Again and again I see misdirection as an important factor to understanding markets. When everyone is focused on China for example it will be German industrial production that moves markets, or when interest rates seem important it will be earnings and growth that matter. Big moves in commodities matter, until they don't matter anymore. A rate change now seems in the bag so the 30 year rallies, not sells off. The Fed Fund rate is in fact rarely even employed by banks, misdirection. It is the reverse repo and excess deposit rates that are very active.

Even using a quantitative approach to markets, there are only so many things you can test. So testing the what happens to the right hand will not help when the ball is in the left. No easy answers here, but Ricky Jay is a great resource on the topic and has a good film on Netflix.



 Has anyone studied Art Cashin's claim that:

"When October is up over 7 percent, the result of the next two months — the so-called Santa Claus rally — is cut in half," UBS's director of NYSE floor operations told CNBC's

His research comes from Stovall from S&P, if I hear him right. Cashin says that instead of approx 3% benefit long drift you only should look for half of that because of the >7% rise in Oct.

anonymous writes: 

I have not studied his claim, but if he does not somehow factor in the relative strength of the market in months just prior to October, I'm not sure the observation is worth much. Presumably, the very week August and September of 2015 created a reset of sorts and the odds of a Santa Claus rally occurring this year are probably no worse than usual. Just my opinion of course. 

Jeffrey Hirsch writes: 

We have.

While I love Art Cashin, he and everyone else mistakenly calls the yearend rally the Santa Claus Rally. As defined by Yale Hirsch my illustrious father and mentor the Santa Claus Rally is the short 7-trading-day period cover the last 5 trading days of the year and the first 2 of the New Year. Most importantly as the songwriter in Yale has made clear: "If Santa Claus should fail to call, Bears may come to Broad and Wall." Here is the page from the 2016 Almanac and a slide image I use a presentations.

From Page 114: "Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January. This has been good for an average 1.4% gain since 1969 (1.4% since 1950). Santa's failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. We discovered this phenomenon in 1972."

The history of the Santa Claus rally:




















 Yes, I think the following is relevant to trading, counting, regime changes, confirmation bias, the lizard brain, and the struggle to understand whatever we can define as objective reality.

"Placebo Effect Grows in U.S., Thwarting Development of Painkillers":

Drug companies have a problem: they are finding it ever harder to get painkillers through clinical trials. But this isn't necessarily because the drugs are getting worse. An extensive analysis of trial data has found that responses to sham treatments have become stronger over time, making it harder to prove a drug's advantage over placebo.

The change in reponse to placebo treatments for pain, discovered by researchers in Canada, holds true only for US clinical trials. "We were absolutely floored when we found out," says Jeffrey Mogil, who directs the pain-genetics lab at McGill University in Montreal and led the analysis. Simply being in a US trial and receiving sham treatment now seems to relieve pain almost as effectively as many promising new drugs. Mogil thinks that as US trials get longer, larger and more expensive, they may be enhancing participants' expectations of their effectiveness.

Stronger placebo responses have already been reported for trials of antidepressants and antipsychotics, triggering debate over whether growing placebo effects are seen in pain trials too. To find out, Mogil and his colleagues examined 84 clinical trials of drugs for the treatment of chronic neuropathic pain (pain which affects the nervous system) published between 1990 and 2013.

anonymous writes: 

The placebo effect is evidence of susceptibility of the population to influence. Past research shows that the more people are stressed, the more they are susceptible to influence. The original research was done by Pavlov (the dog guy) and the results had a major impact on brainwashing techniques in the last century. Stress people enough and you can convince them of just about anything. Brave New World Revisited.

Who does this benefit?

Russ Sears writes:

This of course is why an investor should not listen to the news in a down market. Once under the stress of losses, people look for "influencer" and all the perma-bears, con-men and fear mongers are lined up to offer their snake oil pain relief through the news media. 



 Obama is pressing for Congress to give Puerto Rico money to save USA SPEC investment.

anonymous writes: 

I don't know what the president's view is on this. But, I am fairly certain that discussions within branches of the government are entirely against any monetary support at the present for Puerto Rico. Consider the example it might set for other municipalities, states, etc.

But to be sure, Puerto Rico will be a growing topic going into the next election year. I believe I outlined here what I thought where some of the key macro issues in Puerto Rico several months ago. Specifically the key salient differences between Puerto Rico and say a Greece. I didn't see the whole piece but apparently Wilbur Ross was talking about this yesterday.

Since that time one particular meme has caught my attention. The general workout numbers developed by many on the degree to which Puerto Rico must right down the debt fall into the same trap the IMF and Europeans have. Here in lies one of the similarities with Europe as well. Both PR and Greece are in a currency union and cannot use the currency for stimulus and the fiscal tightening required to get the budge in order contracts growth for a very long time. Thus the future GDP assumptions several years out are inflated relative to what realistically can occur.

Further, despite the tax incentives, one might consider the population exodus at circa 3% of total population per year. Yet another key issue in the debt workout for the future as those leaving tend to make up a certain bracket of the population that has both financial and educational resources.



 Monday, October 19th is the 28th anniversary of the 1987 crash. As I was a young pup in junior high school in Queens, NY at the time, I certainly remember the reaction around New York be it media, neighbors, etc. I even watched my father pretty much chug a scotch when he got home that night and he is an Accounting Professor who never drinks and is certainly not of the speculator ilk. (He likes his drift nice and slow) For participants who lived it, what is the best thing to do in that situation? Certainly, taking out the canes is warranted for best of breed stocks. But does one start thinking differently, would a past in a form of martial arts training, boxing, or Krav Maga be of help? I can't help but think of the value of situational awareness as is taught to fighter pilots. Any insights would be appreciated.

Jeff Watson writes:

That week in '87, the grains had a magnificent sell off, which made many locals millionaires. I know that I had a good year in a 7 day trading period. That rout was almost as good as the Chernobyl disaster a year and a half before when one was able to sell as much grain as their account would carry……at the top. However, Chernobyl had some tectonic shifts which caused mini quakes for months. Lots of newly minted millionaires on the 19th, and the existing trade didn't get hurt that much so it was good business for all.

Russ Sears writes:

This, I believe, is a great question for sports psychologists. Visualizing your actions in a stressful situation and deciding ahead how you are going to react is very helpful. Then when the pressure comes your instinct is much more likely to go with what worked in your visualization rather than choke, flight, or freeze. You are even able to choose your fight tactic.

If I would have known this in 1992 at my peak in running but novice at the marathon, I could have been an Olympian. The USA competition was weak that year and I was at my prime. But when I hit 20 mile mark in the LA marathon at 1:41 time of change but also hit the wall soon after and crashed and burned because I eased up rather than pushed through it. That pace was easily the fastest pace for a USA runner up to that point that year if I could have head even close to it.

On active trading I found though that much of the stress comes from watching the market too closely so that every jump seems to need preparation. But basic risk management says to have a cash contingency stored for a short emergency use whether it's a stock crash or a bout of unemployment.

Mr. Isomorphisms writes:

Five minute miles. I just can't wrap my head around that.

Russ Sears writes:

Easier for those who run 65 second 400's than those who run 11 minute 2-miles, imo.



 Amazon has 45 million people who are subscribers to Prime and roughly the same number of regular customers who are not Prime members. The current estimates are that Prime members spend $1500 a year and non-Prime members spend $700.

Alibaba claims that it now has 400 million customers on AliPay who spend between $1000 and $1100 annually.

The per capita GDP in China is estimated at $7500; for the U.S. The figure is $56,000.




 I rushed into a shop the other day, seeing a football logo drinking glass that I quite liked in the front window. I was rushed, as I needed to be somewhere, and was running late. I asked the shop assistant, do you have one in my team colours as I picked it up and he said no.

While still standing near the front of the shop, some distance from him I asked how much it was, while at that moment seeing a price tag on the item of $20.00. He replied $12.00, and I said $10, while simultaneously making a move to put the item back in the window. He said DONE.

It only occurred to me later, how many variables came together in my actions and words, totally non scripted, to get him to deal at a price half of what the label said.

I looked rushed, it wasn't exactly what I wanted, and I gave the attendant no time to sell the item to me and prove its value, ending in him hitting the bid, not me lifting the offer.

Some things to remember for trading or further purchases.

And yes, I can hear you, his deal price may of been $5 and he still got the better of me. Though I still quite like the lessons learned. 



 GS just launched a smart-beta product which I believe is their first proprietary ETF.

They are charging only 9 basis points for the GSLC <equity> etf!!!

It's a large cap etf, rebalanced quarterly based on their scoring of value, momentum, quality, and volatility. A quick look has them underweight the largest 40 S&P names except for Gild, HD, CVS and WMT. Interestingly, they don't hold any GS — probably due to regulatory issues.

If anyone knows of a backtest of their index, I'd be interested in examining it. Without historical data, it's difficult to understand the attraction versus competitors (except their fees are extremely low and so they've undercut Wisdomtree and other smart beta products). Perhaps their inhouse brokers will sell this as an alternative to the S&P?

Ed Stewart writes: 

Have you continued to look at this product? at 9 basis points it seems like a reasonable core holding. I'm curious what the turnover will be given the rebalancing rules. I assume GS will make the money on servicing the fund such as trading, stock lending, etc vs. the direct fees.

anonymous adds: 


There are a number of similar products out there (so-called "Smart Beta") which charge between 9 and 20 basis points. So the management fees are only slightly more expensive than S&P or Russell Index Funds. I would argue that the Smart Beta products are themselves "index funds" — but they are tracking a different index! I think this discussion is very important and provocative. I'll provide my two cents below:

Rather than focus on a 5 or 10 basis point savings, I would focus on assessing the probability that one (or more) of these smart beta strategies (of whatever flavor) will outperform the S&P over the next 3, 5, 10 years. When you commit to one of these things in a taxable account, you also need to consider the tax effects of selling early/switching to another fund — as the capital gains taxes can really hurt your long term performance. And you need to consider the chance that the ETF is liquidated for some reason, because that will trigger taxes too. You also need to consider the chance of upward fee drift. For example, GS priced their fund at 15 bp in the prospectus, but lowered the fee to 9 BP on the offering. AQR is also cutting their prices. But at some point, there must be consolidation among these many fund complexes, and after that happens, they will surely start to raise prices — since the tax consequences of switching make the assets very sticky.


The academic literature for the anamolies which these smart beta funds exploit is, I believe, compelling. But equally compelling is the fact that their outperformance versus the S&P has been in secular decline. I did some back of the envelope calculations and found that the average annual excess performance for the past 15 years > 10 years > 5 years. That is, the market has woken up to the anamolies and with the advent of these low cost/smart beta funds, it's plausible that you'll see decreasing, if any, outperformance in the future. Cliff Asness at AQR recently wrote an essay on this subject. See:


I think the right way to pick one of these funds is to understand one's own temperament and market beliefs. It's during bear markets and periods of underperformance that one's temperament is revealed and it's critical to be able to stay with these smart beta products during 1, 3 and 5 year periods of underperformance (however you define "underperfomance"). For example, do you love the "hot" stocks? Would you own Facebook/Amazon/Netflix regardless of valuation? Then the momentum strategy is the right choice. But if you like to own "quality" and feel comfortable with less sexy things (Johnson & Johnson, Microsoft, etc) , then you the Quality anamoly is your right choice. Do you like to be a contrarian? Then the "value" portfolios might make more sense. And if you think you are a trading genius, then you want to move around these different things as you predict the next flavor of the month.

If you put a small amount of long term capital into each of these funds, what's the probability of outperforming/underperforming the S&P on a compounded total return basis? I honestly don't know. But I'd guess that at any given moment — with a X month lookback — one of these smart beta funds will look really good — and one of these smart beta funds will look really bad. And therefore, it's no different from picking a stock or a fund manager or a sector. And consistently doing that is very difficult. 



 As of Friday, mining stocks make up the lowest proportion of the broader ASX 200 ( Australian Stock Index ) since modern records began.

One often sees hysterical market commentary such as:

"Market 'X' trades at the lowest or highest level since such and such a date"

In and of themselves such statements are best ignored.

One wonders, however, if it might not prove of some nourishment to test future expectations of sub components within broader indices based on, for example, if the dub component currently resides in the lowest or highest decile as a percentage of the broader index.

One is far from being a single stock specialist but straight off the bat I can see trouble with the fact that one is not measuring like with like and companies fall into and out of the sub- index.

Regardless, it can be tested against randomness/ throwing darts towards a dart board.

(Or a picture of the Captain of the English Rugby team in anticipation of their drubbing by Australia,  who are, incidentally and pound for pound, the greatest sporting nation in the history of Carbon based life. And YES that does include you America.)



0.95 is lower than 1 /1.05. For this reason a 5% increase followed by a 5% decrease (or vice versa) results in a net decrease. *

In researching volatility drag, with respect to daily vs monthly ETF's (and levered vs unlevered ETF's) I am drawing near to the conclusion that the famous drag phenomenon might be due to a flaw in design rather than in execution. If you design a product to match *percentage* moves, you will induce drag.

The discussions I've read of this phenomenon all go too deep (AM-GM inequality, Jensen's inequality, geometric averaging, lognormal returns, ….) into maths to pick up what I think might be the root flaw of some of these 3rd-gen / 4th-gen ETP's.

* .95 and 1.05 aren't the best numbers to see the mismatch. 1 / 0.5 = 2, not 1.5.



 James Simons wisdom:

"I was just lucky to be good at two wildly different things. Maths and finance are not very alike."

"Tax strategy is very important." (Look at whom he hires.)

"My early success [I believe this is at Axcom] came from just thinking about things slowly, deeply, for a long time."

I've also heard the speculation that the fetish for hiring rocket scientists on Wall Street began with Simons. I would have thought it began with Meriwether. BTW, "Characteristic Classes" by Stasheff & Milnor is what to read if you want to understand Chern-Simons theory (imo).

Here is a video of Milnor discussing something where they come up in a way you might be able to catch from the context. To watch it you need to know that a solid disk maps to a spherical shell via the "drawstring bag". In general N-dimensional rooms map to N-1 -dimensional spherical-shells similarly.



 One for Dr. Bejan.

The Coffee Ring Effect is a well-known phenomenon. A puddle of coffee leaves behind a dark ring, instead of a uniform brown stain. This video explains why— and how this phenomenon resembles what happens in an avalanche.

Dr. Adrian Bejan replies: 

Dear Victor and Pitt,

Thank you for this excellent video. Very inspiring.

I have not worked on predicting the coffee ring phenomenon, but I worked on related phenomena. Here I show you two related ideas:

First, my short video on predicting the architecture of the snowflake, which is based on an article in nature scientific reports.

Second, my article on how to predict droplet impact behavior, splat vs splash. No film about this yet.

The broader domain of life and evolution as physics, to which all evolutionary flow architectures belong, was reviewed during my lecture at the NYC Junto on 3 September.

With best wishes to all,


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



 We often hear that hard work is critical. I agree. But what about the power of waiting? Anxiety can drive one to take an action that is inopportune, not ideal, rushed, or sloppy. Wait and pick the fruit when it is ripe. The idea is related to time preference. I came to the idea when I noticed that much, if not most, work is a salve to cure the desire to "do something" instead of accomplishing something real. So what if one sits back and just waits and by waiting accomplishes in minutes or days or weeks what could not otherwise be accomplished in most of a lifetime. Is it possible? Yes, I think so, as long as one can work hard when needed and on command.

Vince Fulco adds: 

Very hard work is often an avoidance mechanism, and a terrible one, for active or passive significant underdevelopment of the rest of one's life…especially hard relationships which require smoothing out or resolution. I am seeing it with unhappy married friends now who work ridiculous hours because the thought of confronting the elephant in the house is too painful. I think it is a middle eastern saying, "if you wait long enough, your neighbor's body will pass by your doorway."



 In some states, like Oklahoma, there are no emissions inspections. So it would seem like now would be a good time to buy one of these cars on the cheap before the software upgrade and then not do the upgrade (assuming that is, that you don't care about the emissions).

A friend said: "Don't underestimate the seriousness of this.  I am not a lawyer, but isn't triple damages common due to fraud, if proven?"

My answer: Ha! You are assuming that laws actually apply to top corporate executives.

Jordan Low writes: 

I almost purchased a "clean" diesel vehicle. Even if the government is out of the picture, as a consumer I would be outraged. As a consumer, wouldn't you want to return a product that has fraudulent specifications? The liability would already be huge for VW.

Stefan Jovanovich writes:

Read the fine print, people. The car does pass regular emission standards; the software fix was needed so that it could also pass the higher standards that made it eligible for "clean" (sic) energy tax credits. Those were, for a brief period, so ginormous that they would, by themselves, sell the car. That was the incentive for the cheating. 



1. Why don't the exchanges and the sell side research behemoths distribute the same descriptive information set about all markets equally?

For example, the FX Market disseminates certain highly valuable information into the public arena that would be most valuable to the trading of various futures markets. An exhaustive yet discreet enumeration of ALL available information released by exchanges about major futures contracts does not include the information to which I refer.

(I posit that the FX market does not realise the power of the information so it slips out)

2. What does it say about the value of financial information when it is given free of charge?

3. What value financial instruments sold as 'protection' when, if the feared or hoped for event occurs,  best prices (or no prices!) are not available to the participant due to extraordinary spreads, components of the instrument not opening or exchange diktat? I refer here mainly to options markets and the much degraded and over interpreted VIX, among much other detritus.

4. Why are strategies, techniques and other associated 'bells & whistles' best kept out of the public eye?

I don't think this is as clear cut as many other points. I do agree, to an extent, with the AQR research team's recent paper about how a strategy can still work in the public domain , but in the context of not relying on drift or long term returns, being leveraged and aiming for solid risk adjusted numbers - I think things are best kept close knit (perhaps with the judicious application of the law of contract). If anyone reads this post and wants to see the AQR piece let me know.

5. The HFT crescendo. The move from cable to things like sound, vibration and microwave line of sight technology that I have mentioned over recent years in the annals of this lists contributions have certainly coincided with a high public awareness of what goes on now.

Attempts to 'beat' them and devise strategies to mitigate the effective HFT tax should now be 'du jour' to all market players. If not… Well. The Chair's two decade old published comments on the ecology of markets have certainly withstood the test of time.

As a nice aside and another in the plethora of available examples of ever changing cycles, much of the HFT–ahem–'talent' has moved on. It started in the banks, then HF's and now much leading edge technique resides within private family offices. I refer here not to execution of orders but to short term trading based on the ingenuity of the portfolio managers.



 This is my advice to a college student or grad who is worried about answering the question "what are you doing with your life?". Have a little speech put together ahead of time. You can be sure at a family dinner, or other gathering some one will ask you, "what are you studying? What are your plans?". If you have a good sounding and coherent statement to make, whatever it is, say it confidently, mix in some recent related personal experience, and you'll impress the heck out of everyone. Be specific, even if you're not sure what you want to do. Don't just say, "international studies". Say what country you studied at least. Even little kids can do it. I want to be a fireman. I want to be like my Dad. I want to be an astronaut.



 I love Formula 1 Motor Racing.

I love the technical side, the global locations and, after several attendances at the Monaco Grand Prix, I admit to a love of being aboard the super yachts and the beautiful women.

This weekend sees the staging of the Grand Prix in Singapore. It is a very challenging street circuit against a spectacular backdrop.

The qualifying stages are interesting.

There are three stages–Q1, Q2 & Q3. Q1 has the full field of 20 cars, Q2 starts with the quickest 15 cars and Q3 with the top 10. The point of the whole thing is to set places on the starting grid.

It brings to mind relative performances of and rank consistency in markets. Considering groups of stocks within an index it may be worth considering relative performances and rank consistency in a similar way to F1 motor racing.

I could include all stocks for the first month, eliminate the weakest 5% at the end of month one, and then eliminate the worst 5% at the end of month two and so on.

If there is anything to relative strength and momentum in physical stock trading and investment then there should be value in something derived from this.

I am definitely not the person to ask on this as none of my strategies deal with single stocks or momentum and relative strength (although like all reversalists I am a trend follower as soon as I put a trade on–ha!)



This paper is interesting.

It deals with the estimation of travel times on roads. Of much interest though is the volatility of these times.

In the context of the paper, the author speaks of the factors that influence average travel times such as traffic incidents, weather, time of day etc.

Looping back to markets one believes that time is at least as important as price. Given that, it is interesting to consider how the path of prices throughout a trading session impacts upon average price moves or ranges for a set holding period.

To elucidate further, imagine a market, let us call it market 'X'. Perhaps the average range of this market is 14 units.

It is interesting to consider the path dependency throughout the day and study if the steps and stumbles throughout the day will hasten or prolong the time it takes to achieve the average range.

[no need to be married to 'average range', the point is to have some measure of price performance whose average time to occur can be measured].



 Water is unstoppable. Given enough time, it will defeat all the mortal ingenuity of the best and the brightest.

Two atoms of Hydrogen bonded with one atom of oxygen.

How can something so powerful in one context also be so weak in another. Jump off a high diving board and hit the water abdomen first and tell me it doesn't hurt, but sit next to the pool and you can effortlessly push your finger into the water.

I think it is very helpful to think of relationships between financial markets in this way.

There are circumstances under which past conditionality allows one market to predict another for a given holding period with much greater accuracy than normal. In this context the weak bonds between molecules that allow you to push your finger into the water correspond to those occasions when leading correlative effects are absent and vice versa for those fleeting periods when regularities are plentiful.

It makes some measure of sense to look at what situations might make the molecules (predictive relations) hold closely together and those times when the mistress collects her dues from market protagonists.

Clearly having the predictive relations is enough. But some measure of 'meta-understanding' does not hurt, even if such classification is elusive or futile.

There really is nothing to lose by doing so.

Jim Sogi writes:

The speed of water or the object over the waters will determine the interaction. Anonymous's belly flop example is good. A slow moving stream is easy to cross, but a raging torrent will knock down huge trees. A small little wave tumbles gently, but larger waves move faster. In the surf, the lip of the wave as it pitches out and over on an 8 foot wave can be over a foot thick moving at 50 miles and hour and is enough to snap your board in half. In surfing, one of the worst things that can happen is getting "axed" by the lip as it crashes over on hits you directly. The tactic to avoid this is first, don't be there, or second, on smaller wave is to duck dive, with your board, under the the water, under and below where the lip hits. A big wave will penetrate deeper than you can dive, so that doesn't work big waves. The strategy is to wait for a lull to get in the water. We time the sets, their period, and the amplitude in order to time entry.

The analogy to the market is that a fast moving market carries some momentum. Big waves, like we are having now can wash through. Measuring amplitude, period seems helpful. Expecting wash through can save some wipeouts.

Jeff Watson writes: 

One must be very careful when describing the characteristics of water or any other molecular compound. While bonding is of utmost importance, temperature is the main determinant of the characteristic one will observe. Water temperature at -50 degrees C is ice which can be as hard as a rock. Water at the triple point can have the lowest co-efficient of friction which is close to zero somewhere around .02-.05. Water above 100 degrees C assumes a gaseous nature and contains a latent heat of vaporization of somewhere around 2600 Kj/Kg which means it feels hotter at 100C than liquid water at 100C. At around 11,750 degrees C water can turn into plasma….But when describing compounds, one must take into account the temperature and pressure.

Temperature and pressure are important in the markets also. One might think by the looks of things an easy splashdown of a trade will occur because it's a soft landing in water. It could just as well crash into solid ice, land into steam and cook you, or it might land into plasma where very interesting things will happen to your electrons.

Metaphorically speaking, one must find the sweet spot where it will be easy to get out of a trade with an minimum transfer of energy. Ideally using water as an example, that sweet spot would be at the triple point (0C depending on pressure) where the ice on ice has a co-efficient of friction of 0.02. The nice thing about this analogy is that there are more sweet spots than one depending on pressure differences. Always go for the gentle landing, it's easier on your account balance. It would be interesting to study other (triple points) and learn some market lessons.

Sushil Kedia writes: 

With so many interesting insights into markets relating to the molecular chemistry of water, here are my two cents on the table.

This derives from a Chemistry exam term test in the 9th year of my schooling. We had an awesome new teacher in Chemistry Mr. A Das come into teach us. The entire school was swept over its heels with his intellectual purity and his natural charms as being a fantastic teacher. The term exam paper he set had maximum 50 marks and Minimum 20 was necessary to earn a pass. None but yours truly got exactly 20, several ended at 19 and no one could cross the boundary of 20. His entire question paper was to tear everyone apart and push everyone to go to the library and read far beyond the textbooks.

That game changer question where I "managed" to earn that 1 mark was as follows:

If Sulphur is a heavier compound (Its in the row after where Oxygen is in the Periodic Table) then how come H2S is a gas and H2O is a Liquid at the same room temperature and same atmospheric pressure.

This question was poking a hole into an "anomaly" into an "irregularity" of the almost divine knowledge that we felt we received in learning the Periodic Table.

In battling with that very humbling question paper, I didnt want to leave any answer blank. This H2O is a liquid and H2S is a gas question I made a "Story-telling" answer:

The true molecular structure of water must be (H2O)n where n is a random unfixed number creating large coalescing molecular structures of variety giving a lighter compound as H2O the properties of a liquid while a heavier compound as H2S is only a gas and I believe this number n is an unfixed (I didn't know how beautiful the word random was at that age so used unfixed) varying number due to which there is no specific colour or odour water has since colour and odour of any compound is an intra-molecular property and not an inter-molecular property and because water has no odour or colour the varying value of n cancels out all intramolecular frequencies to produce a null colour and null odour.

This question had 2 marks. I got 1 from the 2 possible, because I was almost right, it so turned out when our answer papers were discussed by our teacher! My teacher penalized me in not giving the entire 2 because I wrote unnecessary additional mumbo jumbo about how n must be a varying quantity.

Morals of the story:

When faced with an irregularity, ingenuity in your response does work at least often enough and there is something called luck we knew back in school and today I love to call it as randomness.

When you are still able to make an effort to pull yourself out of a pile of horse-manure be brief and to the point. 

Jeff Watson writes:

We were never lucky enough to get essay questions on chemistry tests. It was either multiple choice, or solve a problem with showing your work and getting the correct answer. Our teachers were sadists. they never gave partial credit.

Sushil Kedia writes: 


Is the glass half empty or half full? Yes, it depends.

An Essay Type test has an undefinable probability of scoring on guess-work. A multiple choice test does have a definable probability of 1/n if n is the number of choices! If teachers never gave partial credits the also could not deduct 1 out of 2 marks possible for telling more than required! Glass is half full and half empty, always. 

anonymous writes:

A final note on this subject:

I accept that a multiple choice exam can test the ability of a student to possess and regurgitate basic and essential factual information. And a well-written multiple choice exam can do somewhat better than that. However, I have met and worked with endless numbers of people who score in the 99th percentile on standardized tests and have perfect grade point averages and despite these "successes," these people lack the ability to differentiate between facts and knowledge; they never learned or acquired critical reasoning and creative problem solving skills. I believe that these things cannot be probed on a multiple choice exam — they requires a free-form response. (Some might say that these things cannot be taught, but I believe otherwise.)

Just for amusement, let's imagine a multiple choice exam for the Presidency:

Question: If Russia invades another country while the President is on vacation what should you do?

(a) Instruct the Defense Secretary to move the 6th fleet to the region and have US fighter jets engage in skirmishes near the border

(b) Call an emergency session of the UN Security Council

(c) Recall the US Ambassador to Russia and boycott the Olympics

(d) Launch a pre-emptive nuclear strike on Moscow

(e) Continue with his golf schedule because the President must appear calm and in control.

And here's one for a hedge fund manager:

Question: If the stock market suddenly drops .8% on an unconfirmed headline of a terrorist attack in New York City, what should you do?

(a) Immediately reduce all open positions by 30%

(b) Immediately cancel all stops to avoid getting stopped out.

(c) Immediately increase all exposure by 30%

(d) Do nothing because you are a long term investor

(e) Check Twitter and if the subject is "trending", then (a). If the subject isn't "trending", then (c).

And here's another one for a hedge fund owner:

Question: If a new employee is producing P&L results that are remarkably good and vastly superior to expectations and everyone else in the firm, do you:

(a) Give the employee more capital to manage and a pat on the back?

(b) Call the employee in and ask him probing questions about what's going on in his portfolio?

(c) Have another employee study the new guy's trading records and positions to figure out what he's really doing?

(d) Reduce the employee's capital because you think he's just lucky and his hot streak will end?

(e) Retire and hand over the firm to the new guy.

Now imagine what a free-form essay response would be ….



 Hi Vic

I send you greetings from Pretoria.

Here is a reaction to my lecture last week at the Academy of Europe.

Please share this with Mr. Epstein, in the hope that he will review my book Design in Nature.

With thanks and best wishes,


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



Most specs need to work on their skills of sizing up a market, whatever it is they trade. A successful spec should at all times have a pretty good idea how much of whatever they are trading is for sale, they need to know the size of the market. In the wheat market, one can expect a market and likely fill of 1/2 million bushels at every quarter cent, possibly several million bushels at the cent. Be very wary when you're in the grains looking at the highs of the day/move and there is nothing for sale. It's times like these that cause people to jump out of buildings.



 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 


I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 



 In deciding on strategy, I think it efficacious to consider, for the intended holding period of the trade or investment, the ratio between the expected return on the one hand and the 'coastline' on the other.

Some specs may not have heard of the concept of the coastline in markets. It refers to, at the tick by tick level, how far a market actually 'travels' in getting from point A to point B.

In terms of markets, an investment or trade may depreciate 6% from point A to point B but the 'coastline' might be 30%. i.e all the up and down squiggles add up to 30%.

Another way to think about the coastline is as a measure of pure path dependency. By definition the coastline will always be longer than the simple difference between A and B.

Those who care if their transactions move against them may want to study past examples of the trade and ascertain:

1. Whether the ratio of expected return to coastline over the predetermined holding period tells you whether buy( or sell) and hold is more or less efficient than an active trading strategy.

2. In market moves in general of a given elapsed time and net magnitude, might the future distributions subsequent to shorter coastline measurements be more harmonious with a counter trend or momentum approaches.

3. Might relatively longer coastline measurements be indicative of impending volatility.

4. For a move of, say, 1% in the price of a macro market- do the different coastlines for the different markets foretell subsequent individual and relative performances.



"What Markets Can Learn from Statistical Learning: Systemic Risk and Systematic Value" is a reasonable introduction to what all the fuss has been about in recent years. In an of itself predictive of little but a good read nonetheless.

For non technical readers out there, there is barely a summation sign or Greek letter in sight.



 Twenty three years ago, when I was more stupid than I am today, I stood beside my Senpai on the floor.

He had just been given (had sold to him) the equivalent of 2000 contracts in the Australian Share Price Index futures market. This was a sizeable position forced upon him and the market was immediately well lower with no bids. All of a sudden he started buying short dated interest rate futures.

What was he doing? As the colour drained from my face and I metaphorically soiled my shorts, he found the bids in the SPI and then covered his longs in the interest rate futures. Nett he lost small but only about 20% of what he would have lost just covering in the core market.

During my post trade inquisition he told me there was no liquidity in SPI so he 'hedged' in the next best liquid instrument. He subsequently did this scores of times and later when the student became the master he did too. He kept manual records of reactions of the local markets to one another in 30 minute increments and used it as a 'hedging cheat sheet'.

But that was in the 1990s, that was before the Internet, when promoters of dying strategies in warm climates raised billions–before the best and brightest lost interest in the world.

It is interesting to note how things that used to be excellent short term 'hedges' have lost much (if not all) of their efficacy. One notes the much reduced to useless hedging effectiveness over the past decade or more of:

The Swiss Franc, Gold, Short Dated Interest Rates, Options based markets: Like all insurance products the spreads to exit during the panic right at the low in the futures market - that the option was purchased to protect against or profit from - are so wide as to make it not worth the bother - better to stick with the futures.

It is changing 'Baconian' cycles, it is government & central banks learning the game (the ruthless and gifted Swiss National Bank is the absolute master), it is interest rates at zero, it is technological advancement and it is - in some way - 'natural' and just that what was once done so well by the true masters has been traded away into nothingness by the smarter student.



I have read that holding periods for stocks are getting shorter. I could ask if lower average holding terms in one period are predictive of higher volatility in the next period. -  A reader.

If you visit Google Scholar, you will find hundreds of papers that address the relationship between market friction and turnover, average holding periods, etc.

Changes in price volatility can be associated with many things. But I find it difficult to see any theoretical economic logic why increased turnover (shorter holding periods) should predict higher price volatility. In fact, I think the opposite can be compellingly argued. That is, if most people don't want to change their holdings, then those people who want to transact will pay a higher price for an execution.

Here's my thought process: Turnover and friction are inversely correlated. Friction consists of commissions, fees and capital gains taxes, bid/ask spreads, and the true depth/size "liquidity" on the bid/ask. Of these, commissions and bid/ask spreads have been in a secular decline since 1990 and I believe this explains the bulk of the data in that chart. Secondly, if you are subject to a 90% capital gains tax and a $1 per share commission, your holding period will increase a lot. That was the case from the 1960's to the 1982. (Note that capital gains taxes increased with Obama's election in 2008.)

Also, in bull markets, one generally sees increased participation and increased turnover; in sideways or bear markets, there are usually fewer transactions, wider bid/ask spreads, and obviously, higher risk premia. This is generally true in most markets including real estate, collectibles and stocks.



Take it for what its worth, but I haven't seen this kind of academic study before.

This study assesses the economic value of technical and fundamental recommendations simultaneously featured on "Talking Numbers," a CNBC and Yahoo joint broadcast. Technicians display stock-picking skills, while fundamentalists reveal no value. In particular, technicians overwhelmingly outperform fundamentalists in predicting returns over horizons of three to nine months and moreover they produce large alpha with respect to the Fama and French (1993) and momentum benchmarks. Considering market indexes, Treasuries, commodities, and various equity indexes, both schools of recommendation generate poor forecasts. Overall, the evidence shows that proprietary trading rules could, at best, enhance investments in single stocks, while returns on broader assets are unpredictable.

"Consider first the stocks that the technical analysts identified as strong buys. They on average proceeded to outperform the overall stock market by 7.9% over the subsequent nine months, while the stocks they recommended as strong sells underperformed by 8.9%. That spread of 16.8 percentage points is highly significant from a statistical point of view. As the professors put it in their study, it means that "technicians display rather impressive stock-picking skills." "Contrast that with the performance of the fundamental analysts. The researchers found that their strong buys proceeded on average to underperform the market over the nine months following recommendation — though not by enough to conclude at the 95% confidence level that these analysts were actually worse than random. Even worse, the stocks that these analysts rated as strong sells did not perform appreciably differently than those they considered strong buys."

Andrew Goodwin asks: 

How would a chart technician buyout fund do? 



 Another beauty escapes into the clutches of cyberspace.

The Baconian saying 'Copper the public' is developing more into something like 'iron pyrite the public'.









From the NBER Digest, National Bureau of Economic Research, September 2015 Issue:

Cheap Talk, Round Numbers, and Signaling Behavior

Items listed at multiples of $100 ultimately sold for 5 to 8 percent less than items with non-rounded prices, but received offers faster and were more likely to sell. In the marketplace for ordinary goods, buyers and sellers have many characteristics that are hidden from each other. From the seller's perspective, it may be beneficial to reveal some of these characteristics. For example, a patient seller may want to signal unending willingness to wait in order to secure a good deal. At the same time, an impatient seller may want to signal a desire to sell a good quickly, albeit at a lower price. This insight is at the heart of Cheap Talk, Round Numbers, and the Economics of Negotiation (NBER Working Paper No. 21285) by Matthew Backus, Thomas Blake, and Steven Tadelis. The authors show that sellers on eBay behave in a fashion that is consistent with using round numbers as signals of impatience.

The authors analyze data from eBay's bargaining platform using its collectibles category˜coins, antiques, toys, memorabilia, and the like. The process is one of sequential offers not unlike haggling in an open-air market. A seller lists an initial price, to which buyers may make counteroffers, to which sellers may make counteroffers, and so on. If a price is agreed upon, the good sells. The authors analyze 10.5 million listed items, out of which 2.8 million received offers and 2.1 million ultimately sold. Their key finding is that items listed at multiples of $100 receive lower offers on average than items listed at nearby prices, ultimately selling for 5 to 8 percent less.

It is tempting to label such behavior a mistake. However, items listed at these round numbers receive offers 6 to 11 days sooner and are 3 to 5 percent more likely to sell than items listed at "precise" numbers. Furthermore, even experienced sellers frequently list items at round numbers, suggesting it is an equilibrium behavior best modeled by rationality rather than seller error. It appears that impatient sellers are able to signal their impatience and are happy to do it, even though it nets them a lower price.

One concern with the analysis is that round-number pricing might provide a signal about the good being sold, rather than the person or firm selling it. To address this issue, the authors use data on goods originally posted with prices in British pounds. These prices are automatically translated to U.S. dollars for the American market. Hence, the authors can test what happens when goods intended to be sold at round numbers are, in fact, sold at non-round numbers. This removes the round-number signal while holding the good's features constant. In this setting, they find that buyers of goods priced in non-round dollar amounts systematically realize higher prices, though the effect is not as a strong as that in their primary sample. This evidence indicates the round numbers themselves have a significant effect on bargaining outcomes.

The authors find additional evidence on the round-number phenomenon in the real estate market in Illinois from 1992 to 2002. This is a wholly different market than that for eBay collectibles, with much higher prices and with sellers typically receiving advice from professional listing agents. But here, too, there is evidence that round-number listings lead to lower sales prices. On average, homes listed at multiples of $50,000 sold for $600 less.

˜Andrew Whitten



In the past six years, we have basically seen two phenomena in stocks: 1. etf growing use, and 2. share buybacks. My theory is that these two forces combine to totally drain liquidity from the stock market. The general downward trend in volume is the proof, also probably explains persistent small upward march of stocks, and the tendency for "corrections" to be much more like "flash crashes."

With one, we have something like robotic superfunds who accumulate mass quantities of stock and hold, rebalancing based on volume in the etf. With two we have drastic reductions in float.

A bear market in that environment will bring a certain violence and toxicity never seen before. Down days are almost forced to be large. So when we talk about a bear and months of down days, it will probably be something truly awful. Etfs will dump stocks on a reduced float market that is largely composed of funds anyways.

The size of the exit is determined by volume and float. Door is getting small…

Ken Drees writes: 

This article explains ETF mechanics well.

Almost as important for the ETF are the authorised participants, or APs, which act as marketmakers. The APs, most of which are banks, help to keep the share price of the ETF close to the value of the underlying assets. Imagine that one big investor in an ETF with, say, a 10% stake, wanted to sell its holding in a single day. There might not be ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns.

To avoid this, the APs act to balance supply and demand. If the ETF is expanding (more people want to buy shares than to sell), then the AP puts in an order to the fund manager for a block of new shares, dubbed creation units, in the ETF. In return, it transfers a bundle of securities, based on the index the fund is tracking, to the manager (this bundle is known as the creation basket). If the ETF is shrinking (more people want to sell than to buy), then the AP sells creation units to the fund manager and receives in return a bundle of securities known as the "redemption basket".

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

So how might this process go wrong? One obvious danger might be the role of the APs. If they fail to make a market in the security, then the price could get out of kilter with the asset value of the fund. Alternatively, they might go bust in the middle of the creation or redemption process, which takes three days to complete. That might leave the ETF short of the shares needed to top up the fund (and match its benchmark) or the cash to pay its investors.

anonymous writes: 

Larry, your analysis seems reasonable. I'm curious if you or other folks here think the lack of liquidity applies more generally than just the stock market (e.g., in the banking and currency markets). See for instance:

"Into The ‘Dollar’ Run Now More Than Illiquidity?"

"Volatility As ‘Money’; Or Really Rising Vol As Anti-Money

Ralph Vince writes: 

And the fact that leveraged and short ETFs must move stock exponentially with a drop in prices. That is to say, the more the underlying securities in the ETF drop in price, the more shares must be sold and this is not — a a drop of 2d takes more than twice as many shares to be sold as a drop in 1d. This would seem not such a big problem except that it is likely to occur during times of vacuous liquidity. 



The Junto on Thursday, Sep 3rd will feature Adrian Bejan, Professor of Physics at Duke, inventor of the constructal theory, one of the most important and wide ranging scientific discoveries and principles of the century. It starts at the Mechanics Institute 20 west 44th street at 7:15 pm. All invited.



 When searching for regularities, it may be helpful to start with things like this. This is a chart of the world's countries scaled by the size of the equity market.

One could look at many things including:

1. Size: does big influence small or vice versa?

2. Time Zone: is there a wave from the East, or have today's almost 24 hour markets mitigated this?

3. Latitude or longitudinal prediction? Neither?

4. Isolation from or clustering with other markets as a measure of under/over reaction?

Amongst much else.



 The ever investigative Nanex informs us that last Friday:

Some 18 billion options 'quotes', or put another way, some 3 years of quotes for ALL 8000 U.S. stocks, were processed by the infrastructure in one day.

Regrettably, many fewer bargains actually were sealed. The deleterious impact of all this, manifesting itself in many ways, continues to compound inexorably higher in a non linear fashion.

Fascinatingly, to me anyway, is that the coming discontinuity may not be a decline in prices. I begin to speculate and think about how to deal with what this 'event' may entail.

1. A precipitous decline in prices. Well, this would be the consensus for a technologically motivated event.

2. A precipitous rally in prices. A more intriguing possibility. Much thought into how and why.

3. My favorite guesstimate would be the 'bookie's choice'. Something in the order of a 48 hour event with the market starting at X, falling until the final of the three circuit breakers hit throughout the day then next day rallying a similar amount back above X and closing that day back at X.

Take out the longs, take out the shorts, close the period unchanged. Beautiful.

It is important to recognize that these modern day robber barons have no interest–assuming no James Bond villain 'destroy the world' complexes amongst them– in killing the Golden Goose, as it were.

I am reminded of similar sentiments from the Palindrome about markets going to the edge and him not wanting to push them over the edge…

I speculate that the probability of what this post is speculating about varies directly with the probability that the regulators belatedly move in for the kill (via either direct means or pernicious taxation). This may be like Waiting for Godot because, as it currently stands, many ex- regulators now work within these groups so… (I must decide whether to laugh or cry about this ).

One thing comes to mind from all this:

Technology has no memory.



Monty Python had a classic "Olympic Hide and Seek Final" in which the first seeker took 3 years, 27 days, 11 hours and 42.23 seconds to find the first hider. Then they reversed roles, did it again, and the result was…a tie.

Similarly for "value" and "growth" over the 23-year lifespans of the Vanguard "Growth" and "Value" index funds.

anonymous writes: 

The feud has been going on for far longer. In 1970s, Nifty Fifty stocks claimed victory with an average P/E of 42, and then crashed by 1974. It looked like growth was a bubble and has lost. Twenty years later, Siegal claimed victory for growth. As long as one diversified and got Walmart in the portfolio, it turns out that Nifty actually did OK.

The next 20 years as your graph suggests shows the Dot-Com and Biotech booms for growth.



I have this serious cheap problem, where my brain has a hard time grokking what the market is capable of. Sometimes as an exercise I will compare the current market to some other market/year, to try to force my brain to see what the possibilities are. Right now my lizard brain very stubbornly has its teeth in the idea that 2015 will wind up looking a lot like 2011.



 Jon Moen and Ellis Tallman wrote a wonderful paper on the Call Loan Market in December 2003.

It explains in detail how and why the Federal Reserve system originated as a further extension of the New York Clearinghouse.

The Central Banks and their own intermediaries (IMF, World Bank, et. al.) are now what the Federal Reserve was designed to be - the people who will never let the markets run short.

The premise then was that the demand for specie (what Friedman called "high-powered money) was an inescapable part of any national banking system and international trade. Settlement ultimately had to be in gold, even if, in a crisis, the clearing of trades would be done Bagehot style - using the central banks' own credit.

In another few years it will be half a century since gold was the ultimate currency for international settlements.

It is now credit turtles all the way down.




Q: Can anyone explain why I am constantly reading posts about possible entry points, buying times/conditions, number crunching stats as to undervalued situations, etc., when it has been absolutely clear to me that we are in the midst of a secular bear market? Mind you, this has nothing to do with personal sentiment or opinion; it is simply interpreting what I am seeing each and every day and trading accordingly. I am not a doomsday bear, nor do I have any biases; it is just amazing to me how many established professionals are still trying to buy buy buy at every possible juncture day to day. Does anyone who calls themselves a trader ever short overvalued stocks/markets/moves? How many rallies do you need to see fizzle into oblivion to prove what we are in the midst of? (Obviously, there are specific sectors and stocks that rise at specific times or under specific conditions and certain short term trading styles where you can be as bullish as you wish; I speak of the market condition in general.) Why have I been able to count on one hand the number of times I have read of any bearish play or overvalued situation? Doesn't this market call for at least some posts of a great short on some overvalued garbage? I am aware that everyone has their own style, but I find it incomprehensible as to why I continue to hear predominantly of bullishness. I'm open to your reasons.

Chair's response:

A personage who is absolutely convinced that we are in the midst of a bear market inquires why he finds so little company on our list besides those obviously talking their book. The reason is that most people on this list have read "Triumph of the Optimists" and "Practical Speculation," and both books emphasize the long-term 10%-a-year upward bias in all stock markets in all countries. That's the reason at a theoretical level. At a practical level, I would add, and this is just personal based on my observations of many years in the business, as well as exposure to almost all major hedge fund managers, including one who hates enterprise as much as Buffett — yes, I would add that the reason we don't hear from those absolutely convinced that we are in the midst of a bear market is that they have been, are or will shortly be, broke, morally and financially, metaphorically speaking. Drinks on me.



In such a technologically influenced trading environment, one is used to instant co- and counter movements in markets.

Without thinking too deeply about it and with respect to Arnold Zellner's 'keep it simple' mantra, one is compelled to ask the following:

Why the heck didn't TYU5 and USU5 trade way higher on Friday given the SP500 move?

anonymous writes:

During a run on Thursday night east coast time I thought about the market and the potential opportunities and pitfalls that may lie ahead in the next 24 hours. Basing my thesis on several factors, the most direct I will elaborate on below, the others too long to espouse upon at the moment. My conclusions consisted of some of the following all of which I acted upon reaching a telephone after reaching my phone:

1. the front end of the curve in the US, namely EDH8 or the like, should rally and have minimal short term downside risk as a continuation lower in equities, the general drift higher in the front end over the past several years, lower commodity prices, stronger dollar, sub-par US growth, etc. supported the view…this is in my view is a slightly cleaner trading on expectations of Fed to less than market expectations based on recent data and markets than the back end, particularly given the flattening in place since around July 13 led by the back end, looking at a simple regression I don't see a meaningful difference between the US 2yr or US 10yr to SPX either

2. the U.S dollar would probably weaken and be led by the JPY given market positions, albeit correlations are not that great to the Nikkei or US 2 year rates, but one thing to consider is newly dirty float of CNY which is somewhat based on "market rates" so I expect that to stabilize or strengthen possibly next week allowing some downward pressure off of Asian FX, including the JPY, I also sold the British Pound on the thesis that there is too much tightening priced into the front end of the curve and the market is long GBP on expectations of the BOE and FED leading the tightening charge, let alone the somewhat mixed UK data of late and the "economic surprise indices" I watch are on the high end of expectations of the past few months

Having said this I made the large mistake of not hedging properly my Euro puts versus the US dollar over the past few weeks and that is a greater lesson of many mistakes to be improved upon.



I am re-reading something about Long Term Capital Management. The way they added leverage intrigues me. It says that without leverage their annual return on asset would be something like 2.5%, but by adding leverage, they got it to 46%. So, the borrowed money had to charge much lower than 2.5% interests. How could they always easily find that low cost loans in the 90's?



Sadly we lost a local doctor Saturday who was trying to set a new world record for depth—1,200 feet. He never came back. [News Story ].  More experienced divers have posted these comments that ring true to many of my trading errors.


Four Attitudes Characterize Leading Tec Divers

In considering your growth as a tec diver, it’s worth noting the characteristics tend to typify leaders in not just tec diving, but in most areas of exploration:

Humility. They realize that they don’t know everything, and that there may be more than one right way to do something. Their ego doesn’t get in the way of learning, doing or teaching.

Open Mindedness. They never reject something just because it’s new or different, and they listen to other viewpoints. They don’t fear change and they’re not threatened by differing opinions.

Analytical. They accurately and realistically weigh the merits of a technology or procedures for themselves and never accept something just because it’s new or because someone else thinks it’s better.

Competent. While they’re open to change and alternative ways to do things, their own methodologies are solid and they can demonstrate a rationale and realistic basis for each. They’re quietly confident about how they dive.



Imagine a world where:

You can observe 'n' prices :X1, X2, X3…..Xn occurring at times Y1, Y2, Y3…..Yn - all in real time and the next day, incredulously, the 'officially provided' information does not agree with this. One should think about what this means for testing and what adjustments might be efficacious.

Almost all information transmitted to subscribers of the major industry standard news / data platforms is of no use whatsoever. One should think about how information gets to the flashing screens in front of you and how many layers of 'flexionic ether' it passes through en route.

The things that work make no sense and are non intuitive. For many years , say between 1990 and 2005, one rejected much because it 'didn't make sense'. A great personage on this list cured me of that most debilitating of trading ailments.

Imagine that world… I'm just saying, is all!

An anonymous old time trader adds:

In the real world, at the exchange, right after the close there is the last price after which the settlement price is determined. The settlement price usually, but does not always agree with the last price, and that is due to the power of the pit committee or whatever they call it nowadays. Things have gotten much better since the closure of the pits, but there are still very rare occasions when the committee will override the last print and adjust the settlement price. There's a lot of money changing hands with a cent and the orders difference for a contract that has an open interest of a million contracts. The rule of thumb is that the committee will move that last price to inflict as little damage as possible to the members and insiders. For what it's worth, this happens more frequently in the grains and meats than the financials but it must be noted that it's a very rare occurrence in these electronic days. Nowadays, there might be the rare occasion where it will differ by a quarter cent, but a couple of years ago, it was the wild West. In 2012, I complained privately to the Chair that my legal limit position at the second largest wheat market, was subject to an average of a 2 cent adjustment everyday at the close, always against me. I knew what they were doing and as a former member of a couple of pit committees, I understood what was going on but still didn't like my pocket getting picked every day. Once after a week straight of their shenanigans, my complaint to the exchange, and threats were so vociferous, they changed the settlement price in my favor… hour after the close….on a Friday. As an aside, a meal for a past lifetime, my mentor taught me to watch the pit committee's adjustment and listen to the conversation right after the close and hear the number they gave the reporter. This gave an excellent indicator as to whether the pit was long or short. But that was then and this is now.



The Haloid Company went public on April 17, 1936. The company name was changed to Haloid Xerox Inc. in 1958. Here is the chart of its full rise to being the stock of the first technology "bubble". From its effective IPO, when it was listed in July 1961 on the NYSE, the company's stock price increased 15 to 20-fold to its height of the early 1970s "Nifty-Fifty" bubble (a period of a bit more than a decade). By then the company was so worried about the inestimable value of its name that it paid to run ads telling people that they should not call copying "xeroxing".

During roughly the same period of time (a dozen years) Amazon's stock price has increased 29-fold from its initial offering price of $18 on January 2, 2002.

 So what did Xerox do differently than Amazon?



Is it a coincidence that I can't find any canned algo type orders that allow a limit price to get hit and then add in a time delay before they start executing? Who would wish to put in a limit order when there could be a news spike that will only get filled well beyond a news shock adjustment price? I'd like a canned order that lets me put in a time delay after limit price hit before it starts to execute. This sort of thing could make a fellow a conspiracy theorist.



Bo's new Executive Hobo website



 Rogue waves can be defined in many ways, yet the one I prefer is "a wave of extreme severity that appears unexpected even to an expert". Given that definition, rogue waves do exist, yet there is no evidence that they would be globally more frequent than conventional (non-linear) waves theories predict, they just don't happen where and when — i.e. in the most extreme sea states — one would expect them. There is no evidence either that the "modulational instability" theory that my colleague Prof. Akhmediev puts forward to explain them would not apply: the theory was validated in wave tanks, optical fibers and plasmas. It is just impossible to know whether the necessary boundary conditions are satisfied in nature. Several points may be noteworthy to the Specs:

1. A recent article shows that rogue events can be empirically predictable, but that for ocean waves the delay would be of the order of the time needed to shout "Buddies, grab something and hold on to it!"

2. "Normal" extremes are at least as frequent as "special" ones, and all indicators based on breather theories such as Akhmediev's have false alarm rates of at least 90%, perhaps 99%, and still fail to warn of about 10% of actual rogue waves.

3. Experienced sailors deny having met "rogue waves". They say that they encountered waves that were rogue, they capsized or broke some ribs (Roger Taylor, Isabelle Autissier), but when you discuss it directly with them, nothing that they were not expecting and had not prepared their ship for.

4. Only a very small percentage of fatalities occur well off the coast (Nikolkina & Didenkulova), most of them happen at the coast or in shallow waters where victims feel wrongly on safe ground or in safe waters.

William Weaver comments: 

Your fourth point is similar to many car accidents happening within a small area from home. People make more mistakes when they feel comfortable. I'm not sure how this changes when accounting for activity though. For example, you could normalize accidents per mile driven and then compare close to home versus far from home, or do a similar normalization for the study mentioned with at sea fatalities, which I have not read. It might be helpful to measure after splitting into bins for types of vessel (cargo ships might have more miles, farther from home travel and less fatalities), and by type of mariner, which might be self defeating as it is more likely less experienced seamen would stay close to shore ( which is not the case for drivers staying close to home).

It seems like a data set prone to torture someone. But do we make more mistakes when we feel safe? The opposite might be true too. My observation is the difference between good and great traders is often the number of mistakes they make. Bring back the checklist posts?

Jeff Rollert writes: 

I see some sample issues. Most sailors (N) do not venture more than 20 miles from the coast. The ones that do are orders of magnitude better prepared (boat) with experienced crew. So I suggest the distribution is bimodal.

Also, there is more than one kind of "rogue" wave. One is an overtaking wave, which is when two waves combine; the second, and more deadly, is when the wave comes from a direction that is unexpected. In my experience, these are the most deadly, as they roll (or broach) the boat. They are also the hardest on the structure of the boat and hit the weakest points harder (deck access from the stern, control or bridge room windows and electrical systems). For fisherman, they dread losing engine power, as the boat becomes exposed in the same way, as fishing boats have the windage at the bow, which turns the boat and presents a breaking wave to the stern.

Lastly, looking at single vs combined storm fronts also messes with their structure.

IMHO, they oversimplified their model.

Jim Sogi writes: 

Surfers expect at least 1 wave each day that will be 3-5x the smallest wave. It's called the wave of the day. In a random sequence this would be one of the far tails. They tend to come with the incoming tide as there is an extra push from the moon.

I think the rogue waves in the ocean might be 20x or more if there were a number of storms with crossing wave trains which could combine. It's the cross chop that creates these large events through random combinations. Rogue is often and mistakenly used as unexpected. Sailing through large parallel swells on a calm surface is quite easy. Sailing through a cross chop is very tiring and rough. Refraction and reflection from shores often make coastal sailing rougher than in the mid ocean.

What always surprises me is how calm the ocean tends to be. You would think it would be rougher given how big it is. 



The link below shows where we stand on data security. Of concern is the fact that what we 'the public' read is likely behind the form i.e it surely extends well beyond this. It is likely that any 'commercial' information is obtainable by those at the sharp end of this kind of work. ( With some degree of risk attached to be sure). One gathers that military and security services have protections (errrr Edward Snowden notwithstanding). One genuinely does not begrudge occasionally losing in organised markets to those who are smarter, have found a new edge, or have deeper reserves/staying power . However, what grates somewhat is losing to technology cheats. ( That is to the extent that it is actually happening, a point on which I have zero proof other than excellent anecdotals from

From Reuters News:

"U.S. researchers show computers can be hijacked to send data as sound waves"



 I've only broken out of four prisons, but each was dramatic:

1. Utah State Prison - Pole Vault I climbed to the prison chapel roof near the perimeter fence with a 16-foot piece of irrigation pipe. It was tin and had the spring of a pole vaulting pole. The roof was level with the razor wire on the top of the fence and I was looking at a 10-feet gap between the edge and wire. I sprinted like a pole vaulter to the end of the roof, and pole vaulted over the fence to land in a roll on the ground on the other side. My getaway ride was waiting.

2. Aiken County Detention Center in SC

Thunder Kicks Finally, after days of waiting and doing leg thrusts, a thunderstorm moved in. The thunder was loud enough to mask my kicks that I matched with the lighting flashes, and counted 'One alligator…' to time the claps. The prison wall I kicked was 15" thick rebar-reinforced cinder block and red brick. In a couple of minutes, the wall began to crumble around a barred window. A minute later, the window popped. I stepped out to my waiting ride.

3. Waynesboro, GA Jail 

Out the Back Door This was an old Andy of Mayberry trick that I saw on TV and put into action. I was on the hall phone chatting with a friend when a deputy entered the back door and walked by. I handed him the phone and asked to find out how much my bail was. He took the phone, and I walked out the back door of the jail.

4. Columbia Correctional Institute (CCI) in Columbia, SC

Escape from Death Row This was my publicized escape by bending the bars on Death Row. The court had placed me on Death Row in Block 2 for my own protection. Every man on Death Row in CCI history had been executed, and the court forgot to include the paperwork that I was not to be. My execution date rolled around, and the guards began to look at me pityingly. Now for the first time I'll reveal how I escaped. My cell had inch-thick steel bars, and since I was well known I had a hacksaw blade smuggled up to me. It took thirty minutes one evening to saw a single cut through the bottom of one of the vertical bars near the floor. I bent it with kicks until it fatigued, and restored it upright with the invisible cut. The show was set. The next day, with inmates and guards as witnesses, I shouted, 'I'm not going to die!', and bent the bar with my hands before their eyes! I crawled through the opening, and leaped to a catwalk and grabbed an officer's mace. I sprayed anyone who came near, and waited for the warden. He brought an attorney named Gaston Farley, who unsealed the classified case and found the court had not ordered me to prison but on parole for a minor charge. I received an out-of-court settlement of $25,000.



 Anything of relevance?: "Rogue Wave Theory to Save Ships"

Stef Estebiza writes: 

Better than "of relevance", it is fundamental. The wave is only the visible part of the situation: "Artificial Surfing Reefs".

Pitt T. Maner III adds: 

Have you seen this video of a rogue wave hitting a tanker? The video is not, by any stretch, a rogue wave though. Those are large enough that their weight simply breaks the ship's steel.

Here is a picture of the damage from a rogue wave to Hornet from WW 2.

Steve Ellison responds: 

Yes, in the markets too there are infrequent "rogue waves" that can be catastrophic. A recent example was the move in the Swiss franc after the Swiss central bank abandoned the peg to the euro. If one is using leverage, such a rogue wave can easily be fatal.

The study of earthquake recurrences might also be fruitful. There was recently some media attention to the possibility of a magnitude 9 earthquake in the US northwest that would have many characteristics of the Japan earthquake in 2011, including elevation changes that would put some areas below sea level and drop others to within range of a tsunami. Such an event could occur tomorrow or might not occur until a later century.

Jim Sogi writes: 

A rogue wave can be a "hole" in the ocean due to random overlapping of normal size waves. Sometimes a hole forms big enough for the ship to drop into the ocean, and get covered up. The waves are not always "high" waves.

In the market, random and other forces can cause big air drops, or a no bid situation. I think these are the ones most damaging to traders. It's not just the big climax peaks.



 In my lifetime it has been a fool's errand to bet against property in Central London.

One non predictive anecdote caught the eye this morning: In 2014, 3900 homes in central London were sold for a value exceeding £1 million ($ 1.55 million).

Apparently there are officially 54000 (fifty four thousand) Central London properties being built or redeveloped from commercial to residential use whose sticker price will be £1million or above coming to market by the end of 2017. It all likely reflects the sharp narrowing in the geography of wealth in the obvious global hotspots that is becoming more acute. (It reminds one of stock indices making new highs on the back of just a few stocks, which may or may not 'mean' anything).

For my money, it's Point Piper in Sydney. (Google some images). Funny how the market works.



 There have been hundreds of fights over time and these are the most memorable:

1. 1988 Sir James in Huntington Beach‏

In 1988 I was living in Huntington Beach, CA doing demonstrations on the beach and under the pier in preparation for my attempt to break 100 inches of concrete at the Ed Parker National Karate Championship. I was in top shape, and had a buddy, Joe, who was small and got picked on. He came up to me one day to report that some guys at a beach party had disrespected him. I hopped on the back of his moped and we rode into the party. I got off and there were no words. They knew why I had come. Two guys came flying at me and I dropped them with a left and right to the chins using their own momentum to knock them out. Two more came and I forward jabbed them in the faces knocking them out. Two more came and I spinning back kicked one in the face and in the same motion back fisted the other, and both were knocked out. They started calling me, Sir James, and one of the six reported, 'Sir James is a dangerous man. He knocked six of us out in 13 seconds.' Actually there was a seventh who came on slowly, alone. He had some boxing skills and we fist fought. He had speed, but I was a little faster, so I slowed down and took a few blows to see what he had. Every good martial artist should to take strikes to know what his opponent is made of, and out of respect. I kept him in it for a long exchange, backed him up against a wall, and said, 'You are one touch youngster' and he hit me in the face drawing blood in the corner of my mouth. I liked that, and walked away from him, but the Sir James name stuck.

2. 1984 Graniteville, SC

In 1984 some local toughs called the Moss brothers catcalled my sister in the Graniteville, SC market parking lot and wouldn't leave her alone. When I came on the scene she was in near tears with two of the brothers on the lot and the oldest in their pickup. They were rough guys, but not gangsters and probably were picking on sis to test me. Sometimes I think people started fights with me just to watch the performance at the price of getting their asses whopped. One came up to me and said, Rambo (my nickname in the south), what are you going to do if I hit you with this bat?' I said, 'Hit me and find out'. He reared the bat over his head and I threw him the pitch. It was a spinning back kick to the chest with so much force he flipped head-over-heels and landed out cold. His brother was moving forwarded but hesitated, and I whirlwind swept him with a spinning squat with one leg out taking his legs out from under him. I helped him up and asked, 'Want to go again?'. He shook his head. I walked to the oldest brother in the pickup and asked, 'Do you think that was a fair fight?' He said, 'Rambo, there is never a fair fight with you,' and rolled up the window.' My sister swooned, 'Oh, James!', and I became friends with the Moss family after that. You have to defend family but can't embarrass someone in a small town and expect to ever relax. It's better to make friends of your enemies after you beat them up.

#3 1985 CCI in South Carolina‏

Central Correctional Institute (CCI) in Columbia, South Carolina was a dangerous place in 1985, especially for me. I had a rep as the toughest guy in this oldest Confederate prison in America. The main hall was called Death Tunnel with several cell blocks on both sides. I had just come out of Metal Shop into the Tunnel and two guys came at me. One was holding a 16" pipe and a 7" knife and the other had murder in his eye. For them to have those weapons here must have been a setup by a guard who either wanted to see a good fight or to have me killed. There was a guard standing next to me as the two advanced, and I asked, 'Well, are you going to do something?' He was frozen with fear, so I eyed the PR4 strapped to his hip which is what the correctional officers call a swivel baton that martial artists call a Japanese Tonfu. I was an expert with the Tonfu. The guard saw me eyeing the baton in his holster, and said, 'Rambo, don't do it', and as he spoke I grabbed it and faced the killers. The one with the pipe and knife muttered, 'Rambo, we're going to beat your ass and kill you.' As he swung the pipe I thrust the Tonfu out from under my shoulder in a fake strike and did a spinning back kick into his solar plexus that knocked him ten feet back and he lost both saddles and dropped the knife. I knocked the knife out of the way with a foot. He got back up with the pipe, and i said, 'You'd better do it quick 'cuz the cops will be swarming in thirty seconds.' He swung and missed, and I stepped in and hit him with the baton with a series of serious strikes. There was blood all over, so I wiped off the baton, slid it back across the floor to the guard (so I wouldn't be accused of attacking him), and the cops were all over us. We were surrounded by inmates chanting 'Rambo' who explained to the cops what had happened. They dragged the attacker away with a broken jaw, orbit, fractured skull and missing some teeth, and his partner had fled. The guard got fired, and I never got bothered again at the prison.

4. 1994 Corcoran Shoe Scopaletti

Corcoran State Prison in CA was called the 'most troubled state prison in America' by the *Los Angeles Times* when I was there in 1994. It was more trouble for me as a sexual offender because the Brand Aryan Brotherhood was murdering sexual offenders right and left. You cannot house convicts and sexual offenders in the same facility and have peace. Over a period of two months, of the Brand had eased into a relationship on the SHU (Special Housing Unit) yard where we would slap each other on the shoulder and do the prison routine of walk and talk around and around the yard. One day, I sensed something in their mannerisms that was suspicious; it had been a set up. They took a killers' stance around me like a pride of lions. One named Dennis 'The Mongoose' Scopaletti clapped me around the shoulder, and I felt a sting in the front of my neck. It spun my head and I continued into a spinning back kick that caught Scopaletti in the temple that crashed into a cement pillar. Blood and gray matter oozed out, and he sunk to the ground flopping like a fish, already dead. The other three ran away into the razor wife. Alarms sounded, red lights blinked and I started to get pelted from the wall by wood bullets. A Big Bertha block got me in the leg, and I knew the next shot would be live, so I lay still on the ground while the responders surrounded me. They dragged the Mongoose off and the guards got me up and asked me if I was alright. I said, 'Yeah', but was having trouble swallowing. A welding rod I hadn't noticed stuck in my neck, so they walked me like Frankenstein to medical where they pulled it out and sewed me up. The yard camera had caught it all, and the guards said I was safe now because the Brand had sent their best man the Mongoose to kill me and he had failed.

5. James Doc Holiday

Had I known that James 'Doc Holiday' was the General of the Black Guerilla Family (BGF) and leader of the Symbionese Liberation Army (SLA) when he patted my ass and said, 'Welcome home, boy', our fight might have lasted more than one second. When he started that in the shower room I finished it with a foot in his temple and he went down out cold. Three guards rushed up, asking. 'Do you know what you just did?' 'He started it, I finished it.' I said. 'Gather your clothes, one ordered. They slapped on a K-10 Red Bracelet on my wrist that is the most sensitive custody. I was crowned 'King of the LA County Jail' by the inmates, guards and staff. It was 1978 and I was only nineteen. Doc Holiday and I made up in High Power maximum security but in every facility I entered after that someone wanted to test the 'King'.

6. 1992 Rolling Pin at Ely, Nevada

‏When the California prisons (CDCR) couldn't hold or protect me any more in 1992, they transported me to Ely, Nevada State Prison. That warden wasn't happy with the responsibility because I was a marked man as a celebrity martial artist and sexual offender. Soon after the transfer, two Aryan Warriors came at me with a typewriter rolling pin and screwdriver. As the rolling pin crashed the back of my head I spun into high caps and hit the Warrior four times with my elbow in the face. In that instant, the other stuck the screwdriver in my forehead at the hairline. I backed him up against the wall as a wave of guards rushed us. Now they made we walk the gauntlet between the guards and the jeering convicts who might have it in for me. The screwdriver was jiggling up and down as I did a sidestep on my own blood through the hallway to the clinic. They unscrewed the driver, and then put me in solitaire. I was so mad I kicked the door until the walls started cracking and the hinges bent out. The guard screamed for backup, and they had to torch the door open. The warden called California and told them, 'You come get this guy. No cell here can hold him!'

7. Sixteen Officers Down‏

In 1978 at the LA County Jail third floor chow hall a guard smacked the back of my head for no good reason. Guards do that to get themselves in hot water so the rest of the guards can jump in and beat up an inmate. The guard smacked me and said to, 'Hurry up,' and I went off verbally. In seconds, my buddy Virgil Kim and I were surrounded by five shouting guards. They didn't count on the backbone of Virgil Kim, a Korean who was an expert in open hand Karate. Back to back, we fought the charging guards until the Goon Squad arrived with their nightsticks, shields and riot gear. That made it even until one dropped his nightstick. I grabbed it and hit them so fast Virgil's eyes were spinning. Then I tossed him the nightstick and he beat the ones nearest him. We used their shields and helmets, passing the baton and hitting them with everything in the chow hall including the coffee pots. Sixteen officers were down! Sergeant Bullis and Brother Gerald, the Catholic chaplain, came in quietly and approached us with palms raised. I had great respect for both of them, and when Bullis said, 'Calm down, and this won't happen again,' I believed him. We piled all of the riot gear next to the unconscious cops, and Virgil and I got our pictures taken wearing their black helmets, and the officer who slapped me got fired.

8. Mexican Standoff‏

Unit 3100 in LA County Jail is called the 'soft block' and I was there as a first time offender of any law of the land and had not yet been declared 'dangerous'. This was my first and last fight in a soft tank because, after it, I would go on to knock down James 'Doc' Holiday and the third floor chow hall 'Sixteen Officers Down' and from then on be housed in special units because either I was dangerous or someone dangerous was after me. But in 3100 in 1978 I was minding my own business in the day room when six burley Mexican's decided to test me. They walked up and said, 'We hear you're good. Let's see how good you are!' I always give people like them a chance to walk away, an out, so I replied, ' Are you sure?' The response was two advanced from the front and two from the back, while two stood at ready. I always take care of what's behind me first, so the ones in front can watch and have a chance to leave. I saw the ones in back in my peripheral vision and used Bruce Lee sounds like, 'Ooh! and Hah! to distract them. I took them out in one motion with a kick to the chest and leg swept the other. I spun, and did the same with the ones in front. The two others had just seen poetry in motion, and didn't want to be the next stanza. I helped them up, asked them if they wanted to play it again, and they said, 'No Mas!' The test was over and we became buddies. You never hit anyone in the face who's trying to test you or establish a pecking order because it's more of a handshake than a fight.

9. Brush at Wasco

In Wasco State Prison in 2009 an inmate came at me with a toothbrush with a razor blade fixed in the handle. He was out to brush my teeth, waving it in my face to intimidate me. I asked, 'Are you sure you want this? I don't want you crying about it later.' He raised the razor, and I right forward kicked his shin. I usually defend against prison weapons with a kick because it would have to hit an artery to do any damage. Then I follow up with punches. My kick broke his tibia that stuck out through the skin like a splintered stick, and then i closed with an elbow across the face that knocked him out. They call assassins like this 'Torpedoes', but he never touched me.

10. Chinatown Street Fight‏

In San Francisco's Chinatown in 1981 I was contacted to fight the ranking world street fighter, Jimmy Tenaca, a Japanese from Seattle, in what the Japanese sometimes call *Kumite*. The modern version of this is Ultimate Fighting where *Kumite *often takes place inside a ringed area similar to that of a boxing ring. In this case, they led me at dawn into Chinatown where the shops were closed on both side of a street that was blocked off, and no cops. It was illegal, high wage street brawling. Tenaca was ranked #3 on the street fighting circuit and this was my first fight. He was cocky and muscular, known for his hand and foot speed. I was a backwoods, self-trained and also known for hand and foot speed. We were surrounded by about 130 people including many Japanese Triad in their sleeved shirts and old Chinese gentlemen smoking. Dozens of kids perched on the shop roofs as Tenaca and I did the pre-fight bow and moon-sun hand-in-fist 'handshake'. He instantly moved in with punches and kicks, while I dodged his attack to observe. I saw he was a traditional fighter trained in a dojo, so I took a free style position. I began throwing punches and kicks using mainly Wing Chun for close combat. My blows landed hard on his arms and shoulders causing him to wince. The Chinese in the crowd murmured to acknowledge their impact and the kids on the roof clapped. After three minutes of exchanges, Tenaca waded into me with hands held high, and by a fluke he raised one to throw a punch just as I released a front snap kick that went under his arms into his advancing chin. Down he went, but not out. They stopped the fight as I walked away the winner out of Chinatown with $7000, I was invited into the USA street fighting circuit but it wasn't my style. I only fight for defense or to aid a victim. It will sound strange, but my best techniques are lethal and can't be used in street fighting. I didn't want people to know what I could do, and wished to remain a free spirit.

Victor Niederhoffer writes: 

What's your opinion on how the former 'world's greatest martial artist, escape artist, and psychic fared with fists.

Jim Sogi adds: 

I've been reading a lot of Lee Child's Jack Reacher series. It's pure pulp fiction, but surprising captivating book after book after page after page. Great mystery also.

Jack fights a lot, street fighting. He uses the head butt, which people don't expect, and the forehead is strong against the nose, and eyes.

He also does a lot of low kicks the the knee, and elbows to the face, and punches to the solar plexus. Punches to the face often result in broken hands so are not effective.

His motto is get your revenge in first, and don't fight fair. Of course he's 6'5' and 250 lbs which makes the punches more effective.

A great guy, I really like him.

I question some of the reverse and spinning kicks the guy talks about in Vic's post. Such kicks in reality are much too slow, and give the opponent way to much time to kick you in the balls while your legs are up in the air. Real fighter don't use high and spinning kicks. It's movies stuff.

Anton Johnson writes: 

Hi Jim,

Thought you might enjoy this video clip, even though it may be a set-up.

Jim Sogi replies: 

In a real street fight the idea is to incapacitate the attacker instantly and permanently, then walk away quickly and not gloat over the attacker.

People think "put up the dukes" and picture Bruce Lee high kick and don't expect the low fast kick to the knee. A big low kick to the thigh can prevent the attacker from chasing when you run right after also.

If you train and can do it size wise, broken finger by hitting attacker hands with a weapon is good. Some sort of weapon is also helpful and advised. Timing is important, don't wait those first beats, strike first.

Now I'm too old for that type of thing anyway.

Trading lessons abound. Strike first, strike hard. Don't necessarily wait for regular hours. Hit and run.

Chris Tucker writes: 

An old friend, Mike, was Marine Force Recon–astonishingly huge guy–arms bigger than my thighs, was hanging with some friends from Seal Team 2 in Honolulu, stepped out of the bar with one of them and headed down the street. A huge Samoan dude hails them from an alley "Hey Bra", "yeah??", "why don't you give me your wallet now?" Mike reaches back for his wallet, winds up and slams this guy in the chin with a roundhouse. The Samoan, a head taller and even larger than Mike, touches his chin and smiles down at him. The Seal, a medic and only 170 pounds wet, gently pushes Mike aside and says "Let me handle this". He steps in front of him and darts past the Samoan, slamming a wicked kick with his heel into the side of his knee, putting him down instantly, screaming in pain. "I told you to let me handle this stuff, you big dummy".

Ralph Vince writes: 

But the problem with a kick, a rear kick or a sidekick is they need to pretty much be standing still. It's very difficult to do if someone is moving around, at least for most mere mortals or fat guys like me.

I've given a lot of consideration to the idea of "getting out of there," after a confrontation, or during it, or if there are multiple attackers. I think you have to stick around, no matter what, and I think there are a number of reasons for this. (I had an episode, a possible entanglement, just last night, that I thought might be trouble, late night in Buenos Aires, with the wife, and the thought occurred to me).

Assuming you are NOT the aggressor (and old fat guys like me never ought to be), then you have to consider several factors, all of which suggest you need to stick around the scene after a problem.

For one, you're probably captured on video somewhere, so if you leave, there's video not only of you, but that you left, which is not something innocent people should do. Secondly, there is a good chance you will be with a female, and a good chance she is in footwear not conducive to getting out of there. Third, I'm too old to run away, and not much inclined to no matter what the younger aggressors might have in mind. Of course, this is why you always need to have multiple, non-redundant weapons with you (and an extra clip of ammo. Look, if you have to shoot someone, and stick around, and you better, they likely have friends, or family nearby, and they may be armed too).

But then there are situations like last night, where you cannot be carrying weapons, and you're at a tremendous disadvantage, especially against potentially multiple aggressors.

Hydrick had some interesting stuff in that post. I think he mentioned something about not being afraid of other boxers or grapplers or martial arts kinds of guys– and you never should be, at least in my opinion. Those are different sports altogether than a real fight. They need their footwear or their clothing or whatever to be comfortable, and they are used to certain rules, etc. If you look at someone you can get a pretty good idea of how they would fight, based on their build and physiognomy. Just because someone has a lot of boxing in their background doesn't mean they have an advantage in a real fight.

For example, it's not uncommon to see a lot of boxers move into a position down and to the outside of their opponent in a sort of "crouched" position, with, if the two opponents are right handed, has the crouchee with his left hand almost against his tummy, his right hand up, not unlike the very popular-of-late "shoulder roll" position, the latter being far away, the former where the aggressor wants to get inside.

But that position (and I contend there are only 8 positions your head / body can viably be in in any fight and have a chance, and most people quickly get out of position) will get you biffed in a real fight where kicking occurs. Instead, someone who wants to get "to the outside: of his opponent (again, assuming two right-handers) is to step in with hands high, left shoulder snapped down towards the right hip, and not waste time in their (whereas the crouchee does want to waste time, he really cannot be hit with any force down there, and he can skooch out if necessary, but this all falls apart in a world where kicks are coming and the fight is usually over in a few seconds).

So there's really not a lot to fear in any opponent, as long as you've decided you're going to hurt him and stick around, and if multiple people, you aren't going to have to encounter more than two or three of them, and most of them are without a clue and not looking for a fight really (which is why they are in numbers), even if you don't have a weapon on you.

So, I've kind of come to the conclusion that it's a bad idea to leave. Best to stick around and tell the cops how you were being attacked, and that "It's probably on video," and be able to live with myself.

John Floyd writes: 

This is pretty standard kick called "kansetsu geri" or "joint kick", it takes some practice for getting the right power and timing but is very viable, and in this case if the Seal really wanted to hurt him there were at least a dozen other things he could have done, one would be a "toho" to the carotid artery or "nukite" right through his eyes, there are also many techniques that allow death to occur slowly over several days to avoid immediate implication of the attacker, but the best advice though is just avoid these situations if you can.



 Forever Stamps are used for currency in prisons and psychiatric hospitals where inmates and patients aren't allowed to have money. Not only is it a medium of exchange, it is a good store of value as stamps appreciate with the US Postal rates which historically have never declined.

The days of prisoners and patients being allowed to have two packs of cigarettes a week are long gone. In California and most other states there is a full ban on tobacco. Regardless, smokers get them and, per supply and demand, the price of tobacco in the facilities has risen astronomically, and can be even more expensive than dope.

When you think of prison economics the second thing that should come to mind after cigarettes is ‘mack' – small tins or pouches of preserved mackerel or tuna. Since 2004, mack has replaced ciggies for trading goods and services because they are small with a inestimable shelf life. Inmates and patients have built an entire economic structure around the oily fish.

Then, in 2007, Forever Stamps became the staple currency because they are smaller and last as long as cigarettes and mack, and they appreciate in value over time. They are non-denominational first class postage which means they can be used to mail first class letters no matter what the future postal rate. For example, in 2013 a Forever Stamp cost $.46 to mail a first class one-ounce letter, but today it costs $.49, which is an appreciation of about 7%.

One pack for a microwaved Mexican cuisine. Two macks for a haircut. Two books of Forever Stamps for a jug of bootleg wine. Forever Stamps are so popular that improvised black markets spontaneously emerge around them with inmates offering everything from handcrafts to clothes and televisions. There are 20 stamps per booklet which has a value of $10.00, and the booklets are generally not broken. That is, starched laundry is a book but never a book-and-half, and a bodyguard for a day may cost five books but stamps are never pulled.

Inmates and patients can procure postage stamps easily and legally by mail or in in-house exchanges for goods and services making them a de facto form of payment. In fact, postage stamps are considered legal tender in the United States. You should be able to go into Wal-Mart or any store and purchase any of these items offered in prisons and hospitals.

However, bill collection in the underworld is more grisly. If inmates don't get paid for goods, services or loans then criminal acts are going to follow. Contract hits over owing Forever Stamps occur daily.

There is an odd wrinkle called 'upping the value' of a booklet by offering a $7.00 item for two books of stamps that are worth $10.00. Yes, it cost the buyer $3.00 more but the thing was in demand with stamps in great supply. The seller may then turn around and put the stamps as money on his prison or hospital commissary account, or send the booklets home to be used as full value to send him more goods or stamps.

All of which means the prison or ward economy runs much like a commodities market: Money in a commissary account can’t be traded, but goods sold at the commissary can be. And since the amounts in circulation are tightly regulated, their value can far surpass their price in dollars. Store men — prison or psych businessmen who have amassed a fortune of stamps — often mail stamps to loved ones outside effectively converting their fortune into cash, reducing the number of stamps in play and thereby inflating the value of individual stamps.

In the corrections and hospital system, enterprising businessmen amass vast fortunes of strange juju. These eccentric fortunes cannot be deposited into traditional banks nor can their value be added on machines. Instead, they are hoarded in secret piggy banks like seat cushions and hollowed bedposts. One never knows when he will need an uncommon item not sold by the commissary such as clean urine (stored in condoms) for a drug test, and has to go to the bank to pay for it. In the joint, everything has a value and ingenuity is priceless.

And with that, we must study the improvised, underground economies of America’s vast prison and psychiatric systems. In traditional economies, money has three primary functions: as a medium of exchange, as a unit of account, and as a store of value. Forever Stamps are the underworld gold standard that citizens outside the walls might envy in some ways.



What sub-sectors are traditionally used to benefit from the elections campaigns, or will the campaign be fought on twitter and other social media?

Victor Niederhoffer writes: 

Tim Melvin is the expert on this. Any company that depends on government largesse will benefit as the idea that has world in its grip is that we are victims and the purpose of government is to take from the productive and give to the poor and foster smallness in humans, and strive for inequality so that none stand out as counterweights to the perks and emoluments and mistresses of the governs. 

Tim Melvin writes: 

Oddly enough today's column addressed this big government trade:

While macro stuff is not my strong point I feel like I can identify some segments of the world we live in that are more or less have to happen situations. Obviously small banks fit well into my long term view of the world. Smaller banks are going to have an increasingly difficult time keeping with regulatory and technology costs. The will find that it makes more sense to sell to a larger competitor rather than struggle to remain independent. This simple trend should makes us all a lot of money over the next decade.

The next powerful trend is one that I hate to see but the fact is that without a social and political revolution the Federal government will continue to play a larger role in the lives of its citizens. They are developing programs for medical care, social programs, energy policy and a host to other instructions and instructions that are going to require huge expenditures. A whole bunch of that money will find its way into the hands of consulting companies like Willdan Group (WLDN), Provident Service Group (PRSC), CACI International, FTI Consulting (FCN) and Ameresco (AMRC) that provide specialized consulting services to the various government agencies that will develop and oversee these programs.

And don't forget the print news and radio companies that will see a ton of advertising dollars from local elections–ahc, salm, SBSA–the hispanic vote will be HUGE and much $$$ will be spent there…TV station owners like GTN, MEG, SBGI–ssp owns both local tv stations and newspapers….

And many thanks. I was just sitting here wondering what in the fresh H*** to write about for tomorrow. Problem solved. I will post full column here when done if chair would like.

Ed Stewart writes: 

I think the same thing Tim talks about in banking is going to happen with brokerage firms, though a bit more stealthily. The second tier firms that are primarily marketing firms are going to give up on the technology side, much of the regulatory compliance side, etc, and become something more like introducing brokers. When this occurs most of them, or a great many of them, will consolidate under IBKR's global platform and then focus on sales and service. Apparently scottrade is the first, they have outsourced their options trading platform to IBKR - and the commission will be the exact same (supposedly) that IBKR's clients receive. They do this because ibkr will treat each brokerage relationship as 1 client, give them the volume discount, and then the other firm keeps the spread between the volume discount and what their individual clients are actually doing. Its a neat business model.

It will be invisible from a client perspective as the front-end will be customized or rebranded. One interesting small cap play on the hispanic market and possibly cycle is hemisphere TV, run by an experienced TV executive. I've looked into it just a bit, perhaps if i do more I will write a brief thing on it for the idea list.

IBKR is also starting to capture more fund business as smaller funds are kicked off the big platforms.

anonymous writes: 

I took a quick look at HMTV. It's an interesting company. But it seems to have a focus on niche markets within the hispanic community. I don't know how much appeal that may have to political campaign advisors. That's not to say it may not make for a great investment. My father invested in Perkin-Elmer in the 1960s because it launched a product that he thought would be great in the classroom. It flopped. Didn't matter, though. The company flourished because of its position as the leading supplier of electronic manufacturing equipment—a booming industry of the 1960s.



 1. It is doubtful that anyone has really profited from the brave new world of "printing paper" other than the people who "manage" the printing. That is a considerable number of people, especially if you count everyone whose work is not tested by actual demand. (Of course the civil servants are smarter and deserve better pay; they know how to avoid any questions about the market for what they do.)

2. Value is another Benthamite corruption; for those who want to find justice in discussions about money and credit, it is a very useful notion. It allows "policy" to become the question and avoids the petty information of what people are actually paying for stuff and services and promises. The awful thing about prices is that they seem to have no memory or conscience.

3. I don't fault the Greeks, Portuguese and Spanish for cheating any more than I fault people here in the United States for having taken out liar loans. The rule is always caveat emptor. If the Germans are now unhappy with what they bought with their currency union, that is something for them to discuss with their therapists at the IMF.

4. The idea that the Germans are worried in their bones about hyperinflation is a wonderful fiction. They, like the Chinese, are worried about export surpluses. As long as they are collecting more money from foreigners than they are sending them, all is good. The currency union with modern central bank attached was, they presumed, going to allow Germany to have a permanent surplus without the risks of having the national Treasury have significant debt held by foreigners.



 As some might recall, I follow coffee pretty closely. And while coffee trading may be a relatively closed shop, the price still responds to supply and demand. I recall from my econ class that even monopolies have to factor in the reduction in demand consequent to an increase in price unless the good is inelastic. That's four decades old, though, so maybe my recollection is off.

Here's the thing: oil's dropping as the supplies bulge and the dollar strengthens. Gold's weak as well. That fits a deflationary environment. Increasing interest rates fits an inflationary one. Coffee remains weak, trolling multi-year lows. What's intriguing to me about this is that evidence continues to grow that the el Nino taking place is getting stronger, and there's now discussion of whether this year's even might be stronger that the record one in 97-98. El Ninos generally mean the coffee crop is smaller than average. So while weather developments suggest a reduction in supply, pricing suggests a marked decline in demand, too. Either that or deflation with a stronger dollar.

Maybe I'm missing something here. (I probably am.) Anyone care to help me understand this better?

anonymous writes: 

Procter & Gamble, Starbucks, Sara Lee, Kraft, Tchibo and Nestlè control 60% of the market. Actually they are in overproduction, 120 million bags (sixty pounds) of coffee products, 105 consumed. The inventories accumulates from year to year.

They are trying to introduce into the market a GMO coffee variety whose seeds ripen all at the same time, greatly cutting production costs and collection costs, allowing automatation. They are destroying the lives of 125 million people, mostly small-scale farmers and their families for profit in exchange for a coffee built in the laboratory.

Andrew Goodwin writes:

Has anyone else made the same observation that nearly without fail, the same people who make the sternest warnings about climate change are the same ones who mostly firmly protest GMO food?

If the climate is changing then please explain why the crops that worked in the old climate will succeed in the new one. Sometimes it is enough to make me think these folks are going to succeed in starving us all.

In this case, respectfully, it seems that some parties would rather see higher coffee prices, which they think will help some number of people. They don't consider that the destruction of the Brazilian rainforest to make room for coffee plantations, profitable only with prices at higher levels, might have catastrophic impact on humanity in the longer term. 

Michael Ott writes: 

I've noticed that those that are vocal about climate change tend to make arguments based on the overwhelming scientific evidence. Yet when pressed with overwhelming evidence about the safety and benefits of GMOs they ignore it or claim it's a conspiracy. They make fun of those who ignore climate change science or claim it's a conspiracy. It's all hypocritical. This article was thought provoking: "Unhealthy Fixation: the war against genetically modified organisms is full of fearmongering, errors, and fraud. Labeling them will not make you safer."

Jim Sogi writes: 

The Kona Coffee specialty crop will be big this year. There are a lot of beans and just starting to ripen. We had some big rains right at the beginning of the season and there were rows of fragrant coffee flowers early on. The coffee borer was bad last year, but as with many natural cycles, it is not as bad this year. With the trees stronger from good rain, the pests can't get as big a foot hold. There is not enough Kona Coffee to make even a drop in the world wide market, but it's what I grow, harvest, process, dry, roast, grind and drink. There's not many coffee gourmets who can say that.

My son got me a nice Rancilio grinder. It's made a huge difference and now I enjoy real Italian style espresso and cappucinos. It's a game changer compared to the cheapo grinders and results in a very even fine fine grind which you can't get any other way.

Stef Estebiza writes: 

There is a ton of material about the problems with GMOs, and not only with the way in which they are then treated with pesticides. The list is long, but lobbyists' interests are mor profitable and important than your health. Here are two articles:

"Cancer Viruses Are Deliberately Inserted Into Your Food"

GMO: Study Shock, Toxic to Animals and Man

Michael Ott replies: 


Those articles are perfect examples of unfounded claims. This quote is just false: "because they are heavily contaminated with the toxic herbicide, Roundup". Literally dozens to hundreds of tests have been performed and prove the opposite.

False: "petunia plant which is a nightshade. That means folks with nightshade-induced arthritis can now get arthritis from soybean products." This has never been shown in a valid scientific study. Rather it's been repeated by pseudoscientists from a base false claim.

The second article showed results based on massive unrealistic doses and has been widely discredited. 



 Andy Lo (paper link here) studied varied technical formations and concluded that the Head & Shoulders isn't useful for the universe of stocks. His paper didn't address the gold market.

I am not a professional chartologist (but I play one on TV), and a cursory look at the gold chart from November 2014 to present sure looks like a head and shoulders. If you believe this stuff, closes below 1150 should project to $1000/oz and below. Certainly, the strengthening dollar, rising real US interest rates, and various other stuff (like the Chinese reserve report released yesterday) and oil prices are not particularly friendly for gold bugs. Also, the long term gold price is still ahead of the M1 and CPI — but it will look fairly in line at 950-1000/oz.

Specs may recall that I very publicly rode the gold bull market for several years and exited in early 2013. I still occasionally trade around it for fun, but I am structurally flat. If you held a gun to my head, I'd rather be short than long right now for a trade. For now, I'm waiting for the GDX to trade at zero before I stick my toe in the water. ;) These are big cycle, macro economic moves — and that gold didn't catch a bid during the Greek crisis or Puerto Rico panic says it all.

Perhaps more interesting than gold is platinum — which just broke $1000/oz. It's pretty rare for platinum to trade at a discount to gold. I know Vic likes to trade big round numbers.

And definitely more interesting than either are GOOGL and NFLX — neither of which I own. Ugh.

Sushil Kedia responds: 

Mumbo jumbo being acceptable on this site for one moment, the head and shoulder argument is good for prospecting how much bearish opinion might be existing here and there. The truth from the university of mumbo jumbo is that momentum as measured by rsi is making higher lows and price has been making lower lows, commercials have the largest long position ever, and if at all someone must look for mumboistic patterns there is a terminal triangle on a c wave. A rocket will fire up soon…. 



 All traders have a tendency to be happier with down 5% after their max loss was 60% than up 25% after their max profit was 50%. Most Asian markets are up substantially with Chinese 25 to 40% up, and yet everyone is talking about the depths of despair there.

Hernan Avella writes: 

It's ubiquitous. I sit here in the airport, after my flight was delayed 3 times and then cancelled at 11:30pm. They tried to settle for a flight tomorrow night. I fought my way into a 5 am flight. I have to spend the next 4 hours in the airport (perhaps finding regularities). It's a disaster outcome that feels like a victory compared with the alternative. Rumors in the airport were that the Obama trip to New York messed up with air traffic. How appropriate.

Thomas Miller writes: 

Do flexions work the same in all markets? When they want to buy at lower prices do they push fear and negativity through media outlets (increasingly social media like TWTR) so the weakest hands sell out at the bottom where they come in buying positioned for the next move up? Or am I being overly paranoid and conspiratorial?



 This page on youtube has narrators talking about the best book they ever narrated. It has some very interesting vids!

anonymous writes: 

Two high-quality long time favorite podcasts of mine are:

1. New Yorker fiction podcasts: one famous author reads another's work aloud and discusses it, eg George Saunders, Roddy Doyle, Harold Brodkey.

2. In Our Time podcast: interviews with 3 professors at once on a subject of intellectual history, eg the Cavendishes, Francis Bacon, The Enclosures. Rarely or never found either programme to be a waste of time.



 Twitter is a fantastic idea, but the point is whether they will be able to expand it to justify the current prices.

Currently much of the "social crap" is standing only thanks to divine intervention.

Who will stand at the next crisis (when the tide of liquidity retires).

The possibilities are incredible for Twitter for business.

Isis recruits about 46 thousand Twitter accounts.

A Jedi can affect weak minds: can alter their perceptions into believing that you have not heard what they heard or hear sounds that do not exist. With the media, you can induce weak minds to indulge your sentences, to answer yes to your question.

With the growth of your faculties, you will be able to convince the weak minds not to see you, and become invisible to them.

Immeasurable is the power of the dark side of the force on the weak-minded. Don't miss out on this media power.



I have briefly conversed with two of of the more experienced traders on this site in recent days.

Our chat has surrounded price spreads between exotic real assets and the current valuation thereof.

Arguably, when dealing with the relativities between somewhat exotic 'real' things like Tin versus Aluminium (and yes Americans that IS how it is spelt!) that a purely quantitative or systematic approach is not sufficient. It is this reason (in addition to the the triggers below) that explain why I would never sell Silver/buy Tin as a spread trade. Conversely I have no problem being long stocks/ short bonds or other financial assets (for example).

History is replete with examples of great traders brought low by these types of trades real asset spread trades.

Almost regardless of how compelling the spread level appears, it is usually only those who grow, mine, harvest or ship the commodities concerned that make money. Likely, this is due to a combination of a genuine understanding of the flow and low to zero leverage.

It is possible to do these trades and, more importantly, exit them with a reasonable proportion of the maximum available profit. However, as has been imparted to me, any size big enough that the players notice is bound to attract penalty rates on exit.

There are similarities to trading Emerging Market currencies in some ways. For example:

You must secure your funding.

One must understand substitutability in case your short cannot be covered.

In the off chance that you out manoeuvre the real players, be prepared to graciously hand them 10-30% of your profit to replay their magnanimity in allowing you to escape their world with a slight overplus.

Anatoly Veltman writes:

A counter-query: isn't it more desirable for "wrong crowd" markets to carry you to profit, making exit easy? Why take on Commercials?

You rightfully point out that Entry at times may appear a no-brainer, but in a narrow specialized market you're likely one of the last to notice



 Questions for speculators to ask themselves:

1. Considering secondary and tertiary effects, what would one have done differently on Friday with foreknowledge of the one minute Armageddon this morning in Gold?

2. What predictive sequencing of runs, cross market relationships and other contemporaneous information of a quantifiable and repeatable nature (if any) existed before the close on Friday that would has encouraged a short position?

3. Is it predictive of anything that the EUR, the JPY, the S&P 500, Oil & the bonds couldn't give a flying '##+#' that Gold experienced a moment of disquietude? i.e they barely budged.

4. Has the true enemy shown his face? Are previous time and magnitude studies of substantial moves 'out of time zone' as it were, predictive of anything more than similar studies during New York hours ? Is it sustainable that the pressure valve just blown will not effect other markets further down the pipeline.

5. A perspicacious study of documents/ agreements with one's Prime Broker may reveal that in liquidating a client's trades due to insufficient margin they may be allowed to act defensively, with 'predictive discretion' and, intriguingly, there may not be any language confirming whether or not the broker or a related entity, in the case of forced liquidation, is or is not allowed to act as a principal.

anonymous writes: 

I am not taking a victory lap since I am flat gold (but it always amazes me when this chart stuff works, which partly answers the bloomberg news rhetorical headline).

"Gold Rout Spurs Search for Answers as Prices Sink to 5-Year Low":

The rout in gold isn't showing any signs of slowing down. In about 15 minutes during Asian trading hours on Monday, prices fell the most in two years, sliding below key levels watched by investors who use chart patterns to trade. While gold later recovered some of the losses, it's still at a five-year low and headed for a sixth day of declines. Gold for immediate delivery retreated 2 percent to $1,112.04 a ounce at 11:23 a.m. in London.



 I'm wondering if others have this experience. Sometimes when I try to reach for something new or novel, I never seem to find it. Other times I look to what I already know. The weird thing is I learn more that is new and novel when I look at something I thought I already knew. The most simple thing that I thought I knew 15 years ago–it turns out I had only the most superficial understanding of it. With luck, in 15 years I will feel the same way about what I know now. Some things are so deep, perhaps it is only just before you die you finally understand half of it, but at each moment you felt you knew everything about it.

Stef Estebiza writes: 

The more you accumulate, and from different angles, points of view, the more your Dbase accumulates nuances, alternatives on which to reason. Reread old books. Concepts overflown and unassimilated, suddenly seem logically obvious. Like trading, the more you experience, the more you realize that they are many faces of the same coin. The problem is that the brain eventually degenerates, loses enamel, and has a hard time tracking down the cluster stored. The hard drive is likely to lose sectors. For this reason you take photographs, directors make movies to store the emotions, a programmer writes a code idea to simplify and recover in a moment the hard work of years of accumulated experience. There is nothing more powerful than the human brain…

anonymous adds: 

Practical trading experience and genuinely new research into live trading applications is asymptotic, i.e there are permutations and combinations of market outcomes that have never happened before. So, in that sense, one never reaches perfect knowledge.

The reaching for something 'new or novel' often comes after observing something new work perfectly and then trying to test it and seeing that it is, like most things, ephemeral.

Intriguingly however, there are things about markets that one can know everything about. I do not believe that 99% of market participants know everything that is publicly available about the quantitative (measurable) securities that they trade, invest or hedge exposures in. Things like: How the Bund and DAX futures open and what goes on in the 60 seconds between the two events.

One can know everything that has happened to a market individually and relatively in the past. The Chair and Ms. Kenner have suggested a periodic table of markets with a bunch of relevant statistics. One suspects this would help prevent much stupidity.

The heterogeneous nature of the FX markets, the uselessness of Value at Risk, the times of day when market making machines are maintained and serviced, the importance of New Zealand and Australia to FX are all knowable.

So, yes, I understand your sentiment.

Also, 'simple' is relative. My first 'upstairs' trade in 1992 was the purchase of an SPI futures contract because it went through a line someone had drawn on a chart. Could there be anything simpler?

Well, on Thursday I sold EURUSD based on an approach I have used more than a score of hundreds of times that looks like rocket science compared to the 1992 stupidity.

As you say, perhaps we will feel the same in another 20 about what we do now.



 I saw Penn and Teller's show with Aubrey. They state there are 7 principles of magic. Palm, ditch, steal, load, simulation, misdirection, switch.

How are these principles of magic carried out in markets. It's a nice classification of deception I think, but I don't know enough about magic to dare to expatiate.

Larry Williams writes: 

I would add—big move covers little move and confederate.

Tom Printon writes: 

I just finished the book Sleights of Mind by Stephen L. Macknik and Susana Martinez-Conde.

Two neuro scientists get an insiders view of how magicians operate. Many interesting insights on biases and deception. Could help a trader navigate a flexionic world where up is really down and down is really up.

There are some good passages from Teller, and it's worth a read in my opinion.

"Magic tricks work because humans have a hardwired process of attention and awareness that is hackable."



Largely as a result of technological advances so magnanimously disseminated throughout all the markets by latency, distance and microwave dependant strategies (pernicious and otherwise) it is only very rarely that we get to see what a given market is really trying to tell us. I think this is particularly true in physical equities.

Arguably, players in the markets of 'weight'–as it were–now consider leaving substantial orders, limit or otherwise, in the market to be anathema to a successful implementation of their trading or investment process. So, when something 'statistically shocking' occurs many orders rush into the breach to try and move volume.  For the purposes of what follows, one would exclude actually announced takeovers as another order of activities ensues in those cases.

The most recent example of this would be the rumour induced move up in that flea ridden end of civilised discourse inducing stock that everyone appears to love–TWTR.

One might find it enlightening, and possibly nourishing, to study all the publicly available information surrounding these occurrences.

Perhaps a list might include:

1. 'x' period returns pre- and post the 'event' to see if they are of a magnitude that is reasonably divergent from randomness

2. Have these events in previous instances occurred during the death spiral of a stock ( all lurking haters and TWTR apologists please send your hate mail elsewhere ) or are they part of a volatility enhanced 'basing' process.

3. time to new high/low created by the 'event' In other words, does the event accelerate the invisible hand's activities.

4. Is it just 'one of those things' that happen and irrelevant to the future path taken by the market in question.

My null, if you like, would be that the reaction of the market to such ephemera says quite a lot about where the big boys are directing their flow.



There are two unpleasant experiences that every trader will face in his lifetime at least once and most likely multiple times. First, there will come a day after a devastatingly brutal and agonizing stretch of losing trades that you'll wonder if you will ever make a winning trade again. And second, there will come a point when you begin to ask yourself why it is you make money and if this is truly sustainable. That first experience tests an individual's grit; does he have the stamina, courage, guts, and smarts to get up and engage the battle again? That second moment of enlightenment is the one that is actually scarier because it acknowledges a certain lack of control over anything. I think I was almost 38 years old when one day, in a moment of frightening enlightenment, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years. This threw my confidence for a jolt. It sent me down a path of self-discovery that today is still a work in progress.

-Paul Tudor Jones



 With the leverage of technology and the network effect, when one hits on an idea that is perfect for its time, it just seems to take off and almost run itself. This fellow just sold the Plenty of Fish biz for 575M.

Very different from a business I have followed but never invested in, Spark networks, (LOV).  Spark trashed their business by diverting funds from their astoundingly profitable JDate into immensely wasteful add spending for mostly failed Christian Mingle, all while neglecting their underlying user experience and product.  

In the second case, they attempted to "force feed" a success vs. the first case, which seemed to feed and grow by itself.

 Is there an analogy in trading strategies, I wonder?



A booming capitalism is occurring in the largest psychiatric hospital in California brought about by short wages to the 1200 residents. I'll call the mental hospital Capitola where entrepreneurs are improving themselves by opening little stands and pushing carts past the assessment offices, nurses stations, seclusion rooms, and along the mall, gym, and gardens. The regular wage for residents is $1 an hour and they're allowed to work only two hours per day. However, it's legal to sell items to residents and staff including the psych technicians and security.

Business is vigorous now in July because residents are receiving their income tax refunds to finance new small businesses. The cycle repeats annually: They get a grand or so from their income tax, from an investor, a loan, or by saving over time. Investors make about 50% semi-annually on their seed capital for one year. The vendors order items online and shipped directly to the hospital, or have them smuggled in bananas or the rectums of psych techs.

The hottest selling items from the carts, cardboard box shops or sidewalk blankets along the mall are computer and TV cables, video games, jewelry, food and tobacco, coffee, bras for cross-dressers, and tennis shoes. Electronics such as radios, DVDs and televisions go at double or more the retail price. A cheap watch that sells for $10 outside goes for $50 inside. The vendors always undercut the hospital grill and store to attract bargain crazy residents, and guarantee their products. Maxwell House coffee that sells for $8 a jar outside goes for $10 from a vendor and $15 at the hospital store. A handful of residents are called 'warehouses' who buy in bulk from online, and then distribute them to resident 'distributors' who either buy and sell inside the hospital at a markup of 50%, or take a 20% commission.

The carts are made from wheelchairs which the vendors rent by the day from residents who have them, and other sellers use cloth shopping bags or spread their blankets along the halls and mall.

Money inside the mental hospital is illegal to touch, and almost all sales are via booklets of Forever U.S. postage stamps.

No one seems to mind, and the staff in their clean white coats believe the responsibility of capitalism keeps the residents busy and stimulates their minds.



 In the spirit of broadening horizons within the aegis of a selfish profit motive, this site discusses concepts that are extraneous to the financial markets that just may have some applicability to one's daily speculations.

Of the many posts on this site that I have observed and participated in, topics can be classified broadly into two genera:

1. Motivational, general, commonsensical et. al.
2. Potentially quantifiable and directly applicable.

I will focus on type 2.

For one's own part, the allometry of trees, seismic activity and gravitational effects of heavenly bodies are my three favorites (nemeses!).

All involve non linear relations between at least two quantities that take account of magnitude, time and force or gravity.

The real problem with using the mathematics from many of these areas is that the relationships in the real world (ex markets) are often much more stable and less prone to 1 in a trillion shots like 1/15/15.

Also, the problem of units. Gravity is one in particular where units (m/s ^2) is hard to transfer.

A discussion on conversion of units, stability of distributions and alteration of some of the more formulaic aspects is apropos.

For one's own part, the most intellectually compelling extra-market relationships involve gravity and allometry but the dual directional nature of the two forces involved in seismic activity seem most applicable.

In all honesty though, making the jump from a compelling description of events to satisfactory prediction thereof remains elusive from these three areas of toil.



 "Ron Clarke, athlete - obituary"

"Although he never won one himself, one of his most treasured possessions was an Olympic gold medal given to him in 1968 by the Czech athlete Emil Zatopek, a four-time gold medal winner, with the words: "Look after this. You deserve it." The medal was for the 1952 10,000 metres."

"Zátopek's running style was distinctive and very much at odds with what was considered to be an efficient style at the time. His head would often roll, face contorted with effort, while his torso swung from side to side. He often wheezed and panted audibly while running, which earned him the nicknames of "Emil the Terrible" or the "Czech Locomotive". When asked about his tortured facial expressions, Zátopek is said to have replied that "It isn't gymnastics or figure skating, you know." In addition he would train in any weather, including snow, and would often do so while wearing heavy work boots as opposed to special running shoes. He was always willing to give advice to other runners. One example he often gave was always to be relaxed and to help ensure that while running, gently touch the tip of your thumb with the tip of your index or middle finger. Just making that slight contact would ensure that arms and shoulders remained relaxed."

John Floyd writes: 

There are quite a few parallels to life, trading, and chivalry here… your own man, value of hard work, stretching for the limits, tenacity, gifts to those believed deserving with mutual benefit, shared comradery in an individual sport, timing of being in the right place at right time…



 I was born with a thirst for knowledge. The earliest harvest was a series of projects. The order was: geology, dinosaurs, astronomy and rockets, birds, rocks, leaves, animal behavior, microscopes, gardening, chess and psychology. I allowed either one or two months, depending on the breadth and availability of literature on the topic. At the end of each I made a list of the half-dozen pertinent points for refreshing later. A stunning discovery at ten was that information on topics began to overlap and to pool into other subjects.

At twelve I began a series of sports (sprints, high jump, homeruns…), famous quotations and board games. I theorized that all the topics would eventually merge to form a bank which has proven true. There was a pause, of course, for university where the study was veterinary medicine. On graduation the small projects continued with stocks and commodities, journalism, body language (studying every night at bars for ten years without drinking), physics, survival, geography in each of 105 countries visited, cons, martial arts and negotiation.

The best advice I can give is that knowledge is power and to keep on reading.



 As part of an amusing, frustrating, wretched but ultimately uplifting and loss minimising part of my daily routine, I categorize mistakes made, differences observed and yes, things that were done successfully in a timely manner.

The hope is that there are some pedagogical benefits to be had from said classifications. What follows is a hard list (no wisdom or homey style nuggets).

It is regrettable that I do not have much perspective on broader aspects of life outside markets that might allow something approaching the towering lists of a Tom Wiswell. But it is what it is and anyway, I have Messrs. Jovanovich, Watson, Niederhoffer & The Poltergeist that provide one with regular cerebral sustenance.

I entitled this post the things 'we' do wrong. The list is mainly me, but I have had the privilege of observing the best and brightest so there are are few others added. All of their problems are subsidiary to mine:

1. Not enough focus on the stock market. I have missed substantial turns in stocks bearish and bullish because one imagined a speculation in Gold, for example, to have been more important.

2. Ignorance of a certain portion of the trading day (heaven forbid I might rest a while). In my defense, this has been fully rectified.

3. Not focusing enough on trade size. I keep an approximately equal size per speculation as I take some 2500-3000 odd trades a year. My view has been if one trade stands that far ahead of the others in terms of expected return, then why would you bother with the 'sub optimal' trades? Thus the constant position size.

4. Ignoring holding period (I am fortunate to say that this is not a point of worry personally).

5. Never adding to positions.

6. A dislike of hard core programming. I much prefer a simple interface through which questions can be asked. It is notable that the only products in this category that are any good are not available for purchase. It is only in recent times that programming/ hacking skill was valued above picking direction accurately. A reckoning approaches on this but I will not discuss it here.

7. I trade too many markets. My universe has 23 macro instruments in it. 3-5 would suffice.

8. I have never found anything REPEATABLE with a holding period more than a couple of days that satisfies me or any of my backers (who would never allow a 10% + drawdown).

9. This one is a bit controversial. I always assume the other market participants are 'better' than me. That their strategies are better in some way. This has stopped me going for the kill in a few very notable instances.

10. I don't have risk on in the moments before scheduled economic announcements or planned flexionic commentary. This has cost me but has allowed a very very low volatility relative to return down the years.

Ed Stewart writes:

Good list. Particularly the conjunction of size, time horizon, and to add a few of my own - reaction to a destabilizing price shock, endowment effect, prospect-type behavior, distractions such as an in-law asking to participate with you for the day, rationalizing excess conservatism when aggression is warranted which leads to the avoidance of big scores, among other things.

Vince Fulco writes: 

Chutzpah built up over an outsized good run (frequency of wins or profit generation) leads to stepping on a landmine you could have avoided if leverage was kept in check.

anonymous writes:

I've accepted the fact that I will feel like an idiot on a day to day basis. The upside of this is that when I calculate a 6 year compound return as I just did last week, I'm stunned as to how it occurred. How can one climb a mountain (in my case a not so big one) while always feeling one is falling and failing.

Victor Niederhoffer writes:

It is always good for a speculator to be humble. Also I think to follow Irving Redel's rule whenever people ask him how he's doing in market: "Fair". 



 An interesting hobo-esque story of hiding out in the woods since 1986. No contact with humans

"The Last True Hermit"

"I drove until I was nearly out of gas. I took a small road. Then a small road off that small road. Then a trail off that." He parked the car. He placed the keys in the center console. "I had a backpack and minimal stuff. I had no plans. I had no map. I didn't know where I was going. I just walked away."

Victor Niederhoffer comments: 

A hoboesque hermit.

Bo Keely writes: 

The quote describes one of two reoccurring situations around the world. The first is when someone decides to shuck society and take a turn into the wilds. It's a cold turkey withdrawal not unlike leaving drugs: You drive to smaller and smaller roads, then walk on less and less distinct trails. In this way, there is no turning back. The other situation it describes is hoboesque in leaving all familiar behind to start on a new track. It usually takes the form of sneaking out the bathroom window and trading the wife in for a freight train to adventure. In the Amazon, the version is taking a large steamboat on a big river to a smaller one on a thinner brook to a canoe alone into a green tunnel of quest. The point is not to be afraid to try anything new.



When he was partners with the Palindrome at Quantum, Mr. Rodgers liked to speak of buying not just when it was cheap, not just when there was a Rothchildian blood on the streets moment but also when the flexionic types were closing the markets down.

With 70% of the free float either suspended or down the limit in China, I feel we are in a massive period of opportunity.

I do not wish to debate The Motorcycle Man's other interests and calls over the years, rather just mention the above.

Unleveraged purchases of Chinese stocks with a portion of the overplus from other speculative activities with a reasonable holding period begins to look favorable as the zero bound approaches.

A good day for reversing today in many markets, at last…



 Saudi Stock Exchange (Tadawul) Opens Up To Foreign Investment:

With the opening up of the Saudi Stock Exchange (Tadawul) last month, H+K Financial's Bobby Morse writes in Banker Middle East about the new communication priorities this brings for companies in the Kingdom.

Worth more than all regional Gulf markets combined, Saudi Arabia's Tadawul is arguably the jewel in the GCC's capital markets' crown. It is home to some of the region's most prized investment targets, including blue-chips in key sectors such as petrochemicals and banking.

Up until now these investment opportunities have been largely out of the reach of the vast majority of non-Saudi investors, except through complicated swap arrangements. However, from June 15 this is set to change as the exchange opens to foreign investors.

With the world's most powerful fund managers now eyeing the Kingdom's brand new and extremely attractive opportunities, we can expect to see Saudi Arabia's companies concentrate on their internal structure and external profiling.

anonymous writes: 

It's not really open in the sense that most US equity investors would expect. Foreigners still need to be approved as a Qualified Foreign Investor in order to buy Saudi shares. JP Morgan put out a SA investment primer last month in which they termed the qualification process as "somewhat cumbersome." I got the sense that the Kingdom wants only the most passive of foreign share owners, with significant limits on foreign holdings in each particular company, and there is inability to effect takeovers or present as an activist.

It also isn't clear what the solution is to a structural budget deficit problem might be (other than the possibility of higher energy prices). Their economy seems to be the antithesis of what libertarian minded folks (such as on this site) would want to see in a marketplace. You can get exposure to a somewhat corrupt and deficit-burdened energy sensitive economy by allocating assets to Russian equities, at far lower valuations than are offered in SA.



I'm not sure how to frame this out yet (perhaps others have ideas) but I am thinking of an accumulation indicator. The basic idea is this. Have you ever seen a market that went from "volatile" to almost a controlled, with a steady rise up. The qualitative thing you see is every single morning dip reverses very quickly. The second thing is that over a period of time there are no sustained pullbacks of any magnitude, an invisible hand guiding the market up. You can imagine how that kind of market feels for a short–every single short covering opportunity is thwarted prematurely.

Regardless, out of these conditions the qualitative hypothesis is that the price needs to accelerate before it can reverse or have a substantial correction. The question is, if defined quantitatively, might such an accumulation pattern show above average expected value. It is perhaps the flip side of the normal swing-type idea of buying a dip. Also, it might be helpful to only look at markets that have a positive drift.

John Bollinger comments: 

Fred Wynia's volume work addresses this concept quite well. The work
is proprietary and quite elegant/sophisticated, but the underlying
concept, that of measuring and comparing volume in swings, has been
around for a long, long time. As usual, the devil is in getting the
details right.

Gary Phillips writes: 

Ed, good luck trying to develop an indicator that is both robust and deterministic. Just a note however, if one only looks at markets that have a positive drift, back-testing results could be affected by said structural bias and rendered useless because they would only reflect the longer-term tendency of the market to go up.

Ed Stewart replies: 

Thanks. The idea as it stands is to complex to begin evaluating. I don't think I have captured the essential nature of the idea yet. I'm going to look if any specific elements of the idea on a stand alone basis. In terms of drift impacting results, that is very true. Drift needs to be incorporated in or it is pure futility. Many years ago when I was a random reader of the site I emailed in and Victor sent me a paper explaining a method that I still utilize, if I recall correctly. That ended up helping me tremendously. 

When I wrote the accumulation post, it was in large part based on watching the climb in IBKR over the prior few months and also similar observations on a short-time horizon. What do you know, IBKR has accelerated quite nicely. Up 5% today and almost 10% in prior 3 days. You can see the qualitative example if you look at a 3 month chart. No luck though, understanding the phenomenon on a systematic basis on the intermediate term. I've had luck with the idea on a shorter time horizon though. 

Gary Phillips adds: 

Most trend following systems have average win rates because of high draw-downs during whipsaw periods. The fundamental problem of most trend-following systems is that in order to deliver a high payoff ratio they must sacrifice a high win rate. If you try to increase the fraction of winning trades, the payoff ratio will suffer. So in effect, you would like to mitigate the negative effects of these problems by by combining a trend following strategy with a short-term trading system that would compensate for the negative trend following performance when markets are range-bound or mean-reverting. I am sure there are those that would argue that volume and volatility are both robust and deterministic indicators, but neither rising volume, nor falling vol, are necessary, nor sufficient, for the market to always trend higher, and even if they are randomly presented they do not necessarily establish timing. 



Econ 101: price discovery has a cost.

Buy Low, Sell Prime

Sam Cohen's business works like this: He walks into a big retail store and buys a bunch of stuff. Then he sells it on Amazon for more.

This is a multimillion-dollar business for Sam — and for lots of other people who do the same thing.

How is this even a job, much less an industry?

anonymous writes: 

Pricegrabber and other broad product aggregators make price comparisons a near effortless task.

keep looking »


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