I just computed the compound annual return of my IRA for the last six years, which is the period over which I have had it. I made what might be an interesting finding. Perhaps it is just chance, but I doubt it. When I stopped reading libertarian blogs about half-way through the period (3 years ago), my returns from that point forward increased by about 10% yr vs. the average of the prior three years. I was definitely not buying the regular staple of small cap, money losing miners headed towards zero that libertarian sites tend to recommend, but I do think it colored my perceptions in a negative way.

anonymous writes: 

Do libertarian blogs really recommend microcap miners? That sounds like more of a goldbug site. Just want to make sure us libertarian kooks aren't being lumped in unfairly with the goldbugs.

Ed Stewart comments:

There is a lot of overlap, at least on certain sites.



 By the way, I believe it might be a subject of speculation whether  Mr. Simons and his colleagues have found anomalies that they can still exploit as they might be much too big, and there is much too much competition from other humble anomaly seekers.  Yes, as Mr. Harry Browne would say, as described by  the true believer below, their pantheon of geniuses soars on a much higher level of cognition than myself or any of my colleagues or hundreds of followers - but then again superior intelligence isn't everything. And aside from the profitability of market making, as first enumerated by MFM Osborne, it might be difficult to capture anomalies on a systematic basis that the competitors in St. Louis and other small venues might have missed, no matter their profundity.

Anatoly Veltman writes: 

Does this also answer the query as to WHY would Virtu decide to go public?

A true believer writes: 

If there is anything whatsoever to the legion of gambling analogies to markets, market ecology and human endeavor then most of the chips will end up in very few hands.

The Medallion Fund represents the very apogee of human brilliance so applied to financial markets.

What is more likely, that there is something rotten in Denmark? Or that the combined work of pure genius including:

James Simons

Elwyn Berlekamp

Robert Frey

Henry Laufer

Sean Pattison

James Ax

The whole 'European Contingent' - I will not list those names here.

Plus a host of mere 'worker ants' cleaning data, programming testing machines and keeping the lights on.

Might just have come up with the single best group of high capacity strategies ever known.

We should all celebrate this achievement. It represents everything this list is about, surely?

Trying to pick holes in something like this is the equivalent of the Barron's columnist bearing bearish for 30 years on U.S. stocks.

My belief and optimism is based on facts, not some idol worship groupie phenomenon.

anonymous writes:

Is one allowed to agree with both the True Believer and the Chair? What Simons and the others did was pure genius–they used mathematics to identify the consistent anomalies that occur when people buy and sell securities. Those of us who lack their pure brains and mathematical chops marvel at what they have accomplished and have done our best to create a glacially slow mimicry using employment data and their correlation to the business cycle. (They are playing Scarlatti the way Michelangeli did; I am playing chopsticks hitting one key a month.)

But, as Vic notes, the question is whether or not there remain any arbitrage opportunities left now that those anomalies have been examined in such detail for decades by the far greater number of smart people who have come after the folks at Medallion.



 Here is a thought provoking chart that made its way to me this morning. Much in the literature talks about different distribution selection dependant upon the existence or otherwise of 'excess Kurtosis' inter alia. (k = 3 for normal distribution). Much online about this interesting measure. Debatable though if the higher moments are useful in the trenches– as it were.

Good weekend all.

P.S. Aliens have landed. No, not really, however - in news that has a similar probability of observation - London is set to have a run of two (YES, TWO!) consecutive days where the sky will actually be visible through brief partings of the oppressive, grey clouds . There have even been rumours on the internet that the temperature may scale the heady heights of 25 degrees centigrade. Like the perfect game, that last point may be an event too remote without divine (or at least Flexionic) intervention.

Steve Ellison comments: 

In the past year, I did some research on kurtosis to inquire whether there might be any predictive implications when the price change part way through a period of interest was in the "narrow shoulder" of the distribution.



 I recently picked up Make: The Annotated Build-It-Yourself Science Laboratory: Build Over 200 Pieces of Science Equipment! to work on some science project ideas with my 7 year old daughter.

It was originally published back in 1963 when chemistry sets came with cool stuff that could hurt or maim the unwary. It has been revived and annotated by someone I have a lot of admiration for over at Evil Mad Scientist, Windell H. Oskay. He has done his best to modernize it with annotations, especially in the area of suggesting modern day ingredient equivalents or where to get some now harder to find chemicals.

It's a fantastic book that provides instructions on building out a home lab, while at the same time providing a ton of experimental questions to consider.

Anyways, I would definitely recommend checking it out. Here's an official blurb:

Raymond E. Barrett's Build-It-Yourself Science Laboratory is a classic book that took on an audacious task: to show young readers in the 1960s how to build a complete working science lab for chemistry, biology, and physics–and how to perform experiments with those tools. The experiments in this book are fearless and bold by today's standards–any number of the experiments might never be mentioned in a modern book for young readers! Yet, many from previous generations fondly remember how we as a society used to embrace scientific learning.

This new version of Barrett's book has been updated for today's world with annotations and updates from Windell Oskay of Evil Mad Scientist Laboratories, including extensive notes about modern safety practices, suggestions on where to find the parts you need, and tips for building upon Barrett's ideas with modern technology. With this book, you'll be ready to take on your own scientific explorations at school, work, or home.



I don't know whether to laugh or cry.

EUR drops 200 yesterday on nothing and TODAY Greek PM Tsipras tells the media that the creditors have not accepted the latest raft of proposals.

It is an outstanding example of flexionism. Or more charitably an efficient market discounting mechanism (yeah, sure!).

One decides that laughter should carry the day in this instance.



 Today was one of those days where you are both exhilarated and exhausted. The wife had trouble sleeping last night. When that happens, she tosses and turns all night. Her restlessness made it impossible for me to fall asleep. So I was awake until sometime after 2 am and up at 7 am.

So this may be a short report as there is a deck chair with my name on it and I am experiencing a serious "nap attack".

First a personal observation: We took a bus tour today. Although the tour guide was very knowledgeable, his grasp of the English language was not that great. And maybe we were spoiled in Gibraltar with a tour guide who went out his way to make everything interesting and personal, but that was not the case today. We often couldn't hear our guide because we were in crowd of 40 people. Couple that with other tours, and the noise was just too much.

If I do this again, I'm going to look into hiring a personal tour guide to show us around.

The history of Cartagena is fascinating. We were told that "he who controls Cartagena, controls the Mediterranean.

It is a very strategically located port and that is easy to defend due to it's shape. The father (?) of Hannibal had a wall built around the city that became known as the Punic Wall. It was thought to be a great defense system that would protect the city. When coupled with the shape and location of the harbor, the city was thought to be a very safe place to be (which turned out not to be the case).

The geological wealth of the city, especially in the form of the silver mines grew the wealth of to fantastic proportions.

The wealthy of the city chipped in and built the great Roman Theater of Cartagena. It was very cool touring the theater and learning of it's history and architecture. It was amazing to me that the theater was lost from history until discovered by archeological digs in the 1980s.

They've been able to recreate most of the theater using (they say) 70% of the original materials and building blocks.

We toured the city streets of the area, walked into a small Catholic Church and took pictures of the statues. I'll try and post some of the pictures later.

The Punic Wall was very nice to see. We were told that we stood at the same place that Hannibal gathered his army to march across the Alps. Supposedly, 90,000 men and 100 Elephants.

Of course, while Hannibal was trekking to Rome, The Roman's used that as an opportunity to attack Cartagena (it was called by another name then…I don't recall what it was). The Romans conquered Cartagena. Hannibal was absent.

Not the best military maneuver on the part of Hannibal.

A few personal notes:

Try not to have elbow surgery a few days before you go on a trip. it limits your ability to do stuff.

I had an infected bursa sac and had to have some minor outpatient surgery. Apparently, there is an international law that says if you see Scott, you must find a way to bump his elbow.

There is a basketball court on the ship. So I went out to shot a few free throws. There are maybe 3 or 4 other people on the court shooting around. As I stand on the free throw line getting ready to see if I can go 5 for 5 from the line, SLAM, a ball crashed into my left elbow. Not my knee, not my back, not my butt, my freaking elbow. Of all the places the ball could have gone on that court, it hit me on the elbow.

The kid apologized hitting me in the elbow. I accepted his apology (he certainly didn't do it on purpose…at least I think he didn't ;-) and decided to try some other activity.

I tried to get a ping pong game going, but the tables were all full. So I came back to the room. My 16 year old, Hunter was sitting at his desk working on something. I asked him what he was doing, he said, "chemistry".

He set a goal of doing at least a little bit of chemistry or physics or anatomy study on the ship each day in preparation for his AP courses in those classes.

It warmed my heart!

Well, it's off the flow rider to watch the kids ride the boogey boards.

Take care, my friends!



 I wonder if there is a point in time at which it becomes too late (unprofitable) to go against in markets. This is clearly under a time bound, like the day, the week, the month etc.

This needs to be analysed in two frameworks. Firstly, the road to some form of answer is different between 'bounded' futures markets and markets that trade in the fashion of spot currency markets whose short term higher number central moments are often very extreme.

Secondly, my work indicates that the 'answer' is not linear. It will not be a specific time of day. The proponents of the arc-sine work have some measure of empirical evidence on their side for the close as the best guess, but it is a blunt tool in this context.

A fascinating case study is the EURUSD spot market today- down almost every hour since London midnight with the total move of relevant statistical 'weight'.

In other words, you should study if a specific time and magnitude combination negates subsequent reversal strategies for the time period under consideration (regardless of the strategy's historical efficacy).

I'm starting to sweat as the EUR declines as I have a bet with an exceptional trader in the spec list that the EURUSD will trade its 1-1-15 level again before the end of the year. The prize is steak and lobster at The Palm in New York.



 I like the part of The Boys in the Boat where the freshman coach pretends that Cal can beat them handily. The necks of Cal swell even further making it even for Washington to cut them off. I followed the same principle in squash, and never admitted that I had a chance to win. I also never admit to a profit in the market for the same reason. It will be interesting to hear what Mr. Rafter has to say about The Boys in the Boat because he has won many national rowing championships. In particular the wisdom and ability of George Peacock, the world's best boat builder, whose materials in wood have now gone with the wind.

David Lillienfeld writes: 

The beauty and terror of baseball is that there is no clock; and the second you stop thinking about the next pitch, you are on the way to losing no matter how big a lead you have.  What made last year's 7th game so good is that neither team ever once lost that focus; the game score was as close as one can be, but neither team ever for a moment got "tight" thinking about the end result before play was over.

Alston Mabry writes: 

Yes, in games like basketball or football or soccer, you can work the clock. But baseball and tennis have that exciting element of the game not being over until it's over.

anonymous writes: 

I have had the pleasure of seeing some true greats in action over extended periods of time in the markets. The only time these guys really lost any money was when they ignored time.

A fixed clock on any speculation in the organized macro markets is vital in my opinion and experience.

Unlike most things we discuss, the addition of fixed clocks (or predetermined holding periods for individual speculations) is actually countable and its efficacy is testable.



 Oeyvind Schanke runs Norges Bank Investment Management in Oslo. They own about 1.3 % of the global equity market apparently.

The Singapore business news carried an interesting quote from him:

"We could choose to wait four days before we execute in the hope that during the course of these four days we will find a natural counterparty to cross this up with".

The article was bemoaning high frequency front running. Of note is that the comment made by Mr. Schanke is eminently testable. They believe that opportunity costs are less than getting stuffed by front running.

What is the question they have asked? Likely something resembling:

Given an expected high frequency rip off factor on our execution, how many days (or some other time period) is it best to wait that allows us to benefit from the normal variability of the market in question.



 10 questions to ask about Greece:

Does the recent outflow of deposits and collapse in growth and tax collections make the patient too sick to rescue?

Do the Europeans proceed without the IMF, at least to extend in the short term?

Do Merkel and Tsipras acquiesce to common ground and still keep their electorate placated?

Do the Greeks hold a referendum and or election given the factious nature of the ruling party and need for popular support?

Does the deal being contemplated even make a difference as all signs point to it being a repeat of the current deal which has been unsuccessful?

Does Italy raise a concern for contagion?

Does a Greek exit matter?

Does Greece resemble Puerto Rico and vice versa?

Do upcoming European elections continue on the recent track of anti-Euro sentiment?

Does the great Euro experiment ever work or is it a flawed concept?



 My current challenge is onboarding approximately 200 new traders in the next three months. While we have built sophisticated tools, systems, risk models etc., I have been becoming a bigger believer of the concept that "Who we are as individuals is how we trade in the markets'. I have compiled some of my own weaknesses and strengths and am trying to build a matrix of self-cognition for other traders to follow. It would be great to get the groups feedback on the thoughts below.


Makes and follows long term business plan


Will ignore long term business plan


Will handle times of market volatility and make smart decisions


Will panic when markets are volatile and make stupid decisions


Strictly follows Stop-Loss rules and Protects Trading Capital


Will not be diligent with Stop losses and will risk trading capital


Handles losses and down times in markets


Gets depressed when facing losses and makes poor decisions


Daily updating charts, indicators, business plans, Economic calendars

•Disorganized Too many charts, irregular updations, too many instruments


Willing to change view on market based on where the market is going


Sticks to own views and will fight the market even if he is wrong


Puts in the hours required for daily research, trading and journaling


Trades based on mood, not bothered with daily research and journaling


Accepts his mistakes made while trading and tries to improve


Does not accept his trading mistakes and blames the market


Understands and acknowledges that every day is different in the markets.


Tries to treat every trading day as same and forces his trading style


Follows a strict daily trading routine based on market hours and economic releases


Irregular with trading hours, does not strictly follow economic calendars


Understands why markets are trading up, down or sideways and trades accordingly


Will focus on personal profit or loss to determine trading strategy


Grounded and humble after making good profits - knows that he can lose it all


Thinks he has 'figured out the market' and feels he can always beat the market

•Not Envious

Focuses on personal trading results and how to improve his own trading

•Envious, Jealous

Is troubled by the results of other traders and loses focus on improving his own trading


Has the ability to maintain an inner peace and composure during extensive market moves


Is constantly agitated at every up or down move of the market and keeps fighting the market


Keeps trying no matter what happens and does not give up till he starts becoming profitable

•Quitting, Fickle

Gives up too soon if faced with trading losses and blames the market for his failure


Because he is polite, he can learn from other traders and benefit from expert knowledge


Because he is rude, he is unable to build a network of successful traders and misses out on the learning community


Realizes that he needs to do whatever it takes to support himself and his family and trades systematically


Thinks only of himself and takes rash trading decisions - often willing to gamble it all.


Understands that trading takes time to become profitable and plans his personal expenses accordingly


Is looking to reap profits in trading from day-one and cover living expenses - makes rash decisions


Will only trade based on defined entry and exit rules


Will trade based on mood, greed and fear


Will ensure that he trades less to keep the commissions low


Will overtrade and land up giving up all the profits in commissions


Builds a consistent track record of trading profits and can raise outside funds to manage


Inconsistent track record means no one will give him additional capital to manage


Realizes that all the trading results are of his own making and does not blame markets


Will revenge trade the markets in order to recover losses


Follows all the rules of trading and DOES NOT find excuses for breaking the rules


Willed Breaks trading rules often based on feeling fearful or greedy


Always analyses profits and losses and accepts where he got lucky and where he made a profit based on his strategy


Does not differentiate between getting lucky and making a profit based on trading strategy


Sushant Buttan
Founder and CEO

Brett Steenberger writes:

Interesting! The internal research we did suggests that cognitive variables are more important to profitability than personality variables. Personality variables had a strong relationship to trading style, not necessarily to trading outcomes.

Pitt T. Maner III writes: 

You are looking for professionals who respond to what seem to be the characteristics shared by most successful traders. But you can not standardize a trader, it's not a HFT robot.

For example, this morning I found this:

Bridgewater's Ray Dalio Simple Advice For Success: "Think Independently, Stay Humble"


"machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it.

"Bridgewater Is Said to Start Artificial-Intelligence Team

Sushant Buttan responds: 

Thanks for the feedback. Much appreciated.

The responses are interesting and in some cases the qualities of a good trader seem to be diametrically opposite to the qualities in the list I posted…definitely food for thought. Vic, please feel free to post on the Daily Spec…would love to get as much feedback as possible. Thanks.

Victor Niederhoffer writes: 

Mr. Buttan's List is a good list for a spouse I think. As to whether they are good for traders' success, one would not know. Some of the best salesman and traders are totally disreputable. I would think that one key thing for Mr. Buttan to do is to do as much of the trading in house as he can, thereby eliminated slippage and bid asked spreads and capturing profits for the house. Indeed if Mr. Buttan were to make his trading floor a central exchange for all Mideast trades, so that he can capture the spread, I think his idea might work. MFM Osborne always wanted to create an automated market making system, and it would be great to see that developed to ones' profit. I have a query for Mr. Buttan. Does he want me to put his list up on daily spec. It's a seemingly useful list, and it might get him some helpful feedback. Galton always said the most important qualities for success were health, persistence, organization and a modicum of ability. One would recommend reading his work on eminence, which Jeff seems to have readily available. A good library would be great as a foundation for his traders.

Brett Steenbarger comments:

Yes, persistence in particular is important. The research on "grit" is relevant in that context. It is not necessarily the case that positive personality traits are associated with successful trading. Some of the highest Sharpe ratio PMs I tested score surprisingly high in negative emotionality. It is their fear/concern with the downside and overall vigilance that helps them achieve good risk-adjusted returns and avoid overconfidence biases. I would think putting the list on the Spec List would indeed generate useful input.



HFT, from anonymous

June 19, 2015 | 1 Comment

 NANEX.net (the modern day Robin Hood of high frequency information dissemination) has a couple of absolute 'doozies' on the website lately.

I won't go into the specifics but all should read the latest from the site once or twice a month. It's great entertainment. Kind of like a celebrity gossip site for people in the game.

Just one thing to note with a comment:

Quotes for Large Stocks and ETF's are cancelled in less than 100 ms 35-45% of the time and cancelled in less than 1 second in 55-75% of the time.

Intriguingly, a notably lower percentage of quotes are cancelled for mid to low priced Etf and stocks.  I wonder why that is. I gather there is an institutional reason to do with the infrastructure. In the blink of an eye (takes 200 ms — twice the time in which 35-45% of quotes cancelled). I feel my blood temperature rise.

But, where we once had the horse and cart, we now have the Maserati Quattroporte! And as such we need to move on. (take a look at microwave technology's entry into data transmission in markets if you want to be really disheartened).

If your view is that you cannot beat them then there are ways to join them. Virtu is one such and there are plenty of shops out there.

We shall see if this activity is stopped or lessened by regulatory activity in due course (I don't see how, when many from the regulatory field have left to join the party).

I thought that Virtu going public, and magnanimously allowing ordinary stockholders to join in the fun, would lessen the future returns from this activity in true 'Baconion' fashion…I guess we shall have to wait and see.

It certainly would be the apogee of Bacon's "coppering the public".



A rumour that is interesting


You’ve Been Warned: Central Bankers Turning Less Market-Friendly
" by Simon Kennedy

Anatoly Veltman writes: 

I think the point to ponder is WHO planted this rumor on the eve of the fact. And the fact indeed was and is: what actual hike can be contemplated while faced with the emergency of keeping Monetary Union? Absurd. So, again: everything is done to prop the impression that hikes are imminently contemplated, while they are not even possible. Which loops back to the suspicion that articles are planted

anonymous writes: 

This is not a new thought for central banking and other authorities, pre Bernanke’s speech that in part caused the taper tantrum, and the Fed to back off, this was a hot topic within said circles and in part instigated his speech.



I participate in Taoist meditation at night. I find it calms my "monkey mind" and I sleep more soundly, get up earlier and refreshed. It has helped in every facet of life. I drink less coffee, lost 20+ pounds and I haven't tested this but my trading has improved.



 One grows tired of not possessing a concise, very readable and practical text covering the majority of known statistical tests.

Despite the last edition being 10 years old, I believe that the book 100 Statistical Tests by Gopal K. Kanji is the very best book of its kind–period.

Each test covers no more than 2 pages. The author suggests when to use it, shows a practical worked example and some other info with tables in the back of the book.

If one wants more detail then a deeper text can be consulted elsewhere. But as a grab off the shelf, check the index for your test and then see how it is done tool, this book scores very highly with me.

William Hughes writes:

Here is a downloadable pdf link for the "100 Statistical Tests" book you were discussing.

Jeff Watson writes: 

In addition to that excellent book here is a great probability and statistics cheat sheet.  



A partisan politics chart from the Fed.



IBKR is up nearly 60% since it sprained its ankle on the Swiss Frank in January. Imagine how much bigger the skid and relative low might be in the future if the "dual momentum" catches hold in a bigger way as the most important book in investment history: "Limiting risk is a no-brainer, after all".



 "There is no reason why they should not be used by all momentum investors." :"Momentum and Stop Losses"

All traders are invited to the party.

p.s. Don't forget to send a thank-you note.

anonymous writes: 

This guy is making quite a name for himself of late. Book has been well received by Quant community. I had an advisor tell me that he thought Dual Momentum was the most important book ever.

Victor Niederhoffer writes: 

There is hope with useful idiots like this.

Ed Stewart writes: 

My thoughts exactly. More juice for the sprained ankle trades of all kinds, among other things.

anonymous writes: 

If you look in the mirror often enough, you will actually believe you look good for your age, until you see a photograph of yourself, and realize how much you've aged. This perceptual bias may be the result of the repeated exposure phenomenon. I see myself in the mirror everyday while I brush my teeth, and shave. My glances into the mirror are incidental and repeated on a daily basis. On the other hand, I rarely look at photographs of myself. No facebook, no selfies. The resulting effect is a psychological phenomenon by which people tend to develop a preference for things merely because they are familiar with them. Therefore, I have developed a bias due to the frequency of exposures to my image in the mirror. It has been determined that changes in affect that accompany exposures do not depend on subjective factors such as the subjective impression of familiarity, but on the objective history of exposures, and even more interestingly, when exposures are subliminal they are frequently liked better. It's not difficult to become subliminally seduced if one allows themselves to be exposed to a myriad of mumbo-jumbo.



 Hi Victor,

Here is a new discovery that may be of interest to your readers at Daily Speculations, and which may serve as introduction to my Junto presentation on 3 September:

"Why humans build fires shaped the same way"

It has generated a wave of interest on the web during the past few days.

Here is an excerpt from the Abstract:

Here we see why humans unwittingly build fires that look the same: edifices of fuel, as tall as they are wide. I show that the hottest pile of burning fuel occurs when the height of the pile is roughly the same as its base diameter. Key is why humans of all eras have been relying on this design of fire "unwittingly". The reason is that the heat flow from fire facilitates the movement, spreading, and survival of humans on the globe.

With best wishes,


Adrian Bejan ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University
Academy of Europe

Gary Phillips adds: 

I wonder if there are corollaries from the abelian sandpile model that are relevant to the ways fires are built and subsequently burn.



 I like LinkedIn as a company – it's oriented about a useful business service (jobs and business references) rather than being purely social. They also recognize that once people get a job they have less reason to visit the site, so they're developing programing to draw people to the site other times. I bought the stock for these reasons – and because my high-performing granddaughter (Yale summa, Baker Scholar at Harvard B School) chose to accept a job there rather than return to McKinsey.

Jim Sogi writes: 

I like FB.  Did you read Dataclysm?  It's all about getting personal private data…big data. That's what Goog is about.  Very scary is the info they have and what they can do with it.

Quants take the data they give and package it for us but there is so so much more data available to some and at different times. That's Chair's flexion beef. Creativity should be directed more at data and sources than chewing over the same old data feed. Satellite live data, crowd cloud data, twitter data, goog data. Buy a data stream from them for market turns. There have been a few failed hedge funds trying this idea and it sounds interesting. 



 What brings an end to an exuberant speculative driven market? The government changing legislation or changing the playing field first and then a trigger kicks?

Take the Australian property market. After explosive growth in its capital cities, particularly in Sydney and Melbourne, they're now reeling in unlawful chinese buying in their residential property market, with an initial 200 home purchases being investigated and this being mentioned as the tip of the iceberg.

It may be worth looking at what transpired in Singapore some years ago, and whether the same forces are at work in different ways in Australia. Singapore ended with a 40% top to toe haircut after their government made significant changes over time and then the Asian crisis hit. Will the same occur in Sydney, Australia?

anonymous writes: 

Your post is titled, "this is the end" and it is substantively similar to the useless idiots who warn others to exit the stock market before it "crashes" … But your logic is arguably worse because a home is a consumption good that has a store of wealth value with substantial transaction costs.

If you want to contribute something useful to Speclist, might you share with us the rate of return on average Sydney/Melbourne home prices from the top tick in 1996 to the present time? I'm certain you will find that it's significantly above the rate of inflation. I'd also guess that you don't own a home.

I have recently done some simple studies of the prime/average Australian real estate market. I find the local pundits to be ignoring the cost of comparable real estate in other world capitals. The typical story says that average prices are 9x income. But the way those numbers are calculated are completely bogus — including taking account of mortgage rates that have declined from >8% to 4ish%. The Australian market looks rich compared to its historical valuation, but it's not rich compared to its peer markets. Since its been the marginal foreigner buyer that is making the headlines, the peer markets need to be considered as the benchmark.

I am not making a call on the Australian real estate market. But if the market value of my home is going to decline 40%, why should I care? But if you think the National Bank of Australia is going bankrupt, then there's a trade there. But that's not what you said. 



 A strange thing happened to me this year in Omaha. I attended the Berkshire shareholders meeting, as usual. I normally stay in the Sheraton, which is a short walk from the conference centre and quite good value. On the morning of the meeting, whilst using the bathroom facilities, I found an unusual note pinned to the wall. I pulled it down and read it with increasing dismay.

I initially thought to keep the contents to myself. However, on finding it again this morning, I have decided to transcribe it. I feel the author may have some serious mental health issues that need addressing. If you think you know who wrote it, please get in touch and I'll try to coax them towards the appropriate professionals. I do apologise for the profanity below but someone's sanity appears at stake.

[Found pinned above the urinals in the Omaha Sheraton, scrawled on hotel notepaper.]

Look down at what your holding: is it tiny and limp? Think about that before you head to the conference centre. What, you've already turned off your blackberry last night? Gonna boast to everyone who'll listen you're not paying attention to prices today? Give me a break. You build a position and hope the stock price goes down as you do it? Did you hope your wife started cheating on you the day after you were married too? You disgust me. Pious pr*ck with your book value and slide rules. So what if your accounts compounded up in some small caps? Over a decade plus? BORE OFF. Did you ever try putting on some portfolio leverage and taking a visit to FAT CITY? How about you go home to the 'burbs and your Mrs Doubtfire looking wife and climb up on that once a month for a minute's gasp? If you get permission! I'll be the one in Tribecca taking some fresh head nightly off of a pair of teenaged Latvians. Did you ever go toe-to-toe with the centrals? No. Did you ever try putting on a spread once in a while? No. Stick your non-recourse where the sun don't shine and try some real margin for once. I'm talking hardcore repos, tick-for-tick, bleary eyed at 3am. Pull that f**king trigger for once, you b*tch. What, you've STILL got 10% of your funds in Berkshire? M. U. G. So what if I had to fold my whole hand. Just 'cos you never went bustid don't mean you don't bore everyone to death. What, you hung up on yet another broker? Made it oh-so-politely clear they shouldn't call? How about I put an army of sell-side families in chicken dinners and new suits with my vig. And then took them for some cocktails and burlesque at W28th for good measure. Try maybe spraying it around once in a while? Don't make me YAWN with your ten minute pitch on some obscure mittlestand engineering concern on 5x EBIT. How about growing a pair and getting five times your equity in cable already? Try tasting some euphoria once in a while. Look down your nose at me running 25% in some 20x sales nubile which is gapping up? Go f**k yourself you motherless f**k. Are you getting the point yet? Anyway, its time you scuttled in to see Warren. Good luck with that. But let me first make it crystal: f**k all you value investors. Now shake it off and zip that embarrassment away.



 "A look at Chinese infrastructure worldwide: China Is Building the Most Extensive Global Commercial-Military Empire in History"

Larry Williams writes: 

I will be speaking there in a few days so did this forecast of their market. Still looks like more rally to come.

Bud Conrad writes: 

I spoke at a huge mining conference last fall and was amazed by China: BIG, teaming, gets things done, has all the latest technology, awful pollution. Despite many warnings from Western economists of Impending real estate implosion, Local government debt, Shadow banking, and Unregulated shark loans; China has kept its momentum. I think optimism on their stocks that may lead to a bubble that exceeds 2008 is likely.

anonymous writes: 

China is positioning themselves to be the world's primary source for commercial nuclear power technologies. They bought their IP from the French and the Americans. They improved on that IP to form their own brand. In the process, they lowered construction costs. Of course, they will attempt to make it on operations and services.

It appears China's biggest competitor is Korea. Their next biggest competitor appears to be Russia.

While painful to acknowledge, American and European technologies are not competitive.  



 I have much respect for many people I have come across along my travels since executing my first transaction in 1992. (For the record it was buying 71 SPI Futures on the Sydney Futures Exchange. I got it wrong and sold them. My superior at the time, an incredible trader and strong protector, made me stand on one leg for 10 minutes practicing the hand signal in front of everyone while they all threw sell tickets at me! Funnily enough it worked and one did not make said error again. Lessons like that handed out to a junior today would see you lose your career in this HR obsessed environment.

I digress. Anyway, I have noted four styles of trading that I have observed over extended periods of time on large assets. As with all styles, they are subject to Baconion cycles and survivor bias but put that aside for one moment. These styles are of varying degrees of 'quantifiability' and I do not use any of them oneself, but in respect to other ways of doing things I thought it might be interesting to list them:

1. One person divides history into regimes, starting with the Fed's stance amongst much else and then uses statistical analysis on each of those regimes to see what worked and what didn't work. He would then take current conditions, look for the closest historical 'regime analogue' and trade accordingly. All of the factors used to create regimes were the same. So, for example, if there were 10 factors that created a regime, then each of those 10 factors must have existed since records began. My guess would be he is 90% quantitative and 10% discretionary.

2. The next style is not really a style but rather a way of getting into trades. Quite simply, this personage ( a brand name in the macro space) takes a trade at the level where his stop loss is. So, for example, if if likes a market at 10 and wants to to risk 3 then he will only take the trade if it trades down to 7. This works for the person concerned as they are very active. This strategy and be quantified fully and combined with some probability work to great effect I believe.

3. A purely discretionary process wherein the protagonist decides what holding period the 'market' has at this point and then ensures that she has a bigger risk profile and longer time frame than the market. I.e she seeks to outlast the short term price fluctuations with wider stop losses and longer holding periods. More than a little horse sense in this. I have quantified half of this, but the other half remains elusive.

4. A pure quant who ensures me he still has no idea what the difference is between a bid and an offer uses a very intriguing approach - he treats each new futures contract as a brand new beast. He assumes that on the first day of trading the market has never traded before and starts amassing high frequency statistics from the get go of the new contract. He says that this allows full objectivity.

One hopes a few things can be taken from each of these.

Have a great day and weekend.

P.S. The U.K. has experienced a record breaking 2 days (yes TWO WHOLE DAYS) of blue skies and moderate (but not warm) temperatures. Apparently the old and the young are dying. Relief is at hand though. Massive thunderstorms are on the way to relieve these temperatures that at one point nudged up against 70 degrees Fahrenheit.



 The surfing grain trader's post brings to mind the fine performance of Guys and Dolls one saw at the goodspeed last Saturday, as well as the sordid life of Titanic Thompson on whom the character of Sky Masterson was developed. And a bit of counting inspired by the surfing grain trader.

Given we were NOT red or NOT green or NOT yellow or NOT blue yesterday,(lets call that a failure ), what is the duration until the next occasion of a success.

Duration to next success after a failure yesterday of 4 colors 2007 to date:

     after green   4.7 days
     after red     8.4 days
     after blue    3.6 days
     after yellow  3.0 days

Green is both up, red is both down, blue is bonds up, S&P down, yellow is  bonds down, S&P up.    The unconditional chances of green, red, yellow, and blue were
respectively, 0.21, 0.12, 0.30, 0.33.

One leaves it to the reader's judgment whether this sort of counting can compare in its utility to that of the surf grain trader.



Since first touching the SuperRound of 150.00 basis September Futures on the 3rd of June, the Bund futures contract has fluctuated within a 1% range either side of the SuperRound. This after a prodigious decline from the last SuperRound at 160.00 in April.

It is interesting to consider this 'arabesque', as it were, about 150.00 for predictive possibilities, particularly and coincidentally in light of the bullish reaction of bond markets today in reaction to allegedly bearish for bonds retail sales data.



"The lenders and their mortgage servicers do not foreclose on seriously delinquent properties in the largest city in the nation."

"Why the Housing Market Collapse is Set to Resume"  by Keith Jurow



 It's lots of money, but it doesn't sound like any of the debt is held by banks: "A judge ruled Argentina owes $5.4 billion, not $1.7 billion — now here's the freakout everyone expected"

anonymous writes:

The basic problem is that there is no international bankruptcy court. The reality is that the vast majority of the bondholders accepted the restructured notes. Had this been a domestic bankruptcy with that many noteholders accepting a deal, bankruptcy court could have been used to force the others to accept it as well.

anonymous writes: 

Argentina offers great travel value with exchange rates, I'm guessing here, on street of probably close to 20 pesos to the dollar. They're hungry for the dollar. The wine is very very good,the food very tasty. The countryside is beautiful. The mountains big and snow covered. So their problem is our opportunity. It is much more cosmopolitan than I had imagined and there are many lively young people. It is much more European than Mexico and many of the people have European ancestry and it retains cultural affinity with Italy and Germany in some areas, hence the good wines. 

anonymous writes: 

There is a black market for US$ as well as a blue market, even better rates for yanks. Easiest way for us to change there earlier this year was at casinos that were substantially better than black market. Their rate, of course, on the bet you would wager so we took the bet at their excellent rate and walked happily out of the casinos. Mendosa is a must for wine and foodies.

anonymous writes: 

Agreed with Larry.

If I had to give it all away and go somewhere, I would move to Buenos Aires in a flash. Buy a motorcycle and travel the country on a motorbike.



 I often think about the concepts in the title of this post. So, while waiting to have my positions decimated by a 'tape-bomb' from the embarrassing, puerile discussions between the Greeks and their creditor protagonists, a brief discussion might be in order.

Shapes: When looking to predict markets using information from other markets, my experience is that it may not be too deleterious to use triangles (in some very complex relationships the square or rectangle may be helpful).

So, for example, I might use a triangular shape with the three corners consisting of two predictors and one market to be predicted. The use of the rectangle or square adds another predictor but I believe in this case that too many cooks may spoil the broth (at least in terms of the out of sample testing before entering production/ live trading).

Intriguingly, the techniques that make money in the triangular framework are decidedly non-linear relationships between the three markets. In this context 'non linear' would mean that the chart of the predictive function would not resemble a straight line but some other look.

Univariate versus multivariate question:

It is my contention that futures markets whose underlying asset is something such as stocks, gold, oil, bonds (i.e not currencies) have characteristics such that prediction is best done by looking for multivariate relationships. For example, you might try to predict stocks using bonds and oil rather than just using past SP500 futures information to predict the future SP 500 futures movement.

Of note, and perhaps why currencies are considered so difficult, is that multivariate prediction in currencies, in my experience, comes a very distant second to univariate prediction (i.e using a currency's previous data to predict it's future movement).

The above reflects my experience and that which I have observed since the early 1990s. Many of you may have had different observations and results.

The univariate call in currencies is much stronger than the multivariate suggestion in non-currency markets.

The univariate nature of currency prediction DOES NOT HOLD for emerging market currency pairs.

Before 2005 currencies and multivariate prediction fared well, since then it has been very poor. A major change in some hidden 'Baconion Cycle' occurred then.

I am talking here about minutes to 2 days rather than anything longer.



Below is a plot of year-by-year Kentucky Derby times. It surprises me to see that from 1950 onward there hasn't been any progress in reducing the times. Don't these horses know about doping?!
















It is interesting how there has always been a question between fundamentals and technicals. Though it seems there is no question. Fundamentals and drift hold the conditions and price action holds the shape–the shape of how to get on, how to benefit, and how to make the most of the current economic situation. You need the macro understanding before anything else is possible… and then magic is possible.

anonymous writes: 

I'm not sure you need the macro understanding. Look at radio and air travel in the 1930s. Or IT (or at least large sectors of IT) in the 1970s.

Fundamentals ultimately win, the same way water does. 



It is interesting to note that since the high in U.S. Bond futures in late January the subsequent move in the SP 500 futures has been very strong.

It is even more thought provoking that since the recent highs in BUNDS till today, that the DAX is lower.

So are higher bond yields bullish or bearish.



 Australia has outperformed the rest of the world for a century with a 7.5% returns adjusted for inflation vs our own 6.2%.

The triumph of the optimists study attracted enough following and we were bombarded in 2006 to 2009 with reports from bulge brackets ( most notably Credit Swiss ) explaining the virtue of investing in Australia for the long Haul. The reports invariably mentioned the outperformance of Australia vs the U.S. with a standard deviation of 18.2 vs our own 20.4 etc..etc..

Other reasons for the outperformance according to the authors of these reports included the resource rich nature of the country and the sound banking system.

The attractiveness of the Aussie dollar should add to the outperformance of Australia over he rest of the world.

The market in its infinite wisdom and sense of humor managed to tell a different story over the following years where Australia managed to underperform by a wide margin. If one incorporates the weakness of the Aussie dollar into the equation, things will look even worse over the last ten years. Ever changing cycles at its best.

One was tempted today to buy some Australian ETFs after listening to a speech from the same guys about "why Australia and Canada will underperform going forward".

One was tempted to bet that the cycles are about to change again.

anonymous writes: 

Huh? The 10 year trailing compounded return of EWA (Australian) ETF is 8.02% The 10 year trailing compounded return of EWC (Canada) ETF is 7.25% Both of those ETF's have an annual ~ 0.51% mgmt fee so add 5%ish to those numbers to compare with the The 10 year trailing compounded return of the SPY is 7.96. And one concludes that it's a backward looking yawn.

Of course, if you just want to look at the past five years, then you are making a commodity market call. Period.

If you want to make a macro cyclical call, perhaps you should look at Japan. For a US investor, it's produced a 0% RoR for the past 20 years — that is, no buy&hold investor under the age of 50 has made a dime there. Readers of this list may remember my macro call on Japan in 2012. I have not touched my position since then.



One has developed a completely irrational 'concern' about the FTSE INDEX.

The current June Futures contract has criss-crossed the 'SuperRound' number of 7000 many, many times since first closing above it on the 10th April 2015.

In the 30 trading days since it has closed above 7000 12 times and below 7000 some 18 times. It has managed to trade 1.2% above the round and 3.2% below it in the time since the first close above.

I guess it will just go up in time in line with the drift or whatever….but something is out of order somewhere…

My apologies for the purely descriptive nature of this post.



Moves in Japan versus China which were down 7% yesterday to 30 day low recalls the story of tortoise and hare.

anonymous writes: 

No need to run. You have to start on time. The story repeats itself.



 Here is an article from the world of transport engineering. It's not too much of a stretch to apply something similar to observations and timings of magnitudes in financial markets:

Extract: "Why Buses Bunch at Single Stops"

Maybe you've waited at a bus stop for longer than usual, and your bus finally shows up. And then, immediately after, a second bus on the same route pulls up right behind. What gives? Why can't they stay evenly spaced to improve everyone's waiting time? Lewis Lehe provides an explanation in a small interactive game.

Two buses travel along the same route, starting off in opposite positions. They make stops and pick up passengers right on schedule. But then add in your own small delays, and you see bunching relatively quickly. It really doesn't take much to throw off the equal spacing…..'

Jim Sogi writes:

Watch the ocean for a while, or the beach. Random waves cluster to form set waves, larger than the rest, or rogue waves, which can be magnitudes greater than the average. I believe this is a function of randomness or alternately pattern formation from simple binary functions a la Wolfram.

Here's some good information about Three Phase Traffic Theory.

Jim Sogi writes: 

When I go to the US Mainland and drive the big freeways for long distances, I try to drive about 2 or 3 miles per hour slower than traffic.  Most try to drive as fast as they can and bump up against slower traffic groups, and results in waves of clusters of cars.  It's more effort and emotional cost to try drive fast and requires more attention to try pass, notice and avoid slower cars, and cars next door.  Driving a bit slower requires less attention, less stress as you set you speed, and allow other drivers to pass, avoids coming up on slower traffic, and allows you to drive in the spaces between clusters, the "lulls" so to speak. I'm not in a rush and find it more relaxing and you can see the clusters in the distance, and adjust to drive between them. In large urban areas, the clusters tend to be time of day (rush hours) and location oriented, except for accidents.

In markets, vol clusters and it's good to be aware of the lulls and clusters, the timing of them, the length of the lulls.  It's like the lulls and sets in surfing. Trading also seems to cluster around the rounds, and time of day (arc sine).

In playing and composing music, it's important to leave "space" in the music, where there are fewer notes to allow emotional development. 

Jonathan Bower writes: 

 Mr. Sogi makes some very good observations. I drive 150 miles round trip every day for work. I see people in such a rush to "slow down" when they inevitably meet slower traffic (or jam). Maintaining a high average speed is much more important in determining length of drive (and better on gas). There is also a strong behavior bias to get in the left lane that frequently staying right, particularly in heavy stop and go, is frequently and consistently optimal.

Jim Wildman writes: 

And mathematically, except on long, open road drives, speeding won't save you signification time even assuming you succeed in increasing your average speed.

You can't save 5 minutes on the typical 20 minute commute by speeding. You can if you are willing (and able) to run stop signs and stoplights.

I used to drive from East Texas (Longview area) into Dallas every day (about 115 miles). It was my observation that most radical speeding (10 MPH over) occurred where it would do the least good. Very few drivers speed in the truly rural areas, but once you get into the more potentially congested areas, the number of speeders goes up.

David Lillienfeld adds:

I've found that the frequency of speeding is inversely proportional to the density of police cars on the side of the road. The result is that you have lots of speeding going on on the interstates, punctuated by islands of drivers going at the stated speed limit. I don't know that the state makes much off of speeding tickets in this setting; I do know that it presents a nice the opportunity for accidents as cars slow down and then speed up. Twice, I've seen cars flip in the course of trying to avoid an accident while slowing down—once was just out of range of a radar gun.

Stefan Martinek writes:

I found that a good solution is to reverse the time zone. I had one period when I was living in the US time zone while in Europe. It is always good to avoid crowds. Gyms are also nice and empty around midnight. No clustering.



I am very interested in changes in relationships between tradeable financial markets. The key words here are changes and tradeable.

Using a period of, say, three years (totally arbitrary choice I know) most relationships between tradeable assets and other tradeable assets with a lag of, say, 1 day usually present R-squared readings circa 0.00. ( maybe a -0.01 to a + 0.01 range). You might be tempted to call this random and that is probably a reasonable categorisation.

What is of interest is when seemingly out of the blue, the two tradeable assets start exhibiting a strong positive or negative relationship. So what is of interest is the 'inflection point' from 'random' to something potentially predictive.

Studying this phenomenon is truly a meal for several lifetimes. These times should be co-incident with strong periods of either trend following or countertrend performance depending on the resultant positive or negative correlation to previous moves.

What is also very true is this. The market allows these departures from 'randomness' for varying periods of time but almost always takes them back to R-squared = 0 territory again. The lifecycle of the move from a horizontal line of best fit to a positive or negative slope and back again is very interesting.

One example would be the DAX futures contract and the EUR USD spot FX rate. Now over the last few years the movement of the DAX today had little to do with yesterday's movement EURUSD. Of late (looking at the moves in a more complex fashion) the movement in the DAX today has been negatively correlated with the movement in the EURUSD yesterday.

I wonder what caused this change. The proximate reason would be the QE program of the European Central Bank and that is a reasonable assertion.

What we should look at are magnitudes, runs & durations in relationships to see if the departures from randomness and back again are predictive.

My own analysis found one of the more incredible relationships I have ever seen between a weak EUR in a previous period to a strong DAX in the next producing some 2000 DAX points in short order. In subsequent testing this has flatlined and indeed started losing.

I strongly believe that most relationships are pulled back to 'randomness' by ever changing cycles.

Here is a prediction: the easily derived DAX bullish signals from EUR weakness will revert back to a win some, lose some proposition from recent 'Rosetta Stone' significance.

I hope this example helps us clarify our thinking further on these important issues.



 Profit. It's one one of the most hated concepts in modern society, but why? Sure, profit is selfish in the sense that individuals follow their rational self-interest to reap the fruits of their labor. However, the prosperity that profit brings in turn benefits society as a whole. This subtle but important concept is fundamental to a free society, yet many students — much less adults — still don't understand it. That's why African Students For Liberty teamed up with the Free Market Foundation to produce a short video explaining the benefits of profit in the form of a parable called "The 100th Man". 

"The 100th Man" tells the story of an African village that is burdened by a two-hour uphill walk to fetch water from the nearest river each day. That is, until one entrepreneurial tribesman has the idea to divert part of the river into a small stream flowing downhill to the village. An economy quickly emerges, but it is not without its challenges. I don't want to spoil the ending for you, so I'll stop there. Click here to watch the video on YouTube, and pass it along to your liberty-curious friends. The time has come for the world to relearn the miracle of prosperity that the pursuit of profit have bestowed upon humanity.

Sincerely & For Liberty,

Olumayowa Okediran
African Programs Manager
Students For Liberty

P.S. Although "The 100th Man" is an African parable, Students For Liberty is a global organization that you can get involved with no matter where you are on the planet. Select your region on our website to find out more about our student activities near you. Or, if your college days are behind you, join our global alumni network. Connect with us on linkedin facebook and twitter.




I was excited to hear on Bloomberg radio about the launch today of a new VIX product — that allows investors to own/short the VIX without the negative carry of the futures and VXX. Sadly, upon reading the prospectus, I am very disappointed to see that this isn't actually how the product works. Savvy arbitrageurs, however, may see opportunities.

The VXUP is supposed to track the VIX positively, and the VXDN is supposed to track the VIX negatively. They are paired — so the profits from the VXUP offset gains/losses from the VXDN. Specs with a long memory may recall a similar structure in a crude oil ETF several years ago. However, that ETF blew up when crude went from 40 to 100+ — which wiped out the short crude ETF and so the long crude ETF stopped rising. The crude ETF pair was unceremoniously liquidated.

The creators of VXUP/VXDN think that they solved the 200% price rise crude oil problem — by having reset/distribution dates — where money flows between and out. And they imposed a 90% price rise cap in place — just in case the VIX quickly pops from 13 to 26+ . That indeed "fixes" the liquidity problem however it creates a much bigger problem. The VXUP/VXDN will not perform in line with the VIX if the stock market crashes — because the VIX will quickly go from 13 to 70ish.

But there's more.

The far more serious problem is that they embedded a "penalty" charge for the VXUP. (See page 3 of the prospectus). Here's the text: "During any Measuring Period and in order to create a balanced market for the Up Shares and Down Shares of the Fund, the Class Value per Share of each Up Share of the Fund will be reduced and the Class Value per share of each Down Share of the Fund will be increased by [a] fixed amount ["Daily Amount"]. In each Measuring Period where the VIX Index has a level of 30 or lower on the prior Distribution Date, the Daily Amount will be 0.15% per day of the Class Value per Share on the prior Distribution Date. If the level of the VIX is greater than 30, the Daily Amount will be zero."


I stopped reading the prospectus after this paragraph because it completely destroys my interest in the product — it has all of the VXX problems of roll-negative carry when the VIX is under 30, but it doesn't have the VXX positive carry when the VIX futures get backwardated. In essence, they have created a product that won't perform if the market crashes, but has all of the problems of the VIX futures and VXX (for volatility bulls).

So what's the arbitrage for Specs who like these things? I see an obvious one. They've arbitrarily picked and locked in a roll cost. And a cap when they think the market will backwardate. They will surely be wrong on both of those arbitrary decisions. For example: Right now the May15/Jun15 Vix future contango spread is 13%. So the 38% annualized penalty for the VXUP is vastly less than the negative carry for the futures roll. The May15/Dec15 futures roll is about 38%. So again, the VXUP penalty charge is less than the market roll. Hence, the obvious arbitrage is that the VXUP/VXDN has priced in a contango of 38% annualized — but the futures market has a different contango. They have also implicitly priced in the VIX level when the VXX goes from negative carry to positive carry (30%). The reality is that the VIX futures market will backwardate at VIX levels much lower than 30.

The way to exploit this arbitrage is left as an exercise for the readers.



A nifty web counting and computation tool is Wolfram Alpha.

I'm sure most or even all know about this site, but it is worth playing around with if you have not done so in a while. It is better than it used to be. It can often help one to count "stuff" that would otherwise be arduous to look up given time limitations. The cool part is that you can use regular English in conjunction with mathematical notation to do some neat analysis very quickly. For example, it is a great way to double check reporters statistics or assumptions, including a quick computation of a relevant base rate.



 I highly recommend the book Natural Born Heroes. It's an incredible WWII story and infinite wisdom for our finite minds. The book also documents what is reported as the only time in history a standing general was effectively removed from the battlefield (the crete kidnapped him, hid him and finally, after a month, removed him… on and from an island). This is a great outside magazine article about the story: 

"No, Heroes Aren't Born. They're Built. And This Is How You Become One.": One of the most
surprising heroes of World War II was a pint-sized shepherd nicknamed
The Clown—and his fitness wisdom can change your life.



The USCI Commodity ETF recently showed up on one of my screening runs. I looked at the chart and noticed that on 5/6/15, USCI traded down from the previous day's close of 47 to a low of 23.875 and then rebounded– closing unchanged.

Upon closer examination, there was a single tiny trade at the open (down 50% in price) that was later canceled by the exchange. Given that this is a commodity ETF, the price move defies logic and was obviously a bad data point.

Yet both the stock exchange and Bloomberg consider this a valid trade.

And so the chart of USCI looks just like the humans who refuse to correct this error: idiotic.



 Excitement levels are rising in my household as the Monaco Formula 1 Grand Prix approaches. I try to attend every year.

This year, one has the rare pleasure to be watching the event from a yacht in the harbour owned by a world class scientist who has recently retired from markets.

I shared a wonderful (all too brief) lunch with him yesterday in a wonderful eatery on St.James' in London called CafeMurano… But I digress…..

We spoke of the great things he has done in markets and what I was doing, amongst much else.

I share the following, absolutely invaluable quotes with those on this list - they are now on my office wall alongside something that Jeff Watson send me some time ago of equal import:

"…..- we made so much money with so little risk because we were applying techniques that were, a/ roundly rejected by academia b/ conceptually very different from what is taught in higher education establishments …" and, most compellingly of all - this gem '…. There exist phenomena in the market that completely and utterly defy physical and traditional mathematical 'laws'…we focused on what we could not see…." (his emphasis upon the word laws).

Let us redouble our efforts. I know I am.



 April is the time of the Master's and jackets (usually iill-fitting of green), and of Opening Day. The grass is freshly mowed. The paint on the dugout top is bright. The peanuts are crisp, and the seats still creak from the stills of winter. The call of "Play ball!" is usually a welcome one, but particularly in April, probably more so in the Northeast and Midwest, where the snows may still be melting, but generally around the country regardless of the specifics. April is the month Passover, of Easter, of renewal. The baseball season awaits, pregnant with potential to confound the statisticians whose analyses figure into most, if not all, of the moves a field or general manager may make in the course of a game, a series, a week, a month, a season. Now is the next season we spoke about last season.

By May, the season is in full bloom. The first assignments to AAA have been made, the first players have been placed on the 15-day DL. The true depth of a team's bench, of its pitching staff, of its bullpen, of its farm system are becoming clear. The Derby is done as the run for the roses completes and the golf world disengages from Amen Corner to contemplate the upcoming US Open. As the month progresses, teams find their grooves and the season begins to take shape.

So one might be pardoned for wondering if the same Orioles team that prostrated itself 10-2 before Toronto last night could possible be the one that skewered the same opponent 5-0 this evening. Looking at the program, they are indeed the same teams. But the games played couldn't be more different.

That's the thing about baseball. It's a 162 game season. Sure, some games are a bit strange, like when the Os played Chisox in an empty ballpark. And there are the glimmers of genius that surface in those who previously performed as if they has no clue, as in Sandy Koufax's show in 1961 (does anyone realize how close he came to just hanging up his cleats after the 1960 season?). Maybe this year, that will be the case with Ubaldo Jimenez. Certainly, there is the potential.

The season's still young, though it is May. Preakness is coming up, and the Stakes isn't too far behind. The wheat fields will be coming to life around then, the cornfields too. And somewhere across the US, there's an 8 year old boy or girl heading off to the ballpark, A, AA, AAA, or the show, makes no difference, glove in hand, convinced that he or she will catch a foul in the stands and, if someone will sign it, a great thing for "show and tell" that week. And at least a ball for a game of catch if not.

Baseball in May. Breathe it in. Smell the freshness of the cool grass in the outfield. Hear the clap of the ball off the bat.

It's restorative of the soul. And watching a team metamorphose as the Orioles did from last night to tonight, restorative of hope and of dreams. In May, in baseball, all things still remain possible.

Play ball!



Always better to see the writing on the wall sooner than later.

"Faces of the Queensland drought":

Cattle grazier Duncan Emmott, who runs stock at Whitehill Station, just south-west of Longreach, (QLD Australia) said he saw the writing on the wall last year. He made the decision to cart off much of his stock and, as of next month, will only have about 120 head of cattle left on his property – less than 20 per cent of what he would normally have on the land. "I think it's a lot easier to make the decision in times like this and to sell and get your stock off while they're still alright to sell, rather than hanging on," he said. "I think that emotionally, psychologically, it plays on your mind a lot more watching your stock get poor, dying, getting bogged, seeing them get pulled out of the bog every day– that's a tough thing to do, to see that happen."



Brendan Simms likes to refer to Germany and the Holy Roman Empire as a force multiplier and their 10 year bund has had a range of 200 points in a day compared to ours of just 50 points in a day recently.

anonymous writes: 

A very sagacious Dailyspec contributor recently stated that when we look back in a few years from now, the Bund will be remembered as the JGB was in the 1990's– as a graveyard of bond bears.

I have no idea beyond the next 36 hours but I do remember the JGB debacle….

Arguably, if my oft stated view that the European (and soon US) banking systems are to be 'Japanified' proved to be correct, then the above will certainly be true as the banks go further and further out the curve to pick up a basis point or two.



 The charity industry is America's oldest profession (the whores came only after the British took over New Amsterdam and brought in the young men in uniforms).

"Helping" in the name of God/Progress/Equality was established as the primary career for the properly educated even as the Indians were coming close to driving the colonists back into the Atlantic.

Without "helping" there is no justification for compulsory primary and secondary education, college attendance and all the soft subjects that are now the bulk of graduate school education in the United States.

It is– and always will be– the real "jobs" program because it is the only way the commercially-inept can maintain their social status and pass on their sinecures. As the First Lady reminded us the other day, she is "an Ivy-League educated lawyer". So there.

Russ Herrold writes: 

The thought that I had when I saw the initial post was this meditation:

"I am for doing good to the poor, but … I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed … that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."

― Benjamin Franklin



 Russ Roberts did an interesting EconTalk with David Zetland recently on water. A comment by Zetland:

I did a crazy, back-of-the-envelope calculation for replacing California's water with desalination, which a lot of people think of as the holy grail. And putting aside the massive energy costs and costs of running desalination, you'd need 500-plus desal plants for California. And they just spent 20 years fighting to get one, near San Diego. So, that's not going to happen.

A summary of the talk:

David Zetland of Leiden University College in the Netherlands and author of Living with Water Scarcity talks with EconTalk host Russ Roberts about the challenges of water management. Issues covered include the sustainability of water supplies, the affordability of water for the poor, the incentives water companies face, and the management of water systems in the poorest countries. Also discussed are the diamond and water paradox, campaigns to reduce water usage, and the role of prices in managing a water system.

anonymous writes: 

It will be tough to convince the majority of Californians to build nuclear plants for desal after their getting the Wave from Japan. On the other side of the ring of fire, those in the CA cities are too green to approve. CA had lax groundwater restrictions but the bottled water companies and private labels are relocating now. This indicates the value of the land is falling because a round of groundwater extraction restrictions is on the way. Water channels from north of CA and use of the rails more likely. Longshot and long-term bet on towing icebergs through the Straits of Drake interesting. 



"SEC Approves Pilot to Assess Tick Size Impact for Smaller Companies"

I found it of interest that they set up a scientific type test with a control group.



I recall when I first started trading, I did not do execution myself and in fact wrote down the orders on trade sheets, blue for buy, yellow for sell. Then took the written order, walking across the whole trading floor, all taking notice, and handed it to the execution trader. I had better have had a good reason for whatever I was doing. This was a very good process and instilled discipline, discouraged over trading and resulted in reaching full holding period more often than not.



Many of the major markets had made quite respectable gains and losses YTD up until recently.

These same markets have, on the whole, traded back to where they were at the start of the year and, in the case of bonds in Europe, gone well beyond.

In the closed system of major financial markets there is more than gristle to be had by looking at relative magnitudes and times elapsed from the beginning of periods to extremes and back again of different markets in ones trading 'universe '.

It is also worth asking if the, for lack of a better term, 'reversionary laggards'–in this case EURUSD and the DAX–both of which still some way from 1-1-15 levels–if this is predictive. Must these errant sheep rejoin the pack and trade back to initial levels seen the start of the year?

Is this a constructural phenomena? I believe it is. And a strong one at that.



I have some reading to do in the form of this paper by Burton Malkiel, John G. Cragg: "Expectations and the Valuation of Shares".



Chart of the Day- 30 Year Mortgage Rate

I, for one, do not share publisher's spin that this implies something down-trending at this junction. I view this chart better representing the fact that rates are way below historical norm. This is not to say how imminent the reversal is; but to say that once reversed, the rates have way more room to the upside than any remaining downside.

Jeff Sasmor writes: 

Two things:

1. that chart doesn't go back far enough for me. This one goes back to 1900

Assuming that that chart is roughly correct, one can see that for most of the last century mortgage rates were generally between 5 & 6 percent. Once out of that range it didn't return for about 30 years (except for a short blip).

2. Rates returning >= 5% will induce great hue and cry from many directions. I am not asserting that such a thing is armageddon-ish, but many will. It will be interesting to see if the Fed has the will to hold back from trying to influence the economy some more at that point.

Rocky's Ghost writes: 

Firstly, I would point out that the bond market (as it drops like a stone) is behaving like a bull market right now. Huh? How can that be? Yes, kids — bull markets are characterized by persistent grinding price gains and vicious pukoramas declines. Think about that statement very carefully before you disagree. Bear markets, in contrast, are characterized by grinding and persistent price declines and vicious price rallies. Again, think about that statement very carefully before you disagree.

But let us assume that Anatoly is correct as a thought exercise. Let us then note that the current bull market has lasted for 35 years. If you want to start setting secular (as opposed to cyclical and trading shorts), what's the hurry? I submit that one needs at least a few months to validate the secular bear market thesis. That thesis requires a lasting change in inflation expectations that break out of the 2-ish% range or a change in the perception of growth/capacity or a change in labor union/gov't policies or a change in the perception of sovereign risk/real rates or a war that changes the balance of investment/spending or deficit financing that exhausts savings or any other number of things that don't happen in a fortnight. Can they happen? Sure. Have they happened? Not yet. Heck, the Fed hasn't even tightened yet. A knock-down drag out cyclical bear market will the fed to be behind the curve on growth and inflation. Growth is still anemic. PCE inflation is still below the desired target.

All that has happened so far is that a bunch of people were on the same side of a multi month trend (bonds, dollar, crude oil, european QE) and those people are all exiting at the same time and moving prices to an equilibrium. This move is about positions. It's not about fundamentals. Yet. 35 years is 12,775 days. The high tick in the TLT was on 1/30/15. So we are about 125 days off the all time high.


P.S. Look at what has happened over the past few years when the 10-15 day moving average crosses below the 100ish day moving average in the TLT. People pay 2&20 for that nugget of advice. Hah.

anonymous writes: 

or perhaps the bear began in july 2012, when the 10-yr yield fell to 1.4% and cpi hit a low of -2.1%.

anonymous writes: 

You say this move is about positions.

From the cheap seats, this seems like the null hypothesis, for sure. Certainly, everybody didn't suddenly decide there's going to be a huge ramp-up in inflation. Or a default in bonds. More likely that many players are leveraged in the same direction(s), and recently enough have decided to "take profits", that others have decided to follow.



 As one gasps for breath the following thought springs forth, motivated by:

A: the recent co-movement in Bonds , the dollar and stocks

B: the LoBagola completed (just about) in Bund futures a little while back this AM.

When related but different markets are experiencing a relatively high/unusual degree of co-movement, might the relative duration taken to 'LoBagola'/ reverse in each market be predictive?

As usual, I am trying to write words while there are only numbers, functions and classes in my head. So, put another way, might not the relative speed of reversal back to an initial market price be predictive for some future time period during periods of extended and robust co-movement?

Good day ahead all.

Anatoly Veltman writes: 

well, on what happened last couple of weeks.

As Bunds neared 0.05%, a handful of prominent entities took a position. They telegraphed the fallen king, who joined in. The risk was not nearly as high as it usually runs in the markets, and thus the speculation could be inordinately large of size…

The contrary trade gained speed as it continued to be helped both verbally and pyramidicly. In the process, the EUR began to look more and more attractive correspondingly.

Eventually, the high velocity moves in both rates and currency disrupted the equities peaceful drift. So you got the moment of all three moving in the same painful direction.

Vince Fulco writes: 

Sounds poetic looking in the rearview mirror.



 I am not a conspiracy theorist, but the official explanation behind Dave Goldberg's (Sheryl Sandberg's husband) cause of death seems improbable:

"He reportedly left his room in the resort near Nuevo Vallarta at 16:00 local time to exercise, and family members went to look for him when he failed to return.

He was found at about 18:30 in the gym, lying by a treadmill, with a blow to the lower back of his head. It was apparent he had slipped on the treadmill and hit the machine, a spokesman for the Nayarit state prosecutor said."

Can someone explain the physics of how you (a) lose your balance; (b) whack the back of your head; (c) end up "lying by a treadmill". Anyone care to bet whether there is a video camera in the gym? Access control? An autopsy report from a board-certified pathologist? Are there any other examples of severe injuries to the "lower back of the head" from a treadmill?

Until I see the data, I'm canceling my trip to Nuevo Vallarta and betting that this was a botched kidnapping (Sandberg is a facebook billionaire) and is being covered up by the hotel and local authorities to prevent a tourist exodus.

Russ Sears writes: 

Treadmills are dangerous if operated at the higher speeds. What is a high speed depends on the individual working out. There are several ways to fall. In order of frequency for me:

1. Step half way off the tread.

2. Power outage due to either over heating motor, or simply power failure.

3. Pulled muscle or cramp.

4. Sudden distraction

But at hotels it's often due to improper maintenance, such as a loose tread or over heated motor. 



 Those amongst you who receive bucketloads of bank Research (even with spam filters turned on high) will note the extraordinary versatility of sales people to be 'experts' in everything. In just the past twelve months, my counterparties have been offering risk taking 'advice' based on their expertise in:

Geopolitical events (Ukraine)

The Euro

Oil prices



And now… BUNDS.

They are all so clever! In all fairness 'cross product sales' and associated financial incentives for same (sales credit anyone?) is likely a driving force.

The fever pitch in the spam often occurs fairly coincidentally with slowing rates of change or reversal in the relevant sector….like Bunds now perhaps.

It is a good demonstration of misdirection, obtaining alms from customers, encouraging the wrong actions at the wrong time and bare faced hypocrisy.

One has to stand up and applaud futures broker this AM for making special phone call recommending the purchase of very short dated 15 delta BUND puts at a volatility so high that no amount of movement could give anything other than a loss.

The seeds of the next move of substance are likely in markets not in focus… Perhaps yield curve in NZD, Rice, South African Rand, or the on going Japanification of the US banking system and its ramifications for the still positive integer on the left hand side of long dated US treasury yields.



It looks like a new currency awaits.

There's lots of assertions about what happens to Greece in case of a Grexit given that the resulting drachma would probably quickly lose value. What if Greece were to tie itself to bitcoins or some other cryptocurrency?

anonymous writes: 

The first step will be capital controls. The second step will likely be some form of domestic IOU's and or default. Those IOU's may or not morph into a New Drachma, etc. depending on both domestic and international factors. Very good chance they default and remain in the Euro as well. The Greek populace has made it clear they don't want to leave the Euro and want some sort of compromise. The bridge to cross between the two sides, however, has proven to be too far to cross. Further, the Greek economy is collapsing and all targets are moving faster than "shoot the freak" on Coney Island.

-primary budget now at best deficit of 1.5% of GDP, target was 1.5% surplus

-so need 3% of fiscal tightening in middle of this recession

-Greek constitutional court now talking of reversing some pension reform

-watch the bank deposit and financial market flows for keys to whether capital controls will be implemented



One notes the chart on page 65 of the May 2-8th edition of The Economist magazine detailing selected MXN bond yields over almost the past 200 years. (required a log scale clearly)

The recently over subscribed 100 year issue puts into perspective just how desperate the market is for yield, come what may and history be dammed.



 Seventy Years Later, I Still Remember….

The scene of the liberation, as an inmate in the concentration camp of Mauthausen, Germany on May 5th, 1945

"It was early afternoon, and lying on the topmost bunk, I saw through a tiny window, on the top of the hill, grim buildings of the camp administration surrounding the Appellplatz, the square where prisoners were counted before going to work. For days now there was only deep silence there: no more labor troops. The Appellplatz seemed totally deserted.

"Suddenly, on the winding road a jeep appeared, followed by an armored car with a soldier at the machine gun mounted on it. They moved very, very slowly, cautiously uphill. The buildings on top were separated by a steel barrier from the rest of the camp. Today it was not the usual SS guard; the soldiers wore a different uniform. The two strange-looking vehicles reached the barrier. They stopped, and for a while the two sides eyed each other. Then the German guard raised the barrier without any resistance. Just as slowly as they came, the vanguard moved forward and stopped again in the middle of the square. Two giant-looking American soldiers got out.

"A minute later, the eerie silence was shattered by an earthquakelike rumble. Humanlike shapes, clad in striped prison pajamas, crawled forth from nowhere, moving grotesquely, seemingly senseless, stumbling, falling, and getting up again, trying to approach the Americans. All the while, they were shouting and screaming inarticulately; the sounds emitted were hardly human. They threw themselves at the Americans, who stood there in shock and disbelief, taking in the apocalyptic scene. Tripping over each other, they kissed their hands, their feet, their uniforms, wherever they could touch them. Many crawled around the vehicles convulsively, in hysterics.

"If man ever cried out from the depths, here was the nadir. These were the victims of the great German empire. All the enslaved, humiliated, down-trodden people of Europe.

"This moment remains indelibly set in your memory. Very few lived through such a scene and survived to bear witness. This is an experience during which you know, right when it happens, that the rest of your life can produce nothing like it. And perhaps time ought to come to a stop here.

For a brief moment it seemed that justice prevailed after all: the innocent is set free, and the evil is punished.

"Lying on the bunk, all that crossed my mind. But I didn't cry. I had run out of tears long ago."



 Any man who plays tennis knows how great a good, men's doubles match can be, with pace and at the net — a fight involving of four where you don't feel the punches.

In November 1996, I had a regular game with three others in a club I belonged to every week, at about 530 a.m. It was worth getting up for. One of those days, I would have a flight later that day to Newark, and from there a taxi or car into the city to do a class at New York Institute of Finance late afternoon, back out to Newark for a red eye flight to Amsterdam, where I was to speak at an IFTA conference the following morning.

One of the staff came out, midway during our game, to tell me I had a phone call.

I took the call, and they were telling me that my 96 year-old grandad had passed away that night. Realizing I couldn't bail on the commitments I made, I got on the plane, did what I committed to do so no one got stood up, managed to get a ticket off the street in Amsterdam (since the airline wouldn't change my ticket) for a flight, out of Brussels the following night to JFK. I got into JFK late, rented a car, drove the 11 or so hours, and showed up at the old man's funeral.

We were quite close, though our horns were always locked. He was a gritty guy who spoke with a Southern Ohio/ Kentucky accent ("I see you on the fourth of Joo-Lie") not unlike the old cartoon rooster Foghorn Leghorn. He played and coached in the early days of pro football ("The worst was that day in Detroit, the wind was cold, the field was cinders, not grass, and every time you went down you gotcha self scuffed"). I used to describe him as "Tougher than catshit."

He was.

But he was gregarious, and fun, and we used to go down to Lou-vull for the Derby quite frequently. It was a big deal every year– it was the culture he was from.

Every year on Derby day, I can;t help but think about him, and how now, now that I am older and slower don't care about a lot of things I once did, I realize how right he was about so many things.

The following May, I had to go without him, and it was more of habit than anything else (and it is not a glamorous place, contrary to the depiction on television, quite the contrary, there is a pervasive seediness to the whole area).

Hemingway describe The Derby as "the most exciting two minutes in sports, an explosion, an emotion."

That Derby
, that one, with my Silver Charm - Captain Bodgett Box, I got it, I got Hemingway. Absent the old man, it wasn't the best Derby I could remember — but it was certainly the most exciting for me.



 What is the real significance of this? Is the sage that clueless that you can't short something riskless and that treasury bonds the second biggest market in world? Or does it relate to waning support for cattle trading?

Buffett Says He'd Short 30-Year Bond If He Had Easy Way to Do It

By Doni Bloomfield (Bloomberg) — Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., reiterated his belief that it's not worth buying long-term bonds at current interest rates and said he expects the value of the securities to fall. "If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," Buffett said Monday on CNBC. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I'll put it that way."

anonymous writes:

"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," Buffett said Monday on CNBC. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I'll put it that way."

One recalls that his track record included some rather gigantic bets made on the long side in treasury strips.

The notion of not being able to figure it out seems clownish. 

anonymous writes:

A few Monday morning thoughts:

1. Next month will be the 11th anniversary of the beginning of the last Fed tightening cycle. That tightening cycle last 24 months and ended in June 2006. So, it has been 9 years since the last fed rate hike to 5.25%. Do you remember the world before Facebook, Twitter, HFT, ETF's, Barack Obama, Windows 7, and a few other things? Do you realize that Steve Jobs unveiled the iphone to the public on January 9, 2007? Is it imaginable that EVERY iPhone in existence has never experienced a Fed rate hike?

Remember: Plus ca change, plus c'est la meme chose.

2. There was an interesting Bloomberg news story for German bond bears over the weekend — and the unintended consequences of negative nominal interest rates. In a nutshell, if you short German bunds, you receive cash (if you are not leveraged). You then must invest the cash in overnight money markets. But, oops, there are negative interest rates in the cash markets too. So you are paying to hold onto the cash. And if you do the trade in the repo market, you still need to post margin in Euros — and that margin gets paid a negative interest rate. All of these moving parts (eventually) get arb-ed out into the derivative markets — for swaps and esoterics wise-guy trades. The bottom line: If you are good, short/intermediate term trader, you can make money trading bonds/bunds/jgb's etc on the short-side; but unless a central bank is tightening, unless there is a sovereign default fear/currency crisis, setting up structural shorts in fixed income is a very difficult game — due to the negative carry that exists despite negative interest rates. This is probably what Buffett means when he says that there is "no easy way" to short long bonds.



DoubleLine Capital's Jeffrey Gundlach said he's considering making an amplified bet against German bonds to join a growing group of top money managers wagering against the debt after some yields turned negative…

Since September last year, the pool of European bonds that essentially charge investors to own them has almost tripled to 2.8 trillion euros ($3.1 trillion) from 1 trillion euros, according to Bank of America Corp. data. The increase has been driven by central banks buying bonds to stimulate economies and has sent yields on German two-year notes to minus 0.273 percent, according to data compiled by Bloomberg.

When you short negative yielding bonds you have a positive carry.

If German 2s yield -0.20%, shorting them produces a positive carry, which when amplified by 100 equals a 20% return.



I wonder what the parameters of the globex trade matching program are for changing the price. One consideration would be to change price to encourage the maximum number of trades. A normal auctioneer calls a price to sell and if there are zero bids after three requests will drop the price. Or if the price is lifted will offer a new lot. Globex does not wait until all the bids are gone before dropping the price. Sometimes it will get stuck with just a few offers. There must be a counter for the number, or frequency of trades and whether they are at bid or ask, and if there is not enough trades, the price will move. There must be a different algo for regular market hours and after market. There probably are fast market programs that kick in also. Seems like an astute counter could reverse count what is going on, and I'm sure some do.



(From my stockbroker)


Nobody has a perfect answer to when to buy and when to sell. If they say they have the answer, just wait for the weather to change.

Just to share info with you… I rely upon a study call "Williams Percent R" listed on tech analysis of Google Finance as "%R" (use 18 periods or days).

Study this a bit. Larry Williams has been very successful with this. %R is a take-off of Dr. George Lane's stochastics. Williams took the stochastics info and put it on one chart so you can see up and down–read on down the page.

The five people shown below are the developers of the most profitable tools. Welles Wilder is in New Zealand.

Notice… below .. %R is the bottom chart … you would prefer to buy when the %R is below 90 and sell when the %R is above 10.

It is not perfect so you should compare it to the price envelop…(red line on price is 3% above and 3% below the 18 day moving average).

Note the main chart is a daily chart. The chart in the background is a weekly chart of the same security. Set this up on two screens. Each of the people shown above often use a tool call "divergence". If the weekly chart has a 30 %R and the daily has a 90 %R, then the daily has diverted off of the path to the low side and may soon revert to the mean, or go back to the range of the weekly, near 30 or 40. This may give you enough to trade for a profit.



 The more accommodating to other drivers I am, the easier it is to get through traffic and avoid potential crashes. Meaning, in those 100 brief moments of interaction between drivers that occur on any city drive, even in a city like Chicago that lacks any notion of community spirit, more than 50% will attempt to return the favor if you yield first are courteous. So you get a positive expected value, perhaps do to the psychological pull of the reciprocity principle.

I am wondering if there is application to this in our trades. One thing I like to do is start with passive orders that are pre-placed, then if/once those fill and the other guy has had his way, I "take my turn" and go active. And it seems many times there is a line of cars that follow along behind me taking their turn as if they were waiting for me to make a move. That observation would need to be tested, as it is based only on my ad-hoc observations. Perhaps this reciprocity or "taking turns" analogy can be extended to broader market action in some way.

anonymous writes: 

A substantial personage in whose employ I was for a few years used something like this,

Using T note futures as an example, he would offer, say, 2000 lots at say 19/32, 'allowing' the market to buy from him (letting them have their way). Once filled he sold 10000-15000 at the market–overwhelming them–taking his turn, as it were!


Ed Stewart writes:

That is exactly what I am referring too, only my experience is not at that size or in that market. My (ad-hoc) observation is it is a useful tactic precisely when it seems most foolish by "normal" logic that does not take into account how it alters other trader behavior (similar to the driver analogy)–creating a shift in tone or sentiment for the rest of ones "drive home". 

Anatoly Veltman writes:

Ed, not sure if anyone finds ANY link to markets further in time of this discussion - but I have a comment re: your initial premise.

I've driven over a quarter million miles, mostly 30-foot vehicles, without an accident. I happen to be a holiday driver (i.e. not driving daily where I live in NY, and not having owned a single car since my distant student years). Unfortunately for myself, I'm yet to own GPS or even use one for the first time - this btw may tie into FB raw that list just went thru. I never opened a FB account to date, either. I think we venerable listers may be too lazy to adopt the basic society's milestones - and no wonder the latest 24y.o. billionaire is way ahead..

What I did found on my dozens drives coast-to-coast and the hundred drives of the entire length of the I-95 was appalling to me, but apparently a norm to what you're participating in daily. Passing thru any urban thru-fare, I see cars obediently lined up for minutes (and possibly adding up to hours), invariably leaving the right lane completely empty and entirely legal to drive on (this is the regular lane on the left of the prohibited shoulder lane). If I once did NOT make use of that legal right lane, giving me substantial edge in traffic, I'd quit long-distance driving summarily. But as it is, it gives me tremendous pleasure to skip hundreds of area regulars in minutes, and leave their daily congestion in rear-view mirror



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

anonymous comments:

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

anonymous writes:

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



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

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

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

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

Total = Constructural + Repulsion.

I'm interested in testing this:

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

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

So, which is stronger,  Constructural or Repulsive?

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

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

anonymous writes:

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



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

"The chilling thing Blackstone said about the oil bust



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

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

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

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

WTI vs. Brent

S&P vs Dax or UK or Asia

Currencies- take your pick.

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

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

Enjoy your weekends.



anonymous writes: 

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

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

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

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

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

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

Paul Marino replies: 

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

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

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

anonymous writes: 

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

Pitt T. Maner III writes: 

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


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

2. Average time between ruptures

A interesting list of earthquakes in California



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

anonymous writes:

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



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

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

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

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

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

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

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

Which leads me to this:

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

principiis obsta (et respice finem)

And the reverse.

anonymous writes: 

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

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

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



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

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

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

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

anonymous writes: 

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

anonymous writes: 

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

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

Here are a few thoughts:

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

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

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

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

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

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

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

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



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

1. Round numbers

2. Opening & closing times

3. Limits

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

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

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

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

As a start, how about this:

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

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

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

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

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



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

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

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

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

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

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



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

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

David Lillienfeld writes: 

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

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

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

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

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

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

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

keep looking »


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