate prediction of political outcomes. Paying out early on our Sportsbook is testament to the esteem in which we hold the illustrious track record of our Exchange.

Sep

15

 Shades of Galton….

Excerpt:

In his fourth-floor lab at Harvard University, Michael Desai has created hundreds of identical worlds in order to watch evolution at work. Each of his meticulously controlled environments is home to a separate strain of baker's yeast. Every 12 hours, Desai's robot assistants pluck out the fastest-growing yeast in each world, selecting the fittest to live on, and discard the rest. Desai then monitors the strains as they evolve over the course of 500 generations. His experiment, which other scientists say is unprecedented in scale, seeks to gain insight into a question that has long bedeviled biologists: If we could start the world over again, would life evolve the same way?

Stefan Jovanovich writes: 

The absence of time's arrow is fascinating. The "fittest" compete in a world where the rules are constant and invariable - "meticulously controlled" - while everything we know says that the rules are always changing in ways that even we brilliant humans fail to predict. Still worse for the purposes of experiment, the rules sometimes instantly and violently, even as they obey all of our entirely predictable laws of physics.

Ralph Vince comments: 

This has nothing to do with "fitness," and everything to do with randomness.

Take X scenarios. At each discrete point in time, they branch into one of these X scenarios, such that after Q discrete periods, you have X^Q branches.

Your "expectation," (not in the classic sense) is the sorted median outcome (whereas the classic sense expectation is the probability weighted mean outcome, and I contend that in the limit, i.e. as Q->infinity, they converge *).

About this sorted mean outcome (at QP0, in the paper this thread pertains to) there is a vast region of similar-outcome branches. It sounds to me as though this experiment has lass to do with evolutionary "fitness" and more to do with artifacts of expectation in finite time.

I am working on a proof of *, but working on it with respect to continuously-distributed outcomes (as opposed to discrete "scenarios") as well as continuous(though fininte) time, rather an discrete increments of time to Q.

It is a struggle.

Mr. Isomorphisms adds: 

This may not be what you're looking for in proving *. But the other day I worked out that you can exploit the "soft max" identity (seen in tropical geometry and elsewhere) to get analytic formulae for the median, third-from-top, etc. (only with log base ∞) which might get you where you need to go.

max = log_t ( t^a + t^b + t^c ), t going to infinity

min = log_t 1/( t^-a + t^-b + t^-c ), t going to infinity

second_max = max( {a,b,c} - max({a,b,c}) )

With recursion you can get all the way to the middle. (Now since we've turned the median into a continuous function we can take derivatives, which I haven't simplified or played around with since I realized one can do this. But I don't think that relates to your * — just hoping the method would.)

Steve Ellison comments: 

Regarding Shane's original question, yes, there is a phenomenon known as evolutionary convergence. Isolated areas with similar conditions often have similar life forms that developed independently. For example, cacti originated in the Western Hemisphere, but there are plants that originated in Eastern Hemisphere deserts that also store water and have spiky exteriors.

Gary Rogan writes: 

Clearly there are niches in the environment, just like there are in the economy, the market, the arts, sports, etc. It seems self-evident that a species that thrives on a Pacific island is likely to be different from a species being able to survive in the Arctic or at the bottom of the ocean. Not having "a single, cannibalizing species inhabiting the planet" only speaks to the niches in the environment not some complicated problem with evolution.

Ralph Vince adds: 

Perhaps we DO, in effect, have one, cannibalizing species, depending on how broad the field of view of our lens of examination.. How many animal life forms on the planet have but one eye? "Evolution" having eliminated that not-so-robust construction in all earthly environments. Is our notion of "species," which we believe to exhibit a vast array of life forms, only show us carbon-bases life forms with, at most, five senses. In that sense, is a penguin so much different from a scorpion from a human being? The notion itself of "food chain," with such biochemically similar life forms, is, in effect, an exercise in cannibalism. 

Gary Rogan writes: 

Since the evidence points to life arising or being successfully introduced to Earth just once, it's not surprising that we only have carbon-based life forms. And just because a scorpion shares a lot of genes and proteins with penguins doesn't mean they are of the same species, simply based on the definition of the word: to be so classified they'd have to be able to interbreed. I'm now no longer sure what the point is, but hopefully "descent with modifications" is not in question.

Ralph Vince clarifies: 

My point simply put, is that I don't find "evolution," or "Survival of the Fittest," an adequate model, i.e. a panacea for how life arose and differentiated (to the restricted sense that it has) on earth. I find it too simplistic of a solution, believe there are likely many other explanations (all of which are, in a limited sense, true, similar to the wave/particle properties of light) and am interested in any other explanations (there is not a debate here, aside from one which I don't believe you ascribe to of "Fitness" being an explanation for all life on earth).

For example, (to the best of my knowledge) every living thing seems to fit somewhere into the food chain. Perhaps there is an overriding-yet-undiscovered mechanism requiring this as a license for life on earth? (And if not, why not? A stupid question, unanswered, is still an unanswered question. I believe evolution seems to explain so much that we use it to explain where a different mechanism may be the driving one, yet, occluded by the seemingly-obvious-to-us explanation of "fitness"). Evolution is a powerful explanation, but it does not explain everything.Not that I have a problem with "fitness" as a driver here — clearly it is, so I am not at odds with you there (though I am not so sure life was introduced on earth only once, again, viral and fungal life is a difficult leap from living cells). So I simply wonder of what other driving mechanisms are at work here that we are unaware of.

Gary Rogan writes: 

Ralph, as it's generally hard to prove a negative, especially in open-ended complicated situation, I can't argue that there are other forces at work. As for fitting somewhere on the food chain, all carbon-based life forms eventually get weak and if not eaten at that point die. Weak or dead concentrated proteins and other valuable chemicals present too rich and too easy a food source not to be consumed by something, so this particular point doesn't instill a sense of wonder in me, but perhaps there is more to it than meets my eye.

We should keep in mind that on the average over any appreciable number of generations every existing species or otherwise categorized collection of biological creatures has almost exactly one descendent per individual, otherwise within a short span of time the group's mass would exceed that of the planet or conversely disappear. Therefore available resources present arguably the highest hurdle on the success of species, but as Hamlet said, "There are more things in heaven and earth, Horatio, than are dreamt of in you philosophy."

Ed Stewart writes: 

Speaking of the food chain, I think the concept of the tropic level has some serious application to the markets, as I the chair documented in his first book. Might be particularly good model to analyze the impact of various stimulus measures - what level the stimulus directly stimulates, then who feeds on that level directly and indirectly for investments opportunity.

anonymous writes: 

There are no marsupials above the Wallace Line above Australia. Below there are the myriad odd and strange life forms in Australia. It was a function of geology creating distinct eco zones and separate paths of development of life forms.

Sep

15

 From Borrow: The American Way of Debt:

While Ford may have pushed cars, he never pushed debt. Ford so loathed the sapping of freedom that debt represented for him that for most of the 1920s he refused to sell his cars on financing plans, and in the process nearly bankrupted Ford Motor Company. His hostility to finance, coupling an anti-Semitic hostility to Jewish bankers and a mechanic's hostility to anyone who didn't make anything, hobbled the company. That Dick could get a job at General Motors, which believed in debt wholeheartedly, is largely a testament to Ford's hostility to consumer credit.

In the 1920s, Americans, both borrowers and lenders, discovered new ways to finance consumer credit, and, of course, it was only the beginning. Debt was everywhere, and its ubiquity was made possible by changes in finance, manufacturing, and law that had occurred after the First World War. High interest on consumer loans had long been illegal in the U.S., but around World War I, progressive reformers, seeking to drive out loan sharks, pushed states across the country to raise the legal interest rate. Now able to lend money legally, at rates which could be profitable, new consumer finance industries sprung up overnight. The legal changes coincided with a new generation of cars and electrical appliances that were both expensive and mass produced. The installment credit allowed manufacturers to sell these new wonders at a volume, and consumers could afford them because of the easy monthly payments. What ultimately made all this lending possible was that lenders could now, for the first time, resell their debt.

Stefan Jovanovich writes:

This is very bad history. Henry Ford disapproved of debt, but he had no problem with his dealers offering it. Where Ford's stinginess really hurt was his failure to offer financing to his dealers to allow them to finance their inventory. That is what GMAC did. Sloan had the wit to insist that GMAC be truly separate so that the brand managers could not channel stuff. The explosion in debt in the 1920s was not in consumer debt at all. It was in producer and public finance.
 

Sep

15

I wrote this article and thought you might all be interested: "Authors Must Be Marketers".

Sep

11

Do any of the sports bettors on the site (Jeff?) have a sense of the following:

Scottish Independence is a binary event, thus the simplest to balance your book. You should therefore be able to make a dutch book?

Further, if the odds don't reflect the real probabilities, in theory, speculative money (or the bookmakers proprietary money) should balance them back up.

But, for uncommon events which involve a high percentage of public money, for which prediction is relatively difficult and unproven, do the odds generally manage to find equilibrium at the true percentages perceived by educated bettors? Or are they sometimes set to balance the money flows?

So for Scotland: if English will "emotionally" bet No, and Scots bet "Yes", and there is a 10:1 population imbalance, will the odds overstate a No?

More generally, say, could Manchester United odds (who have a huge number of world fans versus other football teams) generally be tight relative to the real odds, as "smart money" is insufficient to balance the emotional money? Or is this a sufficiently deep market for proprietary accounts?

Chris Cooper writes: 

Relating it to the practice among American sports books, the overriding concern is to balance the money flow. Thus it is possible to make a dutch book, considering the variations due to location and randomness. I'm not sure how true it is today, but in the past the Las Vegas lines for games involving Los Angeles teams could easily vary from the same lines elsewhere, especially as it gets close to game time, due to the proximity of the cities and thus the money flow.

The lines also vary depending on emotional factors or being public favorites. For example, as "America's Team", the Dallas Cowboys used to command an unjustified perception leading to perhaps a point difference in the spread. Again, the book is just trying to manage the money flow…if it gets too out-of-whack, they will normally try to lay off some of the action.

Sep

9

 Satyam Shivam Sundaram.

These 3 Sanskrit words together, have formed one of the most quoted and misunderstood treatises of ancient Hindu wisdom. Taken one at a time the three words mean Truth, Basic & Beautiful respectively. The root words for each of these words is Satya, Shiva & Sundar meaning Truth, Basic/Basis, Beautiful respectively. In this statement however each word ends with the suffix "am" (prounced as "um" as in gum) that basically is the conversion of any noun into the active entity. This phrase/sentence thus has only nouns and each is the active entity!

Since Sanskrit is one unique language that does not require any rules of syntax, we can translate the original in six different combinations, as follows:

1. Truth is Basic hence Beautiful.
2. Truth is Beautiful & hence Basic.
3. Basics are Beautiful & hence True.
4. Basics are Truth & hence Beautiful.
5. Beauty is the Basis & hence True.
6. Beauty is Truth and hence the basis!

Is there any contradiction? Well, if there are any felt by any, we can recline on Ayn Rand who surmised, "….check your premises". One of the several ways in which the premises can be checked and contradictions removed, that one may take all the six meanings together.

This list is a place where scientific approach to seeking truth prevails. I would be keen to hear from any who notice any contradictions in these six translations and of course from those who can wrinkle out and eliminate any contradictions to help establish a basic beautiful truth about truth, beauty and the basics.

Sep

8

 This book is an enjoyable compilation of studies that are so dense with fruitful analogous studies it is hard to share them all. The book is Behavioral Mechanisms in Evolutionary Ecology Published by University Of Chicago Press.

There is an interesting study in the book involving benefit optimization in birds' foraging behaviors relative to varying probabilities of success in various patches that are foraged in. Which is evolutionarily optimal: the benefit maximizers, the imitators, or the do nothings?

Also there is an interesting one about how to respond to signals when there is a varying probabilities of correct interpretation and/or response (studying frogs). I'm skeptical of the field studies, but the models and reasoning for them is nevertheless insightful and speaks to any one who has a love of economic thinking.

Dylan Distasio writes: 

Here is an interesting article about pigeon behavior:

And here is the abstract of the study

Whereas humans are risk averse for monetary gains, other animals can be risk seeking for food rewards, especially when faced with variable delays or under significant deprivation. A key difference between these findings is that humans are often explicitly told about the risky options, whereas non-human animals must learn about them from their own experience. We tested pigeons (Columba livia) and humans in formally identical choice tasks where all outcomes were learned from experience. Both species were more risk seeking for larger rewards than for smaller ones. The data suggest that the largest and smallest rewards experienced are overweighted in risky choice. This observed bias towards extreme outcomes represents a key step towards a consilience of these two disparate literatures, identifying common features that drive risky choice across phyla.

Orson Terrill comments: 

"Pigeons and humans showed remarkably similar patterns of risky choice, with both species showing risk aversion for low-value rewards and a tendency towards risk seeking for high-value rewards."

Is what underlies the strategy of acquiring deep in the money long dated calls in speculative stocks (SolarCity, Tesla…) and selling nearest dated calls in those same stocks essentially dealing to self selecting risk seekers paying the highest premium? Often it looks reasonable to get back your principle within the first year, and then another 6 -12 months of risk premium as income. The reserve requirements and added costs of frequent options exercises to see how much the return is reduced by those could be a deal killer…

Carder Dimitroff asks: 

How do you do this profitably for SCTY? How deep and how long?

anonymous comments: 

There are experts here that can answer this better; I don't have the real answer. This is in the context of the thread…. trying to deal to the most risk seeking individuals. The idea is to make it as much as like a covered call portfolio as much as possible, but reduce the cost of owning the shares by owning a deep in the money long dated call, with the minimum volatility premium, and subject to the belief that the income from selling near dated volatility can repay you over the duration of the longer dated call. This would suggest the longest dated possible, and probably a strike around half of the share price.

As an example: last week the cost of the 40 strike Jan 16 calls relative to the cost of the 70 Sept 12 calls. Would have put you at ~4% gross for the first week. It's not hard to imagine that after slippage, spreads, and transaction costs that it is possible to recover the cost of the long dated call in ~70 more weeks of selling nearest dated calls. However adding how much, and what, are the portfolio opportunity costs from needing to deliver on those short dated calls sold, and tax issues, make it look iffy at first blush…but it seems like there could be something there.

Even now there might be a $170 credit on selling 12 days (weekends are real) of upside risk from the Sept 20 calls against the the $3500 cost of the 40 strike in Jan 2016. Then you have to repeat the near dated selling; if you brought in $170 on ~21 of the 41 12-day periods leading up to Jan 2016 there would be a break even (gross). That seems like that is a large enough cushion to consider what may be left after taking the total portfolio approach to mitigate taxation, spreads, commission costs, and what return that is against the all the assets involved to implement…

Sep

8

This story [about the first demonstration of anesthesia at Harvard] has many of my favorite things in it, including Harvard's ability to pull the wool over the eyes of its alumni and pay its fund managers 100 times as much as the average professor, not taking into account that there is no sales cost, no symmetry of risk, and no taking into account the normal random variations in performance which would always lead to some doing better and some doing worse. But more importantly it causes one too reflect on how he should change his views over time, be open to new things, and be humble, and appreciative of the young and unaccredited. What revisions of your thinking have been helpful, and what should we do so as not to decry things of value.

Sep

4

George Meegan, who walked around the Americas for 12 years and holds the record for the longest walk, will be speaking at the Junto this Thursday at 7:00 pm.

The meeting will be held at the Mechanics Institute at 20
West 44th St between 5th and 6th avenues in Manhattan.

All are welcome. 

Sep

3

 Friends in Japan tell me there are going to inflate big time and expect stocks there to rip to the upside.

Charles Pennington writes: 

I'm going to bet with Larry. Japanese stocks (as sampled by etfs like EWJ [large caps] and SCJ [small caps]) are trading at around 1 times book value, 4 times cash flow, and 14 times earnings, and that's going to look attractive when free money gets thrown around. Rocky made this point in early 2013 right before a big rally, but what he said then is still true.

anonymous writes:

One of the largest economic myths is that Japan has been in economic cellar.

John Floyd writes: 

DXJ is a good way to play as it takes out the exposure of being long the Yen, should the Nikkei and USDJPY indeed go up. On a timing issue I think there are 2 key points to take in:

1. Structurally, unlike previous announcements and moves since the late 1980's the current move to end the economic malaise is much more entrenched and has wider breadth both from political and social support and the actual measures being using (the 3 arrows). Remember it was the stated intent of the BOJ in the late 1980's to deflate the stock market, they succeeded all too well.

2. Cyclically, Japan's economic growth is likely going to be lower than the BOJ is forecasting while inflation is also going to be lower than they think. However, it seems that the BOJ will not be revising its economic forecast until October and it will be sticking to its policies till then, but is likely to have increase QE prior to year end.

Gary Rogan writes: 

I don't understand how it's possible to to predict the effect on the Japanese stocks of this one factor. Earlier this year Japan raised its consumption tax from 5% to 8%. Last time anything like this happened was in '97 when it was raised from 3% to 5% and caused the economy to slip back into a recession. I don't think Larry believes that recessions matter for stock prices, but that's an arguable point. Also, Japan as an export economy cannot afford to inflate the cost of its exports, so you gotta believe that the price of Japanese stocks in dollars can't rise too much assuming there is anything like a recession or just economic doldrums. Someone mentioned hedging the yen exposure, and that may be the way to go. I'm also concerned that China is getting out of hand with the US walking around with a "Peace Now" sign. I any case, a single-factor analysis seems like something too simple for this situation.
 

Edward Talisse writes: 

I lived in Japan for a long time. It is very tough for non yen based investors to make money in Japanese stocks. The Nikkei tends to rise only when the yen depreciates, so any rise in stock gets offset with currency losses. Japanese stocks are all about corporate governance issues rather than financial metrics. Shareholder activism is rare and companies are usually loathe to reward shareholders with dividends or buybacks.

Obviously anything can happen. Last year N225 was up 57% and Yen was down about 30% and I am sure many are happy to have banked net 27% …but it was still below the S&P which returned 32%. Personally, I am routing for a big win in Japan and I hope the people there succeed. It just tough to make money. If you believe in the reflation story, it may be easier to just short the Yen and forget about stocks. Shorting JGBs should be avoided. All the bonds are domestically held and the BOJ buys whatever the MOF issues.

Lastly the story put forth here that Japan did not or has not suffered a lost couple of decades is at odds with my experience. There are people sleeping on the streets in Tokyo just like in NYC and senior citizens are in a deep pinch due to a lack of income on their savings.

Charles Pennington adds: 

Everybody hates the yen!

I was surprised to learn that the yen (as of July) is 24% undervalued based on the Big Mac Index.

anonymous writes: 

That makes sense, range has been -30 to 0 for past decade or so, and from semi recent travels on comparative basis the cost of hotels, coffee, noodles, etc. has not really changed much in 25 years, real interest rates have been comparatively high.

Alston Mabry writes: 

And at the same time, the surprising thing is that New Zealand is more expensive than Japan.

Peter Tep writes:

Wait until you see prices here in Australia. You will easily spend $20 a meal for a basic lunch, whatever cuisine have you and a drink. Dinner runs double that sans vino.

Public transport costs here are stupid as well as the parking costs. If you were out of town and were Parking in underground park for corporate lunches etc, you are looking at $30/hour.

Personally for me I travel some 15kms to work on the bus which costs me about $12/day. Mind you wages here are running higher I suppose with baristas (coffee makers) earning some $20+/hour. Friends of mine in the 20-30 age group pay $150-300/week in rent for a room in trendy inner city suburbs.

Just perspective for those interested in on ground prices!

anonymous writes: 

Peter, Thanks for the rundown on Australian prices, but they don't sound expensive compared to Silicon Valley.

Sep

2

 How many of the rich were in the lower quintiles like What's App which recently sold for 18 billion to Facebook and the owners were on food stamps the previous year. Is that bad for a society to provide such opportunity and for the mobility between classes to increase or should we be like England where once you're in one class you can never move to another.

Richard Owen writes: 

I am unsure if its really true that class barriers exist to any greater degree in the UK than the USA, other than perhaps in the mind or money of the classes themselves. A bit like Mr. Cosby's riffs to African Americans: don't perceive barriers for yourself. As my friend staying at the Knickerbocker club and being variously harassed for his attire, decorum and guests the other week reported "a certain strain of New Yorker could surely teach the British a thing or two about snobbery." Sure, we have a Conservative government with a disproportionate number of Etonians in it, but when one becomes Prime Minister, one tends to reach for trusted friends and fellow travelers. And being an Etonian is not a vote enhancer. Annunziata Rees-Mogg was asked to reframe herself Nancy Mogg for the purposes of election PR. The USA does not seem short of its own political dynasties and classes.

Ralph Vince writes: 

The chair's example of WhatsApp I believe is the exception more so than the rule.

The churn at the higher stratas sees parties leaving unexpectedly. Those arriving, arrive slowly, believing they will be there forever.

Vast sums of money are lost in a day, a minute or the blink of an eye. You see this principle play out at the baccarat tables and the markets. The new arrivals, the beneficiaries of money-begetting-money for protracted periods, often generations. 

Mr. Isomorphisms writes: 

Regarding the very long timetables, I admired both the diligence/ingenuity of Gregory Clark and The Economist for publishing that the surname "Micklethwait" has enjoyed a run of good luck, when its chief editor is John Micklethwait (graduate of Ampleforth College, and later Oxford). Miles Corak also earns a mention in that Economist piece. A short list of Americans from expensive high schools includes Dan Ellsberg, Charles Coker, Thruston Moore, Glenn Close, Adlai Stevenson, Cosma Shalizi, but not Dan Einhorn. 

Stefan Jovanovich adds: 

If you do any serious searching of genealogical records, you discover 2 things:

1. Longitudinal searches of census data by county locations, including the immediately adjacent ones, show limited "social mobility" because the people who stay where they are born and whose children stay there are largely content with their lots in life. This is one reason America scores better than Britain in the 19th century; the people who stayed in Britain were ok with their lives where as, in America, nearly everyone was moving around, even if many of them eventually came back to "home".

2. The people who leave are the ones who become very rich, by local standards, or flat broke or need to get away from the law. The very rich tend to move to the places where they can be with their financial equals (so the Rockefellers abandon Euclid Avenue Baptist Church and become Episcopalians in New York) and the flat broke know they have better chances getting help from distant relatives than from local ones (a great deal of the Northern migration of freed slaves and, even more so, their children follows that pattern). The need for people to get away from the local sheriff hardly needs explanation.

The Harvard study deliberately ignores #1 and #2. "We assign children to commuting zones based on where they lived at age 16 – i.e., where they grew up – irrespective of whether they left that CZ afterward." The study also makes no adjustments for relative costs of living as a discount factor in gauging incomes. A child who migrated from Charlotte to San Jose gained 50% in gross income during the study period; but he or she gained no wealth with the added income compared to a child of lesser social mobility who stayed back home.

There is one other fact of human nature that you learn from reading the ancestry searches people have done: Everyone with any pretensions finds a way to trace their ancestry back to European royalty, even if the parish records stop 300 years or more before the connection is made.

Aug

30

I just stumbled across this and simply could not help myself:

"Not everything that can be counted counts, and not everything that counts can be counted." — Albert Einstein

anonymous writes: 

You can replace the word "count" with "value", and it still works. Or one can replace it with "say" or "mean". As you try to fit in other words, the sentence starts to tell us that whatever we think we know can be so strange to us. Perhaps this can ultimately be rephrased by Lao Tzu's words: "The Tao that can be spoken is not the eternal Tao". 

Aug

28

 What can be learned from the ice bucket challenge–the challenge task itself, how it has spread, why people enjoy watching it, and how when you search for "ice bucket challenge" on YouTube the next suggestion is "ice bucket challenge fail". The ice bucket challenge fail video reminded me of a stop-stop order that has skidded out of control and exits much worse than expected.

Jeff Watson writes: 

Patrick Stewart has a most elegant way of handling the ice bucket challenge. This meme is transferred similar to a way the Chair described years ago.

Aug

28

Hi, perhaps you could put on the spec list that I have a entry level job opening for a quantitatively orientated trader to (eventually) work our evening shift.

Contact is: R. G. Niederhoffer Capital Management, Inc., 1700 Broadway, 39th Floor, New York, NY 10019. Email: info at niederhoffer.com

Aug

25

 One key finding is that some foreign car companies demand the local manufacturing facilities and dealerships to only source parts through the brand company. Through this scheme, the investigation said, those companies managed to achieve abnormally high profits.

Well, cars have been very expensive in China, many with 2-3 times the prices in the US. For many years, I have been puzzled by why this is the case and who actually take the money. Undeniably, various taxes in China are very high, but those do not suffice for the huge price differences.

Now this finding seems reasonable to explain the mystery.

The question is how they could be doing this from the beginning?

The absence of a useful legal system is cleanly an answer. But there are more hidden issues people often choose to ignore.

1. The state regulations provide foreign car companies with basically two choices: a) sell imported cars and pay substantial tariff; or b) set up local manufacturing and sell locally produced cars and pay less tariff. Choice b) obviously is more preferable to foreign car companies for their high-volume models. But the condition for b) is that they have to form local joint ventures with Chinese companies. To any successful foreign car company which is fully capable of designing, providing manufacturing facilities, manufacturing and marketing their own cars, this provision clearly means a brutal cut into their profit. Why would they joint-venture with local idiots who surely have strong political liaisons but know literally nothing about cars? So then limiting parts sourcing became a genius business strategy for them. The argument is very sound: to ensure the best quality of their cars! The local JV partners have little problem accepting it because with however high cost they know they could use their political ties to force higher prices onto the consumers.

2. Cross-border trades have always been extremely restricted in China. In the case of importing cars, only the extremely few with strong liaisons can obtain licenses. And again, the imports carry very high tariff. The rationale for this restriction that has long been planted into people's mind is that it protects national enterprises (implying the meaning that it is good for everyone in the country).

Now lowering prices should be a good thing for consumers. But it comes not without a concern.

If parts selections are not strictly enforced, qualities are certain to suffer. Would elite Chinese consumers trust Chinese products? No chance!

Aug

25

 "He was a degenerate gambler. That is, a man who gambled simply to gamble and must lose. As a hero who goes to war must die. Show me a gambler and I'll show you a loser, show me a hero and I'll show you a corpse." -Mario Puzo

Rishi Singh writes: 

This reminds me of Ed Seykota's remark to Jack Schwager in the beginning of Market Wizards 2 that the reason Jack blew up is because he wanted the market to tell him when to stop trading.

I spent some time with Ed at his place in Austin a few months ago. Remarkable soul who is on a crusade to change the way we feel about feelings.

Stefan Jovanovich writes: 

Puzo knew something about gambling from experience; he was one, to the point of degeneracy. His knowledge of war was a bit more limited; by the time he got to Germany the war was over. He served as a public relations officer for the air corps. Those who haven't, give tours.

Aug

25

 A while back in "the good ol' days", a list commentator (way back pre-crash) quoted an article "Mistakes of Investors" appearing in Ticker Magazine back in 1908. It seems a good time to reprise it:
Avoid inside information.

Never make an investment on enthusiasm or excitement.

Use your own judgment.

Pay for info rather than getting it for free.

Consider earning value and market value. The man who buys real estate looks to the enhancement of value more than to earnings.

Don't lose confidence. The investor hears rumors of impending disaster, which, if he would reflect upon, he would see would have no effect on his security. This applies to bank runs.

Stay away from names. (Even then there were touts and promoters.) No high sounding titles can make it a success if it lacks the true qualities of success itself.

Don't put too much reliance on advertisements, especially red paints.

The losses through mining investments (not tech) are greatest. Beware of promoters who have no reputation to lose.

The greatest mistake is one of pessimism and doubt. Never let your mind fall into that chasm. Do not think because you have lost money in one investment that all are unsafe." The posting continued with an observation about among article in that first issue, by Roger Babson:

"The most interesting article to me in the first issue was by our old friend Roger Babson, written in 1908 about bank loans. He says that when the proportion of loans to investments gets too high it's bearish and when it's too low, it's bullish, but on a time series basis for all banks, and cross-sectionally between banks within a year. He gives yearly figures from 1860 to 1906 to verify his point and then shows how the panics of 1873, 1894, 1890, 1893, 1898, and 1903, were accurately forecast by the ratio.The key ratio he uses is 50% loans to assets, which was 'In 1873, the ratio of loans to resources first exceeded 50%. Consequently a panic occurred by the spring. Another panic occurred in 1903. Again the western farmer came to the rescue and owing to bountiful crops, the recovery continued until 1897 when interest rates exceeded 2200% a year.'Thus, Babson preceded Boltan Tremblay, Colonel Ayres, the bank credit analyst, the fake doctor, and many other greats in relying upon these credit ratios more than 100 years ago. It's overdue for a test again today."

Jeff Watson writes: 

Here's the kind of statistics the old grain traders used back in the day. When you think about it, not much has really changed. This period covers the 1904-1914 cash wheat CBOT receipts for 1904-1914.
 

Aug

22

 One had a loss today and found it appropriate to go back to Wiswell to see if I can improve in the future.

We have losing days, drawing days, and winning days, and not every day is a losing day, and not every day is a drawing day, and although we may not like it, not every day is a winning day.

The real trouble with making our moves is that we don't know if they are good or bad… untill we have made them.

The good player loses without an alibi, wins with grace, and draws with a smile.

Don't strive to be brilliant, do not scorn simplicity. There is simplicity in the highest flights of all art.

To study the strong players is to learn how to play, to study the weak players is to learn how not to play: to study ourselves is to learn how to play the game of life.

I suggest you study your great victories a long time, and study your great defeats twice as long. You may well learn a great deal more from the latter.

Never let the fear of striking out get in your way.

Many games are won by the art of judicious leaving alone of pieces and men. This negative habit often develops into a win.

Good players do not complain about their lack of opportunities. They are good, in most cases, because they go out and make their opportunities.

Many a draw is lost for the simple reason that you did not ask for it– at the right time.

I seldom use the word impossible regarding chess and checkers. You will see just about everything happen on the board.

The art of playing is not only to make the right move at the right time, but to leave unmade the wrong move at the moment of truth.

Success in the opening can lead to a weak middle game, and finally defeat in the ending.

Playing much, suffering much, and studying much… these are the three pillars of learning.

Common sense wins many games, but there are positions where it would actually lose, and it will take uncommon sense to win or draw. You must decide when uncommon sense must come to the rescue.

The search for the right move while you are playing is helped by the research you have done before playing.

The good moves are all there— waiting to be made: all you have to do is sort them out and put your hand on the right pieces and move them to the right squares. Yet some of the greatest master have made serious mistakes in carrying out this "simple" transaction.

Andrea Ravano writes: 

Great ideas Vic. I've often been confronted with poor performance, and the most difficult part of it is looking straight at yourself in the mirror and saying to that innocent looking person "you are wrong". Admitting ones own errors is the beginning of rebirth, just as realizing that your win at the backgammon board was more then the consequence of unusual dice statistics over your calculating power. 

Aug

20

 Is coffee good for you? A recent study seems to imply it is good for the liver:

Coffee is one of the most commonly consumed beverages in the world. Its health benefits including improved overall survival have been demonstrated in a variety of disease states. To examine the association of coffee consumption with liver disease, a systematic review of studies on the effects of coffee on liver associated laboratory tests, viral hepatitis, nonalcoholic fatty liver disease (NAFLD), cirrhosis and hepatocellular carcinoma (HCC) was performed. Coffee consumption was associated with improved serum gamma glutamyltransferase, aspartate aminotransferase and alanine aminotransferase values in a dose dependent manner in individuals at risk for liver disease. In chronic liver disease patients who consume coffee, a decreased risk of progression to cirrhosis, a lowered mortality rate in cirrhosis patients, and a lowered rate of HCC development were observed. In chronic hepatitis C patients, coffee was associated with improved virologic responses to antiviral therapy. Moreover, coffee consumption was inversely related to the severity of steatohepatitis in patients with non-alcoholic fatty liver disease. Therefore, in patients with chronic liver disease, daily coffee consumption should be encouraged.

Aug

12

 There's lots of PE money going to Europe. Given the continent wide slowdown, I have to ask: why?

Tim Melvin writes:

There is a ton of PE and distressed money moving into Europe to buy bank assets and southern Europe. RE, KKR, Apollo, Baupost WL Ross and others have moved in a big way this year. The fund manager survey does not track this more patient (and probably smarter) money at all. Basically the PE and distressed guys are buying what the classic asset managers ares selling. Guess whose side I'm on?

anonymous writes:

On the macro level the fact that Germany is slowing is a major source of concern for the European economy, and the experiment in the single currency. Considering the Asian export market slowdown, persistence uncertainty in the Ukraine and ME it is unlikely German will have a meaningful pick up in 2014. German was supposed to be the main source of growth of Europe as the rest of Europe tightens budgets and deals with domestic crunch. The growing debt levels in the periphery, persistent weak growth, disinflationary forces, social and political discontent cannot portend well for the future.

The Italian government bond market is the 3rd largest in the world and they can borrow at roughly the same level as the US. Since 2010 public debt has gone from 120% of GDP to 135% and over the past 10 years GDP has been barely above .3%.

There is value in many of these assets being liquidated by banks and asset managers but expect the ECB to remain easy and the currency to make much of the adjustment necessary balance the macro picture.

Milton Friedman said:

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it's hard to believe that it's going to be a stable system for a long time. … If we look back at recent history, they've tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn't in on the euro. It's only a year old. Give it time to develop its troubles.

Boris Simonder writes: 

Interesting quote by MF. That must be a very old one judging by his comment. Fourteen and half years later the Euro is alive and kicking, in fact, well beyond of what any skeptic would believe given recent years.

John Floyd adds: 

The quote was from 2000, alive and kicking is relative, the euro straight jacket has done no favors to other macro indicators such as GDP, productivity, debt levels, etc….I am not making a prediction on Euro survival or failure, in the end that will be a largely political event, as was the inception, one cannot ignore the fact now that a negative political and economic vortex is forming and become self-reinforcing, where the braking mechanism is in asset prices I am not sure, and full disclosure I have been bearish the Euro concept since inception, luckily I have learned from mistakes and been able to squeeze out some profits and both sides and from other asset markets playing the same thematic tones, such as long the front end curves, I merely ask the question now is the timing and confluence of catalysts pushing us closer to seeing the Euro move lower? And yes alive and kicking for some time it has been, but so did the Argentine Peso pegged at 1 for about 10 years.

Boris Simonder writes:

The macro indicators you are referring to has more to do with national and cultural structures of each individual EU country, than the currency itself - As for betting against the Euro since inception, I'm sure no one envisioned an almost 100% rise between 2002-2008. Euro moving lower? Speculators net positioning in the futures market would think so, and perhaps the macro crowd betting on widening EU/U.S rate-spreads would support as well. If you consider Euro to be a risk-on currency, then the climate isn't perhaps the best to support that. Or how about the bag of technical breakdowns since May.

As for the comparison to Argentine Peso, can you really compare a pegged currency against a free-floating one? Or yet a single country against a bloc of countries with far more political and monetary power?
 

Aug

6

“Stigler’s seven pillars of statistical wisdom

Aug

4

 After watching a pro-charter-school documentary put together by non-teachers with big money hiring a slick name-brand director, I watched a counter-documentary filmed by teachers who had evidently never cut a film before.

Teachers' unions, predictably, are the villain in the pro-charter-school movie. And teachers' unions oppose merit pay, which everyone knows without looking is a logical, reasonable, basically unassailable concept. Better pay for better work is fairer and more motivating. Period. Think about Charlie Munger's FedEx example– is there really more to say on this issue?

Turns out I had been so convinced by the obvious logical arguments against teachers' unions and for merit-pay, that I hadn't actually thought about the details or looked at any empirical evidence. Doing so raised questions that I think are relevant to managing people in any business.

There are multiple ways to spend more on your wage bill, with the purpose of improving labour output. What most of the teachers in the counter-Superman docu seem to repeat is that they want "support in the classroom". Each dollar spent on incentive pay, provided it didn't come from salary reduction, could be spent instead on hiring another teacher or support staff, because managing thirty 9-year-olds at once is hard, let alone trying to get them to learn something. (Other studies show that removing disruptive children from the classroom is more effective than peer tutoring, reduced class size, and even motivation. But someone needs to attend to the disruptive children since they don't disappear and remit includes teaching them as well. In the case of trading any dollar allocated to incentive pay could have gone towards support staff as well.

Each dollar spent on incentive pay could also be spent on better "equipment": whether that be keeping up decaying infrastructure, paying for a science lab, or buying new textbooks. Likewise a trader might perform better with better computers or in a nicer office–that's an empirical question.

There are more questions with how exactly to design an incentive scheme. In Charlie Munger's example he doesn't want to encourage the workers to move so fast that they break the packages. In trading we don't want to encourage taking on positions that look good at year's end but blow up after the trader has collected his cash and moved on to another firm.

More questions. How much of pay is variable and how much is guaranteed? Studies show that incentive pay for teachers is ineffective unless it (a) represents a significant wage bump [like at least 50% extra] and (b) what the teacher has to do to earn the reward is quite clear.

Who gets the incentive pay? Some studies found that merit pay for principals was more effective than merit pay for individual teachers. Likewise we have to decide how risk-managers should be incentivized relative to individual decision-makers.

Bonuses may increase motivation, but lack of motivation might not always be your biggest bottleneck. Try to keep thirty 9-year-olds in check at once, or keep details of thirty trading desks in your head at once, and it may simply be too hard no matter how much you try.

Thus we return to the really hard questions of organizational design. How do you as a manager design a structure to make your people as effective as possible?

Jul

29

 I was thinking about some outdoor adventure type books that I liked that are also big sellers and what they have in common. Books like Into the Wild, Last of the Mountain Men about Sylvan Hart, Castaway by Lucy Irvine, An Island to Oneself by Tom Neale, Rivers Ran East, Jungle by Ginsberg, etc.

Some of these books probably provided a nice income to the author for decades. Into the Wild has been out for 20 years and still sells large amounts. Castaway provided Irvine enough money to live on for 30 years.

To be mercenary about it and try to copy success (which is how Will Smith has made so many successful movies, I've read) how could one backward-engineer a similar big seller? Some of these require tragedy: into the wild, rivers ran east, jungle. Some require interesting characters doing extraordinary things: castaway, island to oneself, last of mountain men. Some are first person. Some are reporting about someone else.

Unless I stumble upon a tragic figure like the 'into the wild' guy, I would probably have to use the 'interesting characters doing extraordinary things' approach. (here are some characters doing extraordinary things).

All this may or may not fit in with what I see as a growing trend/unmet demand for subjects like: hobos, nomads, societal drop outs, mountain men, off grid, alternative housing/living, tiny homes, frugal, DIY, minimalism, simple living, anti consumerism, ….and many other keywords I can't think of right now. There are tv shows on mountain men, preppers, alaskan bush people, and a new one coming on tiny homes.

Can you think of other big seller examples? How could one backward-engineer a similar big seller? What other thoughts pop into your head?

Bo Keely replies:

You've articulated an interesting answer to why some adventure books succeed while most fall along the wayside these days. Along that line, three days ago a phd english Iquitos ex-´pat began my biography using a little business recently began. His package of a 10k word biography (or you may call it an autobiography with him as ghost writer) includes publication of a book with pics at amazon.com for a total fee of $1k, or 10 cents per word. Mine is running over the 10k but he says about the same, that since I'm an interesting character doing off-the-wall things that provide worldly solutions to common problems, the biography could do well. He works fast, should be done in three weeks. 

Jul

29

Can it be true that what is not understood is easier dismissed as being random. Are we confusing unexplained as being un-orderly?

Why do I ask? Assume, there is some day in the future a moment feasible in human consciousness wherein it would be possible to weed out every possible underlying function that could explain patterns in numbers.

That Eureka moment will be, say when the discovery of all possible numerical pattern explanatory functions will come by. Then, there will be some numerical sequences for which no formula could be discovered at such a Eureka moment also, will be there.

Now let us create two distinct planes. On each plane there will be two sub-sets each of the same type.

One type of sets on a plane called the plane of numbers, will contain sequences of numbers that can be explained by some function and the other set on this plane, the complement of the first set will contain all sequences of numbers that cannot be explained by ANY function.

On the other plane called the plane of functions, the corresponding sets will be the set of all functions that explain the sequences of non-random numbers and the complement set will be the set of functions that EITHER do not generate non-random numbers (that is functions that generate random numbers) or it will be a null set.

Given that there is a one to one mapping between the sets of patterned sequences with the set of pattern explaining functions on the other plane, the mapping should not collapse between the set of unpattern-able sequences and the complement set of pattern explaining functions. But it does, since the set of functions that explain non patterns is believed to be null.

By definition any functions that can generate random numbers is an absurdity. Any sequences that can be generated by a function are non-random! So the only complement on the plane of functions will be the null set.

Now for a moment, lets leave aside the path of induction and try to assemble a pathway to truth using deduction. Since the plane of functions is easier to understand, the complement set there being a null set means it will be possible at some point to have the set of functions that can generate all numerical patterns as the universal set!

Does this idea resemble our ability to explain things or does this idea explain our ability to explain that at the Eureka moment things can no longer be not explained?

Even if many will dismiss me as a clever lawyer who only asks questions without making any assertions, such a moment will extinguish all questions. The spirit of enquiry and therefore growth of human abilities will reach a void and a nullity. If such a moment can be reached there will be no difference left in chance and skill, since everything will merge into everything.

However, if I return back to the present moment from such an imaginary state, then it stands easier to grasp that what is unexplained so far, is what we are referring to as random. Why do we have to assert that without a proof of something being random it deserves to be given such an elevated omnipotent nomenclature as RANDOM?

My two cents on the table therefore. Abandon the search for Randomness as that pursuit is seeking a perfectionist definition of randomness. Stick to the simpler and workable idea that what is unexplained is not skill. Beyond the level of significance is skill and within its unexplained. I would like to place on the table a surmise, that the idea of randomness is definitional and thus a changing notion borne out of evolving cognition.

Gary Rogan writes: 

Imagine you have a small company that has a single facility housing a lot of important stuff. Some day an electrical discharge between two high-voltage wires at that facility either starts or doesn't start a fire that destroys a lot of irretrievable stuff, and the company either goes in decline or doesn't based on a single spark that depends on the rate of disintegration of the insulation between the wires, possibly some pests living in the walls, and humidity on that particular day. It's hard to come up with a reasonable explanation of how the sequence of stock prices of that company doesn't depend on randomness.

anonymous writes: 

You're right, people confuse trying to obtain a sufficiently random number with trying to obtain some mythical "100% random".

Randomness is proportional to the amount of information that someone does not have (informational entropy). Something "100% random", or "RANDOM" just means "I know 0%". It doesn't mean that it somehow occurs without any perturbation in energy, or position, or in some violation of the basic laws of physics. It certainly doesn't mean that someone else isn't saying "I know 65% with 99.9% probability" about the same situation (at which point that person would be learning relative to the "no nothing", and the "no nothing" would be relatively evolving, which implies that external forces in their environment have a greater influence over their outcome, all things being equal).

There are always some forces, initial conditions, or systems of equations, to partially explain (if you're lucky) why something moved from (a,b,c) to (d,e,f). The inexplicable changes in the portion of a system might be called chaotic, or it has high informational entropy, or random. To have exact predictions from perfectly separable equations (have all the information) only happens in models (to my knowledge). That is why everything is random to some degree, and that degree depends on our information.

Jeff Sasmor adds: 

To make things even more. Interesting.confusing, in my work I often need to obtain a random number from a reduced set of integers, say, from 0 to 4.

By way of an example, in some games you need a random value from a 'bag' of numbers in order to make a move or to set the value of a playing piece. 6-sided dice would be one example. Another example would be selecting which type of candy piece appears when playing the famously popular "Candy Crush Saga."

Although not widely known, that latter sort of game (generically called Match-3 games) often give more weight to certain piece types in order to make gameplay more difficult and induce you to pay for in-game items.

For example, you can make a histogram of which pieces already exist on the screen and bias the otherwise random selection process to make the game harder.

So when you need more blue candies to win a level the software sees how many blues are already on screen and produces fewer new ones.

That would undoubtedly be illegal for a casino video poker or video slots game but it's legal on your phone or tablet. At least so far.

Ralph Vince writes:

There's a huge market lesson here. In the vast majority of the cases, people are looking for deviations from randomness to find an edge.

The list's own Larry Williams has frequently spoken in recent years about the next trade having a 50/50 chance of being profitable, regardless of what your historical testing might indicate. My personal experience has been to assume randomness, assume that perverse arrangement of incidents and craft a strategy out of that expected sea of data (aside from the sadly gormless delta-neutral strategies now suffocating from the zirp-world-underwater-liability demands and blind-eyed-mandate-carve-outs). I've often found such seeming adges to be vaporous, ofteh the product of fleeting, temporal correlations (ghosts!).

However, the problem with assuming randomness and crafting strategies around that, the potential danger, is to stop looking for non-randomness, to stop looking for a potential edge to be obtained that way.

It's when we observe, distinguish and conclude that we learn (and most lessons hurt). In the world of perverted randomness, the drive-by, un-preened incidents in convertibles with their beer and their dope and their pornos in the trunk, slowly prowling the schoolyard's perimeter (within the legal distance as required by law and which they agreed to when they checked in with their local police station), failures are quite common but the most painful aspect is the moments of self reflection that appear in the passengers seat, stopping to inquire among us (whose crisp t-shirts now stained with the blood from our own noses), "So what did you learn from that failure?"

And the critical student will torment himself for years, looking for cause and effect that ultimately concluded in the particular failure — and come to see that if it wasn't that cause and that effect, it would have been another. Accepting the world as perversely random (yet, still looking for pattern, however fleeting, therein, as an exercise in art if nothing else, an aesthetic exertion for pleasure) does he come to realize the lessons of failure are not the random dominoes that fell and caused it, but the lesson (of survival)  of what to do ex post facto.

Sushil Kedia asks: 

Some more questions:

1. Would it not require a thorough and complete effort to "rule out" any possible pattern than to figure out a pattern?

2. To prove that nothing exists requires one to eliminate all possibilities. All possibilities is the universal set of total knowledge. If anyone is seeking a perfectly random number then for one to achieve that requires reaching state of total knowledge. Is "perfectly imperfect" possible?

3. Does the spirit of inquiry rest on the shoulders of humility?

John Bollinger writes: 

From my perspective, you'd be better off thinking about volatility.

anonymous writes: 

Ralph's comment about this "world of perverted randomness" convinces me that we may not all be Keynesians now, but almost all of us are tempted to indulge in the national vice of moralizing even on this subject of randomness. How else can we understand the continued success of preaching in the field of economics? Where would Paul Krugman and most of his fellow Nobel Laureates be without their pulpits?

No wonder Armen Alchian never came close to winning the prize. He lacked the necessary techniques for railing against uncertainty and time. Still worse, he remained blissfully untroubled that these phenomena which are the facts of the cosmos continue to escape both summary definition and perfect abstraction.

anonymous adds:

Sushil, I don't think it's true that the one-to-one mapping you want exists.

A pattern can be defined as a function from natural numbers to natural numbers, for example 4,123,19716,9,82,92,1,5. The number of such functions is provably greater than the number of natural numbers. Just use the proof that the reals are bigger than the naturals and recognise that in a large enough base a given real number is a map from natural numbers to (bounded natural numbers, but as big as you like).

Randomness is opposite to predictability. But as in Ellsberg's paradox, there's a crucial difference between an unknown distribution and a known uniform distribution. By "True randomness" people usually mean a totally uniform distribution with no patterns of any kind. But even a "stochastic" function like a drift process, can be considered random enough that you couldn't predict it effectively (at least not enough to make money).

Mathematicians have already been working with your concept of "all possible functions" for a long time. It's not a future Eureka moment. But with securities prices, we don't actually want to talk about any possible price pattern, for example no stocks multiply in value 100x overnight (or at least a negligible number do). And it's possible but relatively more rare for thick-volume stocks to plunge to zero overnight (although they can move faster than a drift process).

Mathematicians solve the problems you're talking about with the concept of measure. It is possible that when I flip the coin heads or tails, an eagle flies over me and snatches it out of my hand. But this is considered to be effectively 0% likely ("almost never" in technical language).

Jul

24

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

"Wall Street Skips Economics Class"

Mr. Isomorphisms writes: 

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

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

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

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

anonymous writes: 

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

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

Jul

23

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

Jul

22

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

Jul

22

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

Jul

16

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

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

Paolo Pezzutti writes: 

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

Jul

15

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

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

Jul

15

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

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

Jul

15

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

Jul

8

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

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

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

Jul

8

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

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

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

South Africa is Zimbabwe in slow motion.

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

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

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

Jul

3

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

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

Jul

2

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

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

All DailySpec readers are invited.

Jul

2

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

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

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

An examples should suffice:

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

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

Some things for speculators to consider:

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

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

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

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

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

Jordan Neuman writes: 

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

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

Ed Stewart writes: 

Awesome post with much food for thought.

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

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

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

Jul

2

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

Key Points:

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

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

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

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

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

Jun

30

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

Jun

27

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

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

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

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

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

Jun

24

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

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

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

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

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

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

Something to ponder.

Jun

23

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

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

anoymous writes: 

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

Jeff Rollert writes: 

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

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

A commenter writes: 

This sounds like the skyscraper rule gone retail.
 

Jun

23

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

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

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

Jun

23

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

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

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

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

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

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

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

Any other thing specs have learned from trading lobagolas?

Jun

19

Dear Victor,

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

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

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

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

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

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

Jun

19

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

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

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

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

HDAS Capital writes: 

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

Jun

16

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

Jun

13

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

'What?'

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

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

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

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

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

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

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

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

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

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

Jun

8

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

Gary Rogan writes:

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

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

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

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

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

Russ Sears writes:

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

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

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

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

George Zachar writes:

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

Jun

4

I found this research paper very interesting:

"Political Extremism is Supported by an Illusion of Understanding"

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

Jun

2

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

Jun

1

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

May

29

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

May

26

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

Alex Castaldo comments:

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

***Spoiler Alert***

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

Kora Reddy wrote:

Send me the prize money. It is this ETN .

Yanki Onen replies:

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

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

May

22

Do losers average losers?

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

Boris Simonder writes: 

Or, throwing good money after bad money.

Jonathan Bower writes: 

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

Ralph Vince writes:

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

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

Larry Williams writes: 

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

Ralph Vince writes: 

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

Gary Phillips writes: 

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

Ralph Vince writes: 

Yes indeed.

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

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

It was a defining morning for me. 

Rocky Humbert writes: 

There is always a bit of truth to an aphorism.

For example: The early bird catches the worm.

anonymous writes: 

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

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

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

May

22

 The chair reminded me of the idea of related markets.

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

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

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

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

Is it oversupply?

Is it Keystone XL or related oil trains?

Is it deflation?

Is it a slowdown in the economy?

Are production costs declining?

Are investors dumping ETFs or index funds?

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

May

22

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

May

16

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

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

Jordan Neuman writes: 

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

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

May

12

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

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

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

My thoughts:

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

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

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

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

continued low interest rates are:

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

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

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

granted these too, are all assumptions

but that's the point…isn't it?

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

key levels look like this:

1900

1885(6)

1875

1862

1850

May

5

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

Victor Niederhoffer comments: 

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

Vince Fulco writes: 

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

Richard Owen writes: 

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

Ralph Vince writes: 

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

Apr

29

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

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

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

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

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

- success is fleeting, losing is forever

Leo Jia writes: 

Thanks Gary, for the interesting post.

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

Anatoly Veltman writes: 

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

Leo Jia writes: 

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

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

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

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

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

J. Hughes comments:

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

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

Ed Stewart writes: 

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

Apr

23

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

Vince Fulco writes: 

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

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

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

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

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

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

Henry Gifford writes: 

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

Stefan Jovanovich writes:

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

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

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

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

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

"Timescales of Genetic and Epigenetic Inheritance":

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

Jeff Watson writes: 

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

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

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

Mr. Krisrock asks:

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

Gary Rogan writes:

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

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

Bruno Ombreux writes:

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

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

Apr

22

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

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

Other criteria like Sharpe ratio seem more suitable for institutions.

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

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

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

So then the value of slope/width seems meaningful.

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

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

Alexander Good writes: 

Great post!

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

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

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

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

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

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

Leo Jia writes: 

Aren't they different?

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

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

Alex Castaldo writes: 

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

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

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

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

Any other ways to measure equity curve "quality"?

anonymous writes: 

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

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

Ralph Vince writes: 

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

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

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

Apr

21

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

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

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

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

Hernan Avella writes: 

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

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

Apr

14

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

The Sports Pyramid

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

Emotional Styles:

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

The Bubbler

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

The Actor Outer

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

The Mr. Negative

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

The Manipulator

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

The Positive Thinker

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

The Superior One

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

The Grand Master

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

What Is Your Style?

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

Change Is Doable

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

Step 1 & 2 To Emotional Control

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

Emotional Master or Victim?

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

Become Your Emotional Master

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

Emotional Mastery

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

Review Competitions

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

Have Responses

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

Practice Emotional Mastery

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

Apr

10

 Will there be 7 inning baseball next year?

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

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

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

Apr

8

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

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

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

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

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

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

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

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

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

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

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

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

Apr

2

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

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

A quote from the Palindrome seems appropriate:

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

Happy Fishing, and trading!

Duncan Coker writes:

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

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

Mar

31

"Economic Data–Fred–St. Louis Fed"

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

Mar

28

Data, from anonymous

March 28, 2014 | 2 Comments

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

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

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

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

Go Well.

Leo Jia writes: 

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

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

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

Larry Williams writes: 

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

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

We need to understand what the data represents.

Mar

28

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

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

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

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

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

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

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

Larry Williams writes: 

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

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

Mar

26

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

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

Rocky Humbert writes: 

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

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

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

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

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

anonymous adds: 

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

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

From the Preface:

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

Yale College, 1874.

Mr. Isomorphism writes in: 

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

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

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

Mar

23

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

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

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

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

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

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

Mar

21

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

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

(Link to the past settlement prices)

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