May

14

I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.

Apr

22

I have noticed that some of the strongest, most successful, and most original personalities make relatively little effort to incorporate others' point of view into their persuasion techniques. Do you think Steve Jobs really tried to understand how others saw the situation when he was screaming at them to get things right? I've dealt with multiple "screamers" and I hated their guts, but they had achieved more than me.

You certainly have to make yourself understood. If whoever you are talking to has no idea what you really want there is no point talking. Without doubt great leaders and great achievers of all stripes have to have enough situational awareness to understand whether they are getting their point of view across. But more often than not they simply get rid of people who can't understand them.

Think of some great leaders you know. Some of them have claimed to feel everybody's pain, but did they really? Was there enough detail in their description to indicate that they really knew the nuances of the pain that the multitudes of people they were addressing felt? Think of some of them with quirky personalities. Do their communications on complicated subjects often even make sense? They make sense to them, but sometimes their thinking is so far away from the pack that going down to the level of everyone they are talking to simply is not something they are willing or often capable of accomplishing. Think of some other great leaders who get others to follow them simply by displaying their leadership qualities on the most basic level but not the real goal of where they are going.

So in summary, yes there is some obvious truth to using situational awareness to convince people. But trying to get down to the level of every single person one has to deal with isn't something everyone who is successful does, nor is it strictly necessary to achieve many goals of persuasion.

Apr

17

There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.

Apr

17

Okay, the 142 bank pres and public relations people have the minutes already to be released to public in 10 minutes. Bonds are up and stocks are down. Germany is getting killed. Which way will the release to the non-flexions affect bonds stocks and gold. I've been buying gold whenever it drops as I believe that the bank deposit confiscation has to be bullish for gold as are the trend followers short.

Anatoly Veltman writes: 

Rocky is patient at $1390, getting ready to pull trigger on test of $1320.

Victor Niederhoffer writes: 

Rocky a lot more astute than me perhaps because he has a bit of the idea that has the world in its grip in him from his days at the 'Bank' and his love of trend following. One passed their headquarters near the scene of the crime yesterday evening and it was replete with canine k9 4 footed operatives.

anonymous writes: 

One can imagine the scene:

Fed: Honey, I would love to be with you but we have to lay low a few days after the press got pictures of us together.

Banker responds: If that is the case, you and the D. C. boys have fun by yourselves. Give me the checkbook and I will go home to L.A. to shop. Call me when you decide you need the markets to go up again.

Rocky Humbert writes: 

For the record: I am flat gold. If Cyprus (or any other country) could cure their ills simply by selling gold, there would be no ills. My recollection is that the Korean housewives were selling their gold wedding bands to support the Won … during the 1997 financial crisis over there. Korean bonds were yielding 15% at the time. And I bought a few as an investment. That worked out ok. I am not buying the bonds of Cyprus, Greece or those other places. The wealth of a nation is in its land, its laws, and its work ethic. Everything else is a speculation.

Gary Rogan writes: 

"The wealth of a nation is in its land, its laws, and its work ethic."

Brilliant! I would add "respect for its just laws" to the list. May those who want to reward millions of those who broke the laws of this country by giving them the very object of their law-breaking and by making them a part of this nation give this some thought.

George Parkanyi writes: 

This is not scientific, but my feeling on gold is that given government interventions (manipulation is such a strong word) in markets these days, they can't exactly let that turn into a complete rout either. Fear is fear. Gold was supposed to be the haven of last resort. If people see that collapsing then there is the sense that there's nowhere to hide. The panic could transfer to other markets. It's not behaving as it "should" under the circumstances, which further calls into question in people's minds what the hell IS going on? And what is this action discounting - massive deflation? Governments sure want that idea to spread. This is one of the reasons I'm still holding fast to the core position - though I've taken stop-outs on portions. Not large enough portions to avoid a big hit. But it is what it is. The gold stocks are really getting creamed as well. Solid producers trading like penny stocks. Unless deflation IS ultimately our lot, I'm smelling blood in the streets (some of which is mine) and screaming bargains.

I think the odds are good for a sharp reversal rally. If things go really bad in other markets, that's where they'll be looking to cash out rather really pounded down precious metals. And gold is an international commodity - still highly valued in many cultures. This crowded-trade unwinding behaviour I think could reverse very quickly, very soon.

A commenter adds: 

Was the fall in Gold the result of some bigger thing that I am unaware of, and did someone smell a canary that has been dead for a few months and was the first to find out triggering the selling?

David Lilienfeld writes: 

Let's take a look at what's known:

1. Europe was weak going into 2013, but the dimensions of that weakness are becoming evident. The collapse of auto sales in the EU, the episode with the Cypriot banks (which I still don't understand why the Cypriot government didn't say, "Fine, Germany, we're leaving the euro, we have all these euros in our banks, our new exchange rate is X, and now you have a big mess on your hands, much as we do on ours; don't like that? Fund us!), the coming episode with Slovenia, followed by Spain, Italy (if it can figure out who is the government) and France. Then there's the farce previously known as DC. There's the leader of North Korea trying to demonstrate that there is testosterone flowing throughout his veins. The dimensions of many of these has become evident recently. The degree to which China is slowing down and the degree to which the US housing "recovery" might slow down have also started to clarify recently. I won't get into the potential for a repeat of a SARS-like outbreak in East Asia.

I don't think the canary's been dead for a few months as much as it had a massive stroke, followed by resuscitation from cardiac arrest a few times (OK, OK, it was many times), and it's now brain dead and being maintained by artificial life support, ie, it's dead but it doesn't know it. Or the canary's been dead for much longer than a few months.

There's a lot of bad stuff that's gone on the last few months, and the extent to which the market in the US is near its all-time highs is a wonderful gauge of nothing so much as the power of denial. How there could be as much complacency as there's been (a topic of recent interest on this list) is something I don't understand.

Craig Mee writes:

If you haven't noticed, the first stop for gold was the width of the consolidation. I bring you information on laying of track to take into account expansion and contraction. We must work out what size volatility or influences allows for temperature rises and falls.

EXPANSION AND CONTRACTION.


1611. In laying track, provision must be made for expansion and contraction of the rails, due to changes of temperature. As the temperature rises the rail lengthens, and unless sufficient space is left between the ends of the rails to allow for the expansion, the ends of the rails abut one against another with such force as to cause the rails to kink or buckle, marring the appearance of the track and rendering it unsafe for trains, especially those running at high speeds. If, on the other hand, too much space is left between the rails, the contraction or shortening of the rails due to severe cold may do equally great harm by shearing off the bolts from the splice bars, leaving the joints loose and unprotected. The coefficient of expansion, i.e., the amount of the change in the length of an iron bar due to an increase or decrease of 1 degree F. is taken at .00000686 per degree per unit of length. 

Apr

17

Many of the markets that one trades have an unerring capacity to avoid giving one a profit. If you hold a position over night, they move so much that you can't hold them without staying up the whole night, for two days in a row, which for most people is impossible.

Other markets only let you get out of a position when it's going to go in your original direction by a fast 1 or 2% like the S&P over night today. If they won't let you out then they are ready to go down 150 bucks like gold yesterday.

When you try to trade them in normal hours they go back and forth so that your vig on a small sized position taking account of the back and forth is inordinately large to be unprofitable.

When I trade gold, I find that it likes to move a fast 10 bucks in 2 minutes every now and then so you can't leave limit orders profitably to catch the reversal. If your position is too large, it will move so far against you that you will be margined out, especially over night when you don't have data to provide a buffer as to which way it's going. If you happen to have a position in the right direction and it moves a fast 10 bucks in your favor, why then it's impossible to get out. Within 1 1/2 bucks because only 1 or two contracts is bid or offered within 30 cents, and by giving up that much of an edge to trade a reasonable number of contracts, you lose your expectancy. If you trade with a small size, then the hourly wage from doing all the work is less than a construction worker.

Worst of all are the markets where just a few hardened members on the rules committee make the markets. Many of the options markets are like this. They will maneuver the prices and the rules against you so that it's impossible to make a profit at the settlement or hold the position through it because of marks and margins against you.

If you trade for small gains and losses, that's worst of all because the high frequency people are ahead of you on each tick, so by the time you pay the bid asked and take account of the fact that you never get your limits until it's way against you like in the old pit days, you're giving up infinitely more vig than at Vegas.

The book on baseball betting says that you only pay 2 1/2 % vig on baseball betting, much less than any other market or our market. However, you have to live in Vegas to speculate there, and they treat you like a persona non-grata there and the chances for being comped or otherwise ennobled are close to zero.

Gary Rogan writes:

This just tells me one more time that being a long-term investor, specifically in stocks is the thing to do for all but the very best. Yesterday was a bad today, today is a pretty good day, but do I care? Not really, other than it's more pleasant to see a lot of green than a lot of read. I do care that there is nothing good to buy, but can I do anything about it? No. Like in fishing, I just hope that sooner or later the situation changes, in the mean time watching the drift with noise superimposed on it is like watching paint dry, but a special kind of paint that doesn't dry in a monotonic fashion. So the "mistress" to me is nothing but paint that dries in an unusual fashion.

Apr

4

We have had numerous discussions on this venue regarding stop losses. Part of the surprise from those discussions is that using a stop loss will double your odds of having a loss in the amount of the stop loss.

However the same is true for a profit target. Using a profit target will double your probability of having a gain equal to the target gain. The reason for both phenomena is that in a random walk half of all such trades will get reversed after hitting the target or the stop. The fancy name for this is the Reflection Principle.

Larry Williams writes: 

In a random walk, half of all stops/targets get hit, so if that is not true in several trading systems, does it suggest the market is not random?

Anatoly Veltman writes: 

Electronic markets are far from random. Your broker's HFT frontruns your orders, and non-broker largest HFTs parallel run your orders. Thus your limit (profit-taking?) order is played against by unabling, and your stop-loss order is played against by triggering. Random? Not to your account.

Ralph Vince asks: 

But can non-random ticks, sampled on a bigger time frame, degenerate into randomness?

Anatoly Veltman replies: 

In the sense that all those orders, magnified by HFT mechanism, will carry markets somewhere - sure. The other question is: OK, so 70% of executed trades resulted in robbing the outsider spec - but the HFTs and the brokers have not fully benefited by your loss, because of their high overhead (the arms race, et al). So ok, the wall street salaries, the IT salaries get financed out of your pocket. Then the only way to keep you in the game is to inflate your remaining funds…So the mechanism will continue on…but to what end, if the economy is not picking up? So the result may well be non-random: all prices will go up.

Gary Rogan writes: 

Clearly the natural drift and/or inflation-driven accelerated drift will result in an upward bias that will make a random walk impossible. In addition, if there is an HFT-induced tendency to hit stops and not hit limit orders (by the way are there any objective statistics that prove that?) the question becomes: would an independent observer looking at the data tick by tick, but who is not himself placing limit/stop orders be able to tell that the statistical nature of the tick distribution has changed?

Jeff Rollert says: 

No, HFT is attacking your behavioral biases. Not the academic ones ones. Your bids show your hands.

These are modeled after high yield bond trading patterns.

How would you trade if the book was open and public? That is the point. Trading systems are rational, and your systems are easy prey…seriously, inject the random. To borrow a sports analogy, you can't bore a machine into an error.

Mar

14

I believe the Prime Minister backed off his statement about restarting Japan's nuclear plants. In all likelihood, some of their nuclear units may return to service, but now seems too soon.

Japan's commercial nuclear power plants can produce bulk power for approximately $12 per megawatt-hour. Importing Liquefied Natural Gas (LNG) to fuel gas turbines produces power at approximately $144 per megawatt-hour (assuming ~ $18/MMBtu for delivered natural gas and an average heat rate of ~ 8,000 Btu/kWh).

With 48,000 megawatts of undamaged nuclear capacity in Japan's fleet, the difference between $12 and $144 is significant. Assuming a 85 percent capacity factor, the simple difference adds up to approximately $50 billion per year.

In fact, the cost difference is greater than $50 billion. First, utilities must continue paying operations, maintenance, capital and fuel management costs even if their nuclear plants are idled. Idled plants produce no revenue to offset costs.

Second, the power market is punishing. The $144 would be a base bid in any power auction. Market-clearing prices would start at $144 and shoot up to higher heat rates, depending on hourly demand. (Higher heat rates suggests higher production costs)

The economic pain associated with high energy costs should cause Japan's policymakers to think hard about practical options. In all likelihood, Japan will restart some of their newer units, but not right away. Any restart will likely be slow, deliberate and sequential.

In the meantime, Japan will invest heavily in renewable energy. Production costs for wind, solar and demand-response are near $0 per megawatt-hour. More importantly, power from renewable power displaces the market's costliest fossil-fueled plants watt for watt.

The world seems to be betting Japan will continue to shun nuclear power production. Australia, Qatar, Indonesia and the US are eyening Japan as their prime customer for new LNG production. It appears their collective bet may not fully consider Japan's options of renewable energy and nuclear restarts. But that is another topic for another thread.

As an aside, Japan's power grid has an unusual design. Half of the nation is 60 Hz (because it was designed by Americans). The other half is 50 Hz (because it was developed by Europeans). Japan cannot easily move bulk power between 50 Hz and 60 Hz systems. The fact the grid is not homogeneous means the energy flowing within the grid is not fungible. It also means Japan's power markets are not efficient.

Carter Dimitroff writes: 

From a market perspective, the near zero production costs of wind and solar are reached without government subsidies. Government subsidies drive production costs into negative numbers or they reduce capital costs. Some nations use feed-in tariffs, which subsidies capital expenditures, production costs and margins.

Many in the utility industry are befuddled by production costs. For decades, utilities in the US have been regulated. Regulated assets need not respond to market forces, because there appears to be no market in regulated regions.

The fact is that where there are no formal markets, utilities create virtual markets. Responsible utilities dispatch regulated power assets using market principles. First, they dispatch low production cost assets, then they dispatch progressively expensive assets. The virtual market becomes distorted when there is limited liquidity. Small utility regions with few assets will often dispatch "must run" assets even if they are uneconomic.

Production costs are not levelized costs, nor are they operating costs. They are market-based costs. From an energy production perspective, production costs are the incremental costs incurred when a facility changes its state from offline to production. Those incremental costs are mostly made up of fuel and fuel handling costs. They also include additional costs for manpower, operating based maintenance and, in the case of US nuclear, waste disposal costs. But for the most part, fuel is the big driver in production costs (after all, a power plant is just an energy conversion device that wastes two thirds of its fuel in the conversion process).

Wind and solar facilities are largely passive machines. They need no costly fuel as feedstock and no incremental manpower to operate. They just sit passively and wait for sun or wind to manufacture energy.

Carder Dimitroff adds: 

First, the US has no feed-in tariffs for solar or for wind. There are negotiated power purchase agreements scattered about, but no formal feed-in tariffs exist like we see in Europe.

Second, no grid has an over abundance of solar power needed to spark the imagination suggested. At best, solar acts as a peaker. It is difficult to imagine a case where solar could supplant base loaded production. It is also difficult to magically arrive at a point where there is no cash flow. Investors would have throttled back before reaching this point.

Third, the case you cite for solar is extreme and hypothetical. But it has happened for wind. The locational marginal price has blown past zero on several occasions. But that was a signal there was a problem with transportation, not production. It was also a signal that higher cost producers refused to respond to market signals and as such, they refused to exit.

What does "h" mean?

Anonymous comments: 

Japan's fossil-fueled generation remains high because of continuing nuclear plant outages. Because Japan's thermal energy is imported, solar is beginning to look cheap.

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Mar

6

I'm looking right now at some verse etched into the frosted glass of a medical center's lobby. Written by the prominent American poet, Robinson Jeffers, I found it poignant enough to pass on.

It's a less prosaic way of saying: Nothing changes.

The cycles surely will, as Jeffers attests, but not the grand cycle.

It's the immovable and ineffable force which ensures that the inevitable underlying shifts happen in the first place. As such, the following reads like an ode to the law of ever-changing cycles. And Jeffer's use of the term "Someone", could easily be viewed as an oblique nod to the immovable force.

Someone whispered into my ear
          when I was very young
Someone whispered that
          what was gone returns;
          what has been, is;
          what will be, was;
The future is a farther past.
   

— Robinson Jeffers

Gary Rogan writes:

Totally true unless found in an e-mail with "Sent from my iPhone" at the very bottom.

Mar

4

Herbert Spencer was known for his many unusual hypotheses, all of them untested except for his automatic stair climber. Galton remarked that Spencer was subject to more terrible moments than any as many of his hypotheses were tested by members of The Royal Society and confronted with facts that disproved them. I felt the same way recently with a hypothesis based on trying to capture the vig. If only one could make money by capturing the vig rather than paying it. Well, of course, one of our own, and many others have concluded that selling the etf's short would do the trick. They must pay fortunes in disguised big asked spreads, commissions, churning, sales costs, management fees, assets held in abeyance, and general sluggishness relative to prices paid at the end of days. Well, I decided to test it to see exactly which ones and how to do it. I was ably assisted by 5 or 7 of the best minds and researchers that I know. They did a great job. And one came up with the best methods of doing it, when, and where, and how to rebalance. Finally the only stone left unturned— how much it would cost to do it. The fact that the hypothesis turned on. Regrettably, turns out that borrowing is very costly, so costly in fact that it ruins the profitability. One knows what Herbert Spencer felt like when the Members gave him their sympathies, and raised their eyebrows at the Athenium as they passed him in the Reading Room.

A commenter writes: 

Thanks for breaking this down. A successful HFT once quizzed me on ETFs, without revealing the purpose. I now hazard a guess that their purpose was indeed on the flip side of what I first suspected After all, they may not be forced to borrow. The interview also included the intricacy of what I had capitalized on for decades: the obligatory decay of certain contracts, primarily Wednesday nights, due to two-day banking settlements. I suspect they have eventually figured out how to arbitrage both.

Steve Stigler writes: 

Very nice. You of course recall the passage from Galton's "Memories". Here is a paragraph from a paper of mine in 2007 where I used it:

In the 1860s a small group of young English intellectuals formed what they called the X Club. The name was taken as the mathematical symbol for the unknown, and the plan was to meet for dinner once a month and let the conversation take them where chance would have it. The group included the Darwinian biologist Thomas Henry Huxley and the social philosopher-scientist Herbert Spencer. One evening about 1870 they met for dinner at the Athenaeum Club in London, and that evening included one exchange that so struck those present that it was repeated on several occasions. Francis Galton was not present at the dinner, but he heard separate accounts from three men who were, and he recorded it in his own memoirs. As Galton reported it, during a pause in the conversation Herbert Spencer said, ³You would little think it, but I once wrote a tragedy.² Huxley answered promptly, ³I know the catastrophe.² Spencer declared it was impossible, for he had never spoken about it before then. Huxley insisted. Spencer asked what it was. Huxley replied, ³A beautiful theory, killed by a nasty, ugly little fact.² (Galton, 1908, p. 258)

Gary Rogan writes: 

These days what seems to be popular is for inconvenient facts to be killed by theories, and for the arguments to be about whether the theory is beautiful or ugly. 

Feb

26

"What These Ants Can Teach Us About Problem Solving"

Swarm Intelligence: a single ant or insect probably isn't very smart, their colonies are.

Perhaps one can learn from this for trading in that one trading system might be somewhat dumb but a group of those can be intelligent.

Gary Rogan writes:

The way I look at it is this: the goal of most (although definitely not all, but the vast majority) of the market participants is to profit from the difference between the current price and some future price. As such, their collective goal is to discover the future price. While certainly they have no desire to willingly cooperate, their use of error averaging and cancellation and applying any real information to the goal is little different than some ants trying to move a large piece of food towards the colony.

Feb

21

I came across this interesting graph, which isn't likely much of a surprise given where the market is these days–no fear and all is well in the world. What I don't get is that absent 1987, there are few drops in the trendline, and it's been a notable feast and famine starting in 1997 or so. Question from the ignorant: what happened in 1997? There was LTM in 1998, but the upswing seems to precede that.

Jordan Neumann writes: 

Asian currency crisis. Some on this site could tell you more about it.

Pete Earle writes: 

Currency hi-jinks which began in Thailand, spread to Indonesia, South Korea, the Philippines, Malaysia, Singapore, Hong Kong, and resulted in a number of short, sharp recessions. 

Gary Rogan writes: 

I read something about that series of recessions a few months ago that seemed quite instructive to me. While there were a small number of countries that had what could be described as hi-jinks, most of them did not. The way global investors reacted was indiscriminate though, and they pulled out capital from anything that remotely resembled a dangerous Asian duck, whether or not it walked or quacked like one. This fear response can probably be generalized to how different panics start. 

Feb

19

Do We Live Inside a Mathematical Equation?

BOSTON—From the arc of a baseball to the orbits of the planets, mathematical patterns are everywhere. But according to physicist Max Tegmark of the Massachusetts Institute of Technology in Cambridge, it's not enough to say that math governs our universe. Rather, he believes that reality itself is a mathematical structure. What the heck does that mean? We caught up with Tegmark after his presentation at yesterday's symposium "Is Beauty Truth?" at the annual meeting of AAAS (which publishes ScienceNOW).

Gary Rogan writes: 

I have long believed that the most puzzling thing about the universe is that fundamental mathematical laws and constants seem to hold reliably over vast stretches of the universe. Until we understand how a photon "knows" that it needs to travels through vacuum at exactly the same speed everywhere in the universe, or why any two objects anywhere attract each other gravitationally with exactly the same exponent attached to the distance between them and exactly the same constant attached to that equation, and any number of such things, we are just observing the symptoms of something on a deeper and deeper level without understanding how the whole thing is constructed. Sooner or later this has to come down to some fantastic explanation, like a single basic particle "painting" the universe on its own timescale, or every fundamental particle simultaneously communicating with every other fundamental particle to maintain consistency, or the universe being constructed on some level via a very small number of types of discreet building blocks that are completely invariant.

David Lillienfeld writes: 

That's the one issue I have with the Big Bang–where did all that energy come from?

Gary Rogan writes: 

Well, that's just one issue of several with the Big Bang, like

-What caused it to occur?
-What was there before it?
-How did all the physical constants settle on particular values (regardless of consistency)?

The Big Bang is just another descriptive theory of the form "the universe behaves according to these laws", but provides no explanation for the "why?" on the fundamental mathematical level. And no, religion doesn't help. The "global computer simulation" theory is highly attractive: constant laws and constants across time and space and a definitive beginning out of nothing with a lot of energy are just so easy to explain!

Gibbons Burke adds: 

Further, why are all the physical constants so precisely dialed in that if any one of the 30 or so parameters which define the immutable characteristics of the universe so tightly dependent that a variation in any one of those parameters, to one part in a million, would make life, or indeed the universe, impossible?

Feb

18

If folks would be so kind: could they name their favorite examples of intelligent and rapid economic development of poor countries (but with reasonable educated workforces, so you're not starting with e.g., Afghanistan)?

Famous examples are: Singapore, HK (although these have a unique entrepot status, and therefore wider learnings are not so great?). And then South Korea was impressive.

And of course China, but this was so big and diverse that its hard to reapply. I am looking for more "turnkey" type stories.

Those few examples went totally against the "Washington consensus" for many of their policies, much to their benefit.

Any further case studies people would recommend?

Many thanks.

Gary Rogan writes: 

Chile and the Chicago Boys come to mind.

Jan-Peter Janssen writes: 

I recommend looking at Estonia. It's a tiny Baltic state which is remarkably advanced in IT . Skype was invented in Estonia. Programming is taught at school from age seven. The government aims to reduce bureaucracy through a so-called eGovernment. It is linguistically and culturally close to Finland (where Nokia is from) and together these two nations should have the critical mass of talents needed to create a high tech industry.

Estonia is ranked the world's 13th freest by Heritage Foundation.

Richard Owen writes: 

Ok, here is a consolidated list of suggestions. Thanks to all.

Estonia
Tysons Corner, VA
Reston, VA
Japan WWII
Chile
Poland (Mazowiecki)
Latvia in 90s
Drexel Burnham under Mike Milken
Jaimaica vs. Singapore
Taiwan
Vietnam
Mauritius

Feb

1

Sweden turns itself around. Predictable results from moving in the free-market direction and paying off debt, yet the US has to learn the lesson on its own mistakes.

"Nordic Lights: The Nordic countries are reinventing their model of capitalism"

Feb

1

I am reading Ari Kiev's book The Psychology of Risk.

He argues that goal setting is most important in trading success. Instead of trading passively at what the market offers, one should first set his own goal, then develop a strategy based on the goal, commit enough risk, and trade with faith toward the goal.

Does anyone have any experience or thoughts in this approach?

Gary Rogan writes:

Leo, I just found it interesting that the language sounds like the industry-standard language of "financial planning", other than the faith part, in that that language involves "understanding the customer's goals", "finding their risk tolerance", "establishing a plan to achieve the customer's goals based on their risk tolerance".

Does he believe in some sort of "you dial the risk, you'll get the return if you believe hard enough" kind of thing? As he explains it, is the purpose of "faith" so that you don't chicken out when things get tough or as something else?

Ralph Vince writes: 

From the time I was 19 or 20 years old and a coffee-cranked margin clerk, until now, I have witnessed that the number one determinant of success or failure is a defined criteria (or lack of).

As Kerouac put it:

Two flies, You guys, What are you doing here?

So what are you doing here? If you're just here "To make a better return on your money," you may want to give your criteria a little better consideration.

What are you willing to accept as risk, how will you contain the risk to that? What's the time horizon? (the most overlooked aspect in investing, bar none. We live on a planet of delusion where people are using asymptotic, long-run values which often diverge greatly from the reality of finite time).

Pension funds are able to do this — articulate their criteria, as well as anyone. They need to keep to a specific liabilities schedule. Institutions tend to trump individuals in this regard.

You can tell the compulsive gamblers — the individuals without a specified criteria, disaster is imminent.

So…what are you doing here and when do you need to get it done by?

Gary Rogan replies:

But Ralph, and I'm not at all trying to be facetious, what if I have a hundred bucks, willing to lose fifty and want ten million in a year? Aren't your capabilities/means/methods at least as important as all the other factors put together?

Ralph Vince replies: 

Gary,

Ha! Maybe your plan is a deep OTM option….parleyed 6 times in a row, with half the $100 ?

Without a specific, detailed, articulated criteria, I cannot determine my exposure plan. I don;t have control over what the markets will do
– I DO have control over my exposure.

The whole thing gets you out onto that lumpy landscape I call leverage space, and without getting into the nittygrittynasties of that (and acknowledging you are IN leverage space whether you like it or not, and it is applicable to you whether you acknowledge it or not), let's say your criteria is exactly as you defined. Well that sounds like some sort of portoflio insurance, yes? Your strike price on that is $50. Now, given that there is a peak to leverage space, portfolio insurance runs from that peak (as a % exposure) to 0 (as a % exposure) as your equity decreases to $50 (where your exposure is 0).

So now, given that you have articulated a criteria, you can plot a path through leverage space. In other words, you can create a specific plan to achieve that criteria in terms of your desired exposure.

Leo Jia adds: 

Gary,

I am only a quarter into the book, so still can't comment on all your inquiries.

You are right, it does sound somewhat similar to the financial planning language. The difference perhaps is that the goal is meant for a daily goal or very short-term goal. It should be set at a level as high as one can stretch. One should clearly envision the realization of the goal to make sure that he WILL achieve it. Only by doing this, one can be ensured to devote all his power to achieve the goal.

The faith is to ensure that one does not get chickened out easily. It helps one to steer away from common beliefs one grow up with, such as staying safe.

Victor Niederhoffer writes: 

The power of prayer in markets and life for extending life and gains was well studied by Galton who noted that insurance companies did not reduce the rates for boats owned by divines nor was their life expectancy greater.Having faith in a market reaching a goal, will not alter the counts as to whether to hold for the end or the middle or the reverse. It will just cause unnecessary vig.

Leo Jia asks: 

What about the faith not in a religious sense? Shouldn't one have faith in oneself, in one's well-designed strategy, and in one's ability to reach the goal?

Ralph Vince writes: 

I return to this thread, which, despite it sounding like a hokey, self-help sort of thread, is, as I mentioned, the single-greatest determinant I have witnessed through the peephole of my own experience watching and participating in the trading world. It is what transforms those who are lured here for all the wrong reasons, into dull successes at this endeavor.

Especially as an individual trader, it's so easy to get sidetracked, derailed, spun around and disoriented by the markets. And if we agree that quantity is, over the course of N trades, at least as important as direction (the latter of which we don;t have much control over, and that a gentleman's bet and betting the house — the spectrum across there determines the weight of the specific risk on us), and that quantity is specified by a plan to achieve our criteria, then it is exactly the execution of that "plan," which becomes the vital exercise in trading. And without a goal, without specific, well-articulated criteria, you cannot craft the plan to execute — you are just waffling, flailing.

(And these goals the individual can craft should be more clear than that specified by the investment committee of an institution, because as individuals, you can set a higher bar than a committee of bureaucrat-types).

The exercise then becomes one of executing the plan, something quite boring and clerical, but, to me, something that has resulted in extreme trading success. I won't elaborate further, there are plenty, always, not experiencing success and my aim in this note is to point them in the right direction to achieve one pathway to that success (as I believe there are likely many, though I am only familiar with this one). Granted, I am very familiar with the linkage between achieving a criteria, specifying a path to achieve it, in terms of simple mathematics, but this is not something someone cannot learn and familiarize themselves with to a greater level than i have.

Since doing so, I have encountered success with this that I did not think was possible. The execution of the plan turns you into a trading apostate, relegating most market-related exercise, entry & exit, selection, etc., to their rightful place as secondary or tertiary concerns, contrary to what most believe.

No, I'm not going to detail my specific plan — it's unique to the criteria I am seeking to achieve, and the point of this note is to further highlight the critical importance of criteria and plan. Along these lines, what I later found echoed what I was discovering about my plan in a book called "Great By Choice," by Collins and Hansen, specifically the "20 Mile March" notion as it pertains to specifying such criteria-plan relationships as detailed here for trading and their execution.

I doubt most will bother with what I write here. Growing up in the raucous world of Italians and Jews and their gambling, the lure of a little self-created danger and excitement — the little rush of that, is what draws most to this arena and keeps them here, though they don't see it that way.

Gibbons Burke writes: 

Great post, Ralph. It brings to mind CompuTrac/Telerate's Teletrac software, which was originally named TradePlan. It was built to facilitate putting into practice the old Frenchman's wizened admonition "Plan your trades, and trade your plan." Unfortunately it was a bit weak in an area you championed, sizing your trades appropriately, but in many other respects its design remains one of the best for indicator and rule based analytics.

Ralph Vince writes: 

And, if the Chair will grant me a pardon just this one last time (regarding the French, a topic of seemingly poisonous exosmose to our regarded Chair) the number one rule I have learned of the markets and life: "Never face the Old Frenchman. Never. In anything."

Leo Jia comments: 

Hi Ralph,

Thanks very much for the inspiring posts on this thread.

Your point (if I understand correctly) is that the single purpose of a goal is to define the size of the trades. I understand size is very important but am not very clear on how exactly a goal works on that.

According to some literatures (yours as the most prominent), size is determined by how much one want to lose on each trade based on his strategy, and to win more, one has to increase the size, but there is an optimal size beyond which one's return will diminish. Isn't all that simply mathematics and how aggressive one want to be? How does a goal serve here?

On the other hand, how aggressive one want to be is very much influenced by his faith (or his illusion) on how successful his strategy will be. A key question I often have is how one can be so sure that his strategy will work as tested so that he can simply increase his size to the optimal level in order to maximize his return? And this doubt also applies to execution.

Would you kindly explain?

Ralph Vince responds: 

Leo,

You're asking me to explain an awful lot, too much for a simpled response I fear. Let's say there is a risk proposition, a potential trade or wager. If I am going to play it one time, what I stand to make as a function of what I risk is a straight line (from a gentleman's bet, i.e. risking nothing, where f, the fraction of our stake we risk, is zero, to risking the house, f=1.0, where the line goes from 1, that is, risking nothing we make a multiple of 1 on our stake after the proposition, to some value > 1 where we risk the entire house).

For a subsequent play, where what we have left to risk is a function of what ocurred the first play, a curve begins to form (and thus you can see how the notion of a "horizon," that is a finite number of plays is an important parameter in all of this). No longer is the peak at f=1 when we have more than 1 play. The peak begins to move from 1.0 in the direction towards some value > 0 .

And I can show mathematically (because this is NOT a story about may, but about graphic visualization) that, absent knowing where that peak will be in the future, that the long-term best guess for this peak is p/2, that is the percentage of winning periods divided by 2. If I expect 50% of my plays or periods I have a position to be winning, then the best guess for this peak is 50% / 2 = .25. I am not going into the mathematical reasoning behind that here.

There's more….a lot more now. A curve has formed. The curve has a shape, and the story is in the shape of the curve and all the geometrically important points therein (I have catalogued these and discussed them at length to a disinterested world). And you are neccesarily on this curve when you trade this instrument, whether like or not, acknowledge it or not, and likely moving about this curve — and you are paying the consequences and reaping the benefits of where you are on this curve.

And here's the thing — you have control over where you are on the curve, and where you are moving on it. You don;t have control over the trade. And the thing you have control over is the difference between a gentleman's bet (where nothing is at risk) and having your entire life at risk.

Now, you have a criteria. Someone asked earlier on this thread for a particular criteria, which sound like a sort of portfolio insurance, and thus, a path can be plotted on this curve to accomplish precisely that.

There's a lot more to the geometry of this, and the paths on the curve (or surface in N + 1 dimensions, where N is the number of components you are trading), but people prefer to be blind to this but they do so at their peril and cost.

Newton Linchen writes: 

Ralph,

When I finally understood Kahnemann's proposition, that people (including and - specially - me) are not "risk averse", but "loss averse", and later recognize that was this "loss aversion" that caused me to lose more than I needed to, (since I have always researched trading strategies), the next logical step was to dive into your work.

I'm now at the point of embracing your ideas about the leverage space "for good", because I finally realized that trading requires so much toil… that it's simply not worth it if you don't aim for the maximum goal.

In other words, trading is difficult regardless of anything else… So why not do it for the maximum available profit?

That of course, requires courage, since humans have a great deal of loss aversion - and it's only possible when one realizes that it's just not worth it if you don't aim at the zenith.

Ralph Vince writes: 

If you want to Newton, and you have the stomach for it. If that's your criteria — growth maximization and drawdown be damned, then yes, you want to be at what you expect the peak to be over the future horizon of holding periods you are going to engage over.

Me, I'm old and cowardly. I like to sit on park benches with a shawl on…

Leo,

These are already things everyone is already doing, i.e. they ARE moving around in this leverage space, like it or not, likely moving about it, paying the consequences and reaping the benefits of a location in a geometry which has extreme bearing on his fulfillment (or not) of his criteria. Your guy employing the mean variance approach has, as his criterion, maximizing expected (1 period!) gain with respect to variance (usually within some specified other constraints, like without using margin, without more than x% in any one group, no short sales, etc). He is still invariably in leverage space, moving about it. (Further, in assuming the main facet of his criteria, maximizing return vis-a-vis risk, wherein he specifies risk as variance in that return, is mathematically misguided as variance is a diminution in [consecutive] return, and not risk, i.e. it is already baked into the return portion, i.e. the altitude in leverage space, as one considers consecutive return [i.e. reinvestment]).

It's not a matter of maximizing return, alone or with respect to something — unless that is ones criteria. Regardless, we are in leverage space, moving around, and can craft our plan our path through or stationary location within this space to satisfy our criteria.

And, absent a criteria, a "goal," the virtue of which was questioned at the trailhead of this thread, there can be no plan as nothing is being sought (other than perhaps entertainment or some form of self gratification). And if one does have a goal, a plan can be crafted to try to achieve that goal.
 

Jan

30

There is a zero sum part to trading where what one flexion makes, another high frequency or day trader or poor gambler ruined or lack of margined or viged player uses. The win win aspect is that if you hold for a reas period as almost everyone in market is forced to do, you get the drift of 10000 fold a century, except if you lived in the Iron and played a game with kings moving backwards.

Anatoly Veltman writes:

Ok, I'll say it. Drift prevails over a century. And I had no problem with drift as recently as 4 years ago, when the only true drifter I know, a prince of certain oil, was adding to his C holdings by bidding pennies.

I'm having a problem with over-relying on drift now; because now, four years later, you can only bid pennies for C if you add $42 in front of it. All the while the real economic indicators, as Chair pointed out just today, have not and will not improve much any time soon. Now tell me: why assume that there will be much of a drift effect in the near five, or maybe the near ten years? Do you expect policy improvements, or pray for a budget spiral miracle, or Europe culture unity miracle, or what other miracle?

Jeff Watson writes:

Back in 1932, the DJIA made a new all time low that wiped out 36 years of gain. Likewise, the market didn't totally recover from 1969's highs until 1982, and the market has done a 15 bagger since then. I'll stick with the drift, which is a steady wind. 

Rocky Humbert writes:

There seem to be two sorts of smart-sounding stock market pundits: (1) those who get bearish because prices have risen. (2) those who get bearish because prices have fallen. I am neither smart nor a pundit but my views of the 3-5 year upside from here (small) and current positions (long inexpensive s&p calls) are known to all.

In the face of the current seemingly relentless rise (which has used up a year's drift in 3 weeks)… I confess that I am looking at my new, over 50% combined tax rate, and positing that higher marginal rates disincentive not only my risk-taking, but also my selling (as the taxes discourage my speculative urge to sell now and buy stuff back at hopefully lower prices.)

With this in mind, an academic study might consider whether changes in capital gains tax rates result in more serial correlation (i.e. trending — as I look around three times) SHORTLY AFTER the higher taxes are imposed. And the effect diminishes over time as people become accustomed to the new regime. Obviously I would guess the answer is yes.

Kim Zussman writes:

 Increasing tax regime could be bullish:

1. additional vig against frequent trading (as if there weren't enough already) > 1a. "drift" of holding period toward longer timeframe
2. disincentive to sell = incentive to hold and/or buy (including insiders)
3. restructuring away from dividends toward stock buy-backs

Rocky Humbert writes:

Dr Z may be onto something. Does this mean if Obama raises capital gains taxes to 99%, the stock market will triple over night? 

Anatoly Veltman writes: 

1. I have no problem with counting to include the last few years
2. I have a problem with counting to include anything pre-2007, let alone pre-2001, and even more so pre-1987.

The reason I have a problem with it: historical price analysis, no matter which way analysis is performed, relies on the notion that participants have not largely changed, and that "their" psychology has not changed. This is not the case - if one goes too far back - because financial market mechanism and participant make-up has changed ever increasingly over the past decade.

One of the victims of methamorphosis was "trend-following". I believe that most previosly successful trend-following rules have died in application to regulated electronically executed markets, because most clients are now automatically prevented from over-leveraging. Thus, "surprise follows trend" rule, for example, lost potency. Nowadays, you get preponderance of surprise "against trend". That's a very significant switcharoo, which has put most of famed trendfollowers of yester-year out of biz.

Also, Palindrome was not much off, predicting the other day hedge fund outflows due to old as age "2&20 fee structure". This structure just can't survive the years of ZER environment. Huge chunk of very cerebral participation has been replaced by bank punk punters, gambling public's money for bonuses.

Gary Rogan writes:

The drift seems to be a long-range phenomenon that has existed in different stock markets for a very long time. It is therefore difficult to make predictions of its demise based on any specific factors. One thing is clear: calamities like revolutions end the existence of the market and obviously the drift. Benito Mussolini was very good for the Italian stock market for a long time, and even way into the war it kept up with inflation, but eventually it succumbed to the realities of war (in real, not nominal terms). Granted, Mussolini initially had much better economic policies than Obama, but who would really expect that faschism could coexist with a great stock market? The question still remains: will there be a total wipeout? Short of that the drift is likely to continue.

Il Duce wasn't chosen completely at random, and the question was (just a little bit) tongue-in-cheek.

I could easily make the contention, and a great case, that fascism co-exists with a great stock market right here in the USA.

Ralph Vince writes:

I think we make a huge mistake when we assume that policy affects long term stock prices. Sure, you might have seen events, like a lot of stocks seeing big ex-dates last year, before big tax theft years — but the long term upward drift is a function of evolution. Like our progress has always been — starts and fits.

Sometimes the fits have lasted 950 years! But it always comes around. I like to get up in the morning, put my shoes on, by a few shares of some random something or other. If it goes against me, buy a little more. When it comes around to satisfy my Pythagorean criterion, out she goes.

As I've gotten older, I like to do it with wasting assets, long options.

It makes it more sporting.

Stefan Jovanovich writes:

I wish that we all could agree that prices only count if you can use the money . Zimbabwe's stock market does not have prices for anyone who wants use the money except in Zimbadwe. The Italian stock market was not quite that bad but close enough to make its "performance" entirely fictional from the point of view of anyone wanting to do what people now take for granted - use their dollars to buy/sell "foreign" stocks, close the trades and then take home their winnings - in dollars. That was not possible in Italy after 1922 or in Germany after 1932, for that matter.

As for Mussolini's economic policies, they were far more destructive than the President and Congress' inability to stop writing checks that the Treasury has not collected the money for. In his Battle for the Lira (1926), Mussolini decided that the currency would be fixed at 90 to the pound, even though the price in the foreign exchange market was 55% of that figure. The result was to create an instant bankruptcy for all exporters and those few remaining financial institutions that dealt in international trade. As a result Italy got a head start on the rest of the world; its Depression began in the fall of 1926. But Quota 90 did create a windfall for the Italian industrialists who were Mussolini's supporters; their costs on their imported raw materials were immediately halved. Like the German industrialists after Hitler took power, they saw their order books boom with all the government spending for guns and butter. And look how well that all turned out.

Baldi writes:

Ralph, you write: "As I've gotten older, I like to do it with wasting assets, long options."

Older? You wrote about doing just that in 1992:

"Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have. […]

"There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options.) The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning.) The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some pre-specified goal. If and when you achieve that goal, get out and don't' ever come back."

Jan

30

If you look at it in a slightly different way could it not also suggest that you buy stocks NOT based on publicly available information on some upcoming near-term changes (that if you are not yourself privy to some difficult-to-get information) but instead based on negative sentiment coupled with some well-known value parameters.

How can that be an advantage for individual investors? I am sure many contrarian funds also do that. They have the advantages of visiting the company, calling the CEO and analyzing the entire industry for instance, which are only possible for perhaps large investors but clearly not possible for the ordinary individual investors.

Gary Rogan writes:

An individual investor isn't "graded" every quarter, he/she may hold forever instead of trying to get in and out. There is a well-known asymmetry (in individual investors' favor) that for many institutional managers constantly approximating the metrics they are graded against is preferable to swinging for the fences because reliable mediocre performance isn't likely to result in two or more bad quarters in a row that may get the manager fired. This may or may not be relevant in this case, but if a manager can figure out what everyone else is doing it may be in his interest to just follow that. Also the point is, that after a long time the bet may stop being contrarian and with enough diversification the portfolio starts behaving more index-like but with a built-in positive bias that may take years to play out. The survivorship bias also will eventually favor the winners over the losers, if there are enough of both. Over the long term at least.

The individual investor doesn't get hit by additional decision-making without much information. And finally, negative sentiment is sometimes more powerful than all the buying by all the contrarian funds put together.

Jan

28

It is nice to hear some bullish sentiment recently and I will jump aboard. Here are 10 reason the market will go up from here in 2013.

1. Incentives do matter. The stock market is a reflections of humanity trying to better their lives via work, production and profit. That won't change and will drive the market up.

2. Despite government figures there is inflation in what people actually spend money on, food, energy, healthcare, education. Stocks, similar to hard assets, rise when there is inflation.

3. Fed dollar policy if for a weak dollar. Since stocks are priced in dollars this will help stocks to rise.

4. Scarcity matters. You cannot have guns and butter, stocks and bonds. You have and to pick and the yields are not even close. They favor stocks by a margin of 5-6%.

5. Bear markets come and go and but are not predictable. On the other side there is a welcome documented upward drift for stocks.

6. Big Al's research shows buy and hold beats every other market timing strategy except waiting for a 50% decline which happens only once or twice in a person's lifetime or maybe not at all.

7. After a real estate/financial crisis is a good time to buy, like after 1990-1 recession, S&L crisis, 1907 crisis to name a few.

8. Politicians come and go and markets rise in liberal and conservative times. The markets does not favor political parties but stability is bullish. The current divided government is stable enough for the market to rally.

9. The market weeds out the least productive. The best idea rise and the worst go bankrupt. Owning a stock index is a proxy for the very best ideas put into action, adjusted every year to get rid of the worst ones.

10. There is no upward bound on stocks. There will always be more work to do no matter how productive we become. This will be reflected in rising capital, equity and stock prices.

Anatoly Veltman writes:

Well, I'll take exception to a few of the ten:

1. Stocks is the last thing (just ahead of bonds) that should be rising with inflation
2. Counting on success of Fed's dollar weakening, just pick your cross of choice - not US stock index
3. I'll be gladly corrected, but isn't index's survivorship bias only important in bear market?

My chief contention is this: the country, as well as other top industrialized nations, have been engaged in anti free-market policies. We haven't seen real benefit (should we have?), and we haven't seen the society's degradation yet (in full swing). If we do, I don't think current multiples will prevail. I'm not calling for the entire S&P to wipe out - but I can see market pricing of, say, 10 or lower P/E; you tell me why is that impossible?
 

Gary Rogan writes:

There seems to be contradictory evidence about how well stocks serve as inflation hedges. There does seem to be a lot of evidence that they are significantly ahead of bonds, so "just" probably doesn't do them justice. As an explanation, but not as a prediction, the ability of stocks to function as inflation hedges depends on the ability of the underlying companies to pass price increases. It seems that when inflation suddenly accelerates, stocks don't do as well as when there is a stable rate.

There is some evidence that you need to go beyond broad market indexing if you want to use stocks as inflation hedges because not all companies are generically suited to pass price increases in the same way. I have said a long time ago, just when the current political environment first appeared on the scene that I expected large consumer non-durables to be the best hedges for the variety of ills associated with that environment. I fully expect them to continue even if inflation goes up.

The anti-free market policies will likely affect growth rates in a variety of sectors in the future, and likely have in the past. This should favor low-growth, high-certainty companies over the traditional growth superstars. Should things like fracking and 3D printing and whatever other factors compensate for the anti-free market policies, this "likely" will become the wrong guess. It is certainly true that certain large tech companies have allied themselves very deeply with the regime and are therefore likely to be able to exert some influence.

Very little will protect against collapse, inflation-driven or simply debt-driven. Gold is there, but look what has happened to many who had the gold during various once-in-a-lifetime calamities. Stocks may not be a bad choice short of total colla
 

Jan

25

The ease with which Lance was able to maintain his hoax, and the difficulty that others had in breaking it, and the penalties they had to bear, and the great emoluments that were made from it by Lance and his crew should be generalized. What other hoaxes and conspiracies are there in the world? What is the dead weight and direct cost? I have been the victim of several such frauds and conspiracies but was smart enough in the last ones not to take legal action as I knew that my legal and opportunity costs would be many times greater than the possible recovery. I believe several on the list have also been so victimized. How prevalent is it? And how can they be defeated and fought against?

Anatoly Veltman writes:

Not a direct answer by any means, but the first time I heard Carl Lewis respond to a question on how good Ben Johnson was (question was posed way before Ben Johnson got publicly "discovered") — I was quite stunned by Carl's stern reaction. It was like you asked him if he could outrun a Martian in his prime. One might either conclude sour grapes from hints like that, or suspect that there is no smoke without fire. In any case, maybe one of the best ideas is to ask a competitor?

The question raised here, by the way, may be the most important question of the couple of decades. Every single one of you places your livelihood on the line daily in the system which is totally rigged against you in the worst way.

Jim Lackey writes:

I'll guess the opportunity cost of the lengthy background, due diligence to N^th, and flat out distrust of people, most of whom are benevolent and kind, would be something like the a 1,000,000% drift stocks give us per century. I'll flat out call it that being a skeptical, safe person is costly.

If it is too good to be true, it is, and we are not idiots. We all have some street smarts here. A well oiled con? I'll fall for it every time and I usually get the joke. To hell with them. To catch a thief one must be one or a good officer of the law.

David Hillman writes:

Some of the answers we know.

1] always get it in writing, 2] pigs get fat, hogs get slaughtered, 3] know thyself and resist your weaknesses, 4] invest in what you KNOW, 5] there's some business we just don't write, 6] most of us will make more money investing one's self than in someone else, 7] in the Shakespearian spirit…."neither a borrower or lender be", gifts are OK, but don't expect a return, 8] give at the office, 9] don't invest what you aren't willing to lose, 10] don't buy meat off the back of a truck, and 11] never buy anything with "Magic" in the name.

I have almost always found it best to be the "initiator" of an investment, an idea, etc. than to be "initiated upon". Also, when one is in the mud, it's usually better to hint at legal action, then settle rather than sue (The con often has the same legal and opportunity cost as you, at least the same amount of risk of losing and possibly more dire consequences.)

Even if one is optimistic and has faith in humanity, something I share with Lack and the chair, one of the best ways to avoid cons, scams, etc. is just to say "No, thank you" and go on about one's business. Except, of course, when the high school girls soccer team shows up at your door step in short uniform shorts and t-shirts, smiles all around, selling $1 candy bars to raise money. You say, "Sorry, ladies, I don't eat candy, but here…..", then you give them $20 and go on about your business.

Jim Lackey replies: 

David,

First never let little ones have a coke out of kitchen or touch your computer. One of mine must have spilled soda in my key board.

Next I must differentiate a scam from a good con. A scam, as in Fla scams or any mumbo we see on buy it now sites, well, burn me once and the 2nd time I am a fool and we get that joke.

A well oiled Con, do not even try. Do not worry about it. These are men of genius and spend their lives dedicated to stealing. Cops are so silly. It takes the after the fact to catch most cons. Only a genius officer of the law with 100 years experience will catch these guys in the act.

If you ever read or see some of the cons these men come up with… yeah, I guess it's easy to see after the fact, yet I am amazed at the work, the genius the art and science, James Bond movie types.

They seem to prey on our weakness of love and benevolence. Give that up and ………….. well just don't.

I can see why a Mr or others are concerned. We try to warm family for their future. I guess that is what lawyers and trusts are for, to protect the pot.

Trying to prevent the next con is to me like attempting to predict the next tech innovation. We all saw the music deal and the Ipod, but we dissed or didn't get the Iphone's change of the world and laughed at a zillion Ipads later. Now my friends are trying to buy aapl on a pullback at 500. Umm it was 15 or 30 or 50 many baggers ago. Move along.

Anatoly Veltman writes: 

Jim, yours is very good advice on relationships. My grandpa taught me exactly that. But when it comes to today's electronic financial markets, there are a number of caveats. And since you brought up drift again, let me try this: what if today's world heads have no interest in perpetuating the traditional drift? What if we're moving toward a reset, after which today's investors will not regain purchasing power in a generation or so? What statistics can you rely on, if the US has not conducted ZERP in many preceding decades? Nor has it ever experienced the current rate of deficit growth.

Gary Rogan writes: 

To know about a large financial conspiracy for sure you either have to be present during its planning or see overwhelming and pervasive accounting irregularities. How can one ever be confident that some group has conspired for some wide-spread reset? Whose evidence can you trust? If any particular highly-placed person is saying "yes" or "no", or if someone is writing that it should be clear based on this or that, how can you be sure that any of this is a result of a conspiracy and not otherwise-originated processes or actions? 

Anatoly Veltman clarifies: 

 I'm not saying there is conspiracy already in place as defined. There are certainly unusual goings-on:

1. The Fed has never entered the long-term market to this extent before.
2. The banks have never had access to zero-cost funds for this long before.
3. The employment data has never been groomed in particular fashion for this long before.
4. The US deficit has never been in this shape before.
5. The European experiment has not been really tested yet.

There will come a point, when only unprecedented last-moment multi-national "co-operation" will save the humanity. Figure out in which way, and you are golden.

Richard Owen adds: 

I was recently thinking about just this topic and was considering penning something along the lines of "Conspiracy and the Scientific Method" — even if just to try and settle what I think.

My sequence of thoughts about the helicrash in London had made me think of the essays by actuaries about 9/11. How your correct statistical assumption for 9/11 upon first impact was a terror event. One of Goldman prop's guys in London protected his book with Eurodollar to good profit.

Like all complex topics, it is complex. On the one hand, conspiracy or, more often, functionally equivalent structures, are very important in business. On the other hand, I think for the most part "there is no they".

To precis one thought: I think Lance is a good case study: it wasn't an 'illuminati conspiracy': he was widely known to be doping in the right circles. A public charade was maintained by many parties involved. The message was packaged and diluted appropriately for the media. That sort of "widening circles" structure is what differentiates it from the nutty "illuminati" type conspiracy concept.

For a very interesting case study, see Richard Heckmann and China Water. If Heckmann can be taken for a fraud, after huge ground work to avoid so being, so can all of us lesser mortals.

Gary Rogan comments: 

To quote Victor, "Market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better?"

I can't agree that all will end well, but my theory of the market is that it doesn't really price what it has no idea about, so they just haven't figured it out. Under such circumstances, for anyone in particular, other than the guys planning it (paging Dr. Palindrome) plus some Free Masons and the Illuminati, it seems like figuring out how and if the unprecedented last-moment multi-national "co-operation" will save the humanity is too computationally intensive.

Jim Lackey writes:

Perhaps Mr. Stefan can overrule me as to when, but one doubts there was ever a time when the elite class wanted to perpetuate anything but the certainty of their own. Unless the rules in the USA go above and beynd the restictions of the EU, China and all, I can't see how anything but good can come out of our future. Less good or not as good as ones past or beliefs is relative. Yet I grew up in the 80s and saw the worst of it all for the good working men. Now we see the recession and depression of finance and perhaps the medical. Let's get the joke no way can the govie medical and finance command such a slice of the economy. It will be shared fairly by free market forces in new buisiness and growth. Construction is back and even oil refineries are being expanded again and never ending job at BP in Whiting IN.

I'll note the huge growth and investment now In Tulsa OK out to Nashville and building plants and things right here in US of A as even the advantage of current energy costs is enough to over come the rise in tax or any other threat. If you do not believe it, the Nordic EU venture boys are in deep buying all they can in Tulsa and kids are running Hass Machines out of their garage as start ups. The innovation is not in Silicon valley and instagram or new social…it's building real for the fracking that may or may not go global.

Tommy Ryan shot me an email back and once I figure out how deep this fracking can go global we shall have better answers to your questions. The DC boys are so far behind the kids. They are busy trying to regulate the white show firms that are already old line banks. From what I can tell, the kids already left for Singapore or some island to trade. I'll never leave the US, but if my kids were not in grade school I'd be Larry's neighbor.

Stefan Jovanovich writes:

There is only one reason to be optimistic about the future of the United States. It is that the country keeps redefining who the 'elites" are. It infuriated Henry Adams that a man with only a technical education could become the 19th century's most popular President. What was even worse was that a jumped up railroad lawyer's son could become the voice of all that Republican hard money. The Zinnistas, who never bother to do any counting, love the idea of the ruling class because that crude parody of Darwin's theory is as wonderfully tautological as the notion that a species' fitness determines its survival. The present Mandarin rule by believers in the pump theory of money spending is truly awful, but it hardly qualifies as a uniquely disastrous deficit ZIRP episode. One can argue that the country's entire history from the 1830s through the Civil War was comparably awful. We are not taught to see it that way because the extravagance, waste and fraud occurred not at the Federal level but among the states, not on Wall Street but among the country banks and state treasuries; but the country's government and official lenders were just as skint as they are now. All of this is now safely forgotten because of the explosion of wealth creation that occurred even in the defeated South in the last third of the 19th century; but no one visiting the U.S. in 1840 or 1850 or 1860 was writing home to tell everyone how marvelous it was. Dicken's sour descriptions were accurate, and Tocqueville's rosy forecasts were already an anachronism by the time they were published. No one was predicting that the Democrats' spoils system would do anything but continue. Yet within 2 decades the dollar had become an international currency and the marvels on display at Philadelphia were putting the Crystal Palace show to shame. We shall simply have to wait and see; the only certainty is that the Times (assuming they can get Mr. Slim to give them the money to survive) will be against whatever the future brings.

Gary Rogan adds:

This is an interesting case of a hoax that refused to die even when exposed, it's illustrative of how no amount of denial will destroy a hoax that is sufficiently implanted prior to the denial.

The Indian rope trick is stage magic said to have been performed in and around India during the 19th century. Sometimes described as "the world’s greatest illusion", it reputedly involved a magician, a length of rope, and one or more boy assistants.

The trick, considered by western magicians as a hoax, was perpetrated in 1890 by John Elbert Wilkie of the Chicago Tribune newspaper. There are no known references to the trick predating 1890, and later stage magic performances of the trick were inspired by Wilkie's account.

 

Jan

25

The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America 's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

~ Senator Barack H. Obama, March 2006

Gary Rogan comments: 

Here's a picture from today to go with that quote. Not the first one of its type either, these creatures know BS and where to find it.

Pitt T. Maner III writes: 

Howard Hughes had a unique way of handling this problem:

"Kistler also relates touching tales that depict Hughes's shrewdness and an underlying humanity. For the fly-catching incident, Kistler had brought a frozen fly from home in order to pretend he had "captured" it so as to placate Hughes. Hughes chuckled and looked at the fly. Then he said, "That's a nice fly. But next time, let's make it a REAL one, OK?" Another time, Hughes was at Lockheed in Atlanta. He took one of their planes up to do some touch-and-go practice landings in it. A man on the ground was watching the show and then said, "That must be Howard Hughes up there. No one else can handle a plane so beautifully." The man turned out to be Lockheed's chief test pilot. Hughes of course had once been a world-class pioneer aviator in the 30s."

Can also be viewed here.
 

Jan

20

The book Rational Herds: Economic Models of Social Learning by Christopher Chamley has many stories, models, and algorithms, that are helpful for gaining insight to markets. The stories start with the penguins standing on the edge of the ice, needing to get food but not knowing whether a killer whale or seal is waiting for them underneath. The first penguin to dive in provides much information for all the others. But it's not advantageous for him. The asymmetry between what's in the interest of the individual and the group and the advantages of social learning are readily seen by this example. The solution is for the other penguins to push the unlucky one in. The analogy of running the stops in markets with the first one to do so possibly losing money, but the others all gaining from the information is seen.

Another story is based on yellow cabs being 90% probable in a city. But an accident happening and the observer saying it was a red cab that caused it. Problem is that the observer's is only right 4/5 of the time. Bayesian analysis shows that after the first observation it's 9/13 that the yellow cab hit him. But after two reports the probabilities drop to around 48. The rate of convergence to red versus yellow follows a definite process which leads to all sorts of implications for cascading, herding, randomness, and social learning. Many examples of investment decisions based on following the leader and false decisions making from random events are given.

One wishes that the author would have followed some of the stories that motivated the book and shown how all the formulas would work for the simple examples above. The book is intended mainly for economics, social psychologists, finance people, and statisticians. But it's also relevant for anyone interested in how information travels. It's not easy reading and requires pencil and paper and working out a few examples to get much benefit from it.

I alternated reading it with modern times, and books on plants in my recent visit to Chicago. Glad to be back with you.

Jim Sogi writes: 

Sitting in LA traffic a few days ago got me thinking about individuals in a group. Ants probably think they are pursuing their own individual interests to be fed, to be safe, to have friends. But looking down on them from above shows a different picture. Each car in traffic has their own individual desire and plan but looking down at traffic patterns shows a different picture. Each investor or speculator has their own reason to buy or sell, for ex, personal reasons, business, family, taxes. But looking at the aggregate shows a different picture.

Gary Rogan writes: 

Worker ants can't reproduce and cant think. Their only genetic purpose is to help the colony survive so that the queen propagates her genes by producing a relatively small number of fertile descendents. Human beings can think and reproduce, thus even genetically they have a very different purposes, closer to the ant queen but with thinking abilities. Their natural goals are not those of the collective. 

Leo Jia comments:

I've come to think that perhaps no human can step out of the herd no matter how hard he or she tries. While there are many who realize the disadvantages of herding in a modern society and try to break free, they nevertheless follow another herd, trying to break away from the traditional ones.

I was thinking about this the other day. We understand how cells serve the functioning of our lives. They are alive themselves but work selflessly in ways defined for them to serve the body and mind. Can they be said to be herding?

Are we here to serve some upper life like ants serve the colony? That is a hard question, but if it were true, perhaps herding would be not only inevitable but also necessary. It would ensure we live by the rules, which are the only basis for our lives. By that logic, being selfish would only serve ourselves negatively.

Jan

20

Eccentricity/degree of crazy is class based. If you are rich and like to chase dogs down the street while naked, you're considered to be eccentric, but if you are poor and do the same thing, you're crazy.

Gary Rogan writes: 

Eccentricity at the top is also somewhat cyclical as people often want the opposite characteristics to the last package that didn't work or simply became boring. You could argue that Hollande is far less eccentric than Sarkozy, that Putin, Yeltzin, and Gorbachev were/are significantly more eccentric than anyone between Khrushchev and them, and that the highly non-eccentric Bush Sr. led to a string of Presidents that were each differently eccentric, to coin a concept, with the last one being more non-orthodox in a number of parameters than eccentric.

That same principle works on Wall St. It's seems highly predictable (in retrospect, of course) that the dot com crash would result in a reversion to the mean in the investment bankers' wardrobes. Animal spirits that clearly go back and forth between extremes work the same way, as revulsion with past failures is probably one of the strongest forces in investment trends. The Depression and the subdued consumer spending in the US lead to the consumerist paradise which itself reversed to a kind of malaise, with a few more minor cycles that followed.

Eccentricity is in many ways like the periods of fast mutation in evolution, which themselves tend to revert to the mean. And speaking of Churchill the reversal he suffered after being thrown out of office after the war had a profound influence on him, and likely his health and was used as an example of being extremely powerful and then suddenly not, and the effects of such changes, in the book I'm currently reading. Nothing is forever, and I'm sure eccentricity will return to the British political scene in due time.

Richard Owen writes: 

Winston Churchill would sit starkers in his bathtub and dispense to his secretary notes and instructions for the Great Offices of State. Soak complete, he would towel off, don a Chinese floral silk dressing gown with matching fez hat and take bedside visits from his Cabinet. Part of the game was to leave the odd setting and peculiar garb unmentioned. Out for duty, he would don a custom made Siren Suit - a glorified boiler suit - and set forth to whichever geopolitical circus he had budgeted his day to. Sartorial fruitiness featured throughout.

What does one look for in a great leader, thinker or doer? An ability to act independently? Think differently? To consider the facts of the matter and take provocative, even painful action?

Siegmund Warburg - perhaps the only individual in the modern era to create a full service European investment bank from scratch and entirely within his own lifetime - upon his death bequeathed a large library of fine literature and other books. Within sat a unique folio of pornography, surgically extracted, before handing over to St. Paul's School for Girls for posterity. Some of Siegmund's business rules included: good manners; consideration of others, particularly juniors; ignore the fashionable; non-conformism as a right, not a duty. This does not feel familiar in today's Wall Street.

To be branded an eccentric these days can be terminal. Particularly in the American paradigm. Instead of independence, determination, or contrary thinking, it is a signal of unreliability and cause for suspicion Some of the driving factors are positive: the British eccentric has class-based roots. The public schoolboy, assured his place in the firmament, could afford to transport his playground hijinks into the world of work. Just as investment bankers re-donned their suits after the dotcom crash, so did the pressures of openness and assessment mute some of the rakish public school excess. But a paradigm can swing too far.

Who do we have leading the Labour left in the UK? Mr. Edward Miliband, an impressive man whipped into a strait jacket of conformity. He arrived by Faustian deal with the trade unions; everything he utters is calculated for short term gain. Even the passion moments - the big conference set-piece speeches - feel badly scripted with an insipid instinct for popular policy.

The batty leaked clip of Miliband repeating the exact same soundbite answer to every question thrown his way at a media scrum - whether it made an iota of sense or not - gave the impression of a malfunctioning replicant whose circuitry had badly fused. The semi-autistic response mechanism was a guerrilla tactic to cope with today's minefield 24-hour news loop.

The irony is that Miliband's constituency - the unions - have backed a man who's supposed state educated, humble upbringing, disguises a militant intellectual father, likely private tuition, and all the other bells and whistles of hidden cultural advantage. The socialistic Labour left's distaste for the British grammar school has hamstrung a generation of intelligent working class and closed off their main vein of progress to the upper-echelons. Eccentric this is not.

And the Conservative coalition? Headed by David Cameron, every inch the PR man. A better looking, more charming and affable version of Miliband? Perhaps. But we need not repeat the basic assessment - they are both ultra-Blairs. But without the Blairite flair within.

Blair himself was most definitely an eccentric. He was willing to throw his whole reputation onto the pyre for a self-styled humanitarian war in Iraq. You can assess the merits, but at least it showed spine. Blair was so effective that he construed the ensuing hate into three back-to-back election victories.

Blair, however, left a messy intellectual endowment: the idea that, today, politics doesn't matter and one just acts as intelligent administrator. And just at the very turning point where hard choices, real budgeting, became essential.

What isn't obvious from the public record is that underneath the "call me Tony" demeanour was a burning intellect. A man who insisted on rising early to pen his own speeches. An intentionality. His followers have adopted the outer shell, but are missing the flavoursome crab meat inside.

When discussing interesting investment outcomes on Wall Street, we refer to eccentric or non-systematic returns. Bespectacled, absent minded Leon Levy could thread profitable eccentricity back-to-back. Just don't ask him which subway stop he meant to get off at, next year's EPS to one decimal, or the date of his anniversary.

Wall Street now wants conformism pretending to be eccentricity. Actuaries demand excess return without deviating from the crowd. And yet we're surprised at the aggressive behaviour created.

Ace Greenberg, penning Chairman's memos to his staff would channel the advice of Haimchinkel Malintz Anaynikal, an imaginary and often hilarious business philosopher; a figment of Ace's minds eye. If Jamie Dimon tried that today, he would be carted off the premises and branded a loon. Perhaps private partnership allowed better for private eccentricities. But something deeper, more cultural, is at work.

 To quote British banker John Studzinski: "after the dotcom crash, investment bankers were put through the meat grinder and came out robots." Warburg was so listened to by clients because he actually had something useful to say. His eclectic, eccentric outlook gave him a differentiated, potent opinion. Instead today's bankers collect endless, vapid powerpoint slides rather than bequeathable collections of fine literature. And they have opinions to match. Produce views and analysis like clockwork. But Warburg knew that producing was for the farmyard and generated opinions like manure. Quoth Siegmund: "One general reservation which I feel about some of the US investment banking houses is that they put too much emphasis on measuring, almost from month to month, what a specific partner produces. I don't even like the way they pronounce the word - not produce, but 'prodooce'. All this emphasis on producing - that is all right for a cow, but not for a human being."

Keynes, the great economist, trader, bon vivant, and political adviser was as likely to be found of an evening cottaging with the local bishop as penning a treatise on the National Product. Disraeli, a spectacular Prime Minister, was also a former bankrupt, mining entrepreneur and spiv. Try shoehorning such vitae into a political career today.

What do we have instead in British national life? Andrew Mitchell and the Plebgate inquiry, staffed by thirty full-time police offers, all straining to determine whether a politician muttered the word "pleb" to himself when heading past some cops at Westminster's gates. It's not so much fiddling whilst Rome burns as actively brainstorming more and better fuel supply lines.

Thatcher, every bit the eccentric, would have known what to do. Colleagues stung in the press by petty scandal would be grabbed by the arm and marched through Westminster's lobby. A show of support from the top; a smothering of the flame before it became entrenched in the press.

Straight-laced individuals, politicians, businessmen, forget their independence, their room for originality. Horrific, black swan events demand attention; perhaps a gun review is sensible post Sandy Hook. But don't forget the didactic nature of the Oval; exactly how FDR sucked billions of deposits back into the banks, or a gamely Reagan re-invigorated a whole nation. The lowest cost, highest impact fix would surely be a fireside chat on the benefits of sitting down for dinner daily with the family; taking an interest in your children.

On complex issues, one can't clear one's throat. The free-thinking intellect and the prejudiced have an intersection: the former will at least try on the latter's opinion to see how it fits. But don't dare be caught by the media as such.

Even the thesaurus is gripped by the modern will - it serves up for eccentric: aberrant, abnormal, flaky, crazy. Perhaps all those things. But also: essential.
 

Jan

14

One concept common in turf handicapping is the speed rating. It's not so much whether the horse wins the race, but what its fastest time was for a given quarter or some such. One wonders what the ideal predictive speed ratings for markets are. If we come up with the answers, we may be able to contribute to the ecology of the system and possibly prevent our losses from being as great as the public.

Gary Rogan asks: 

At first glance, I'm wondering is the history of speed ratings for any markets likely to be as predictive of the future as it is at the track?

Russ Sears writes: 

When someone is starting training for distance running, it is important to understand the maximum heart rate. Then training is geared around this number. The pace you should run to achieve different objectives is a range of percentage of this number. For example a speed workout, you might want to hit 90-95% of this rate. For a recovery run, maybe 60%. As you learn the pace to achieve these objectives you can stop measuring your heart rate and then go off feel.

However, as you get fitter, it becomes more about the recovery time to a base rate. The time it takes for your heart to get close to pre-workout rate will get shorter as your fitness increases. Then as this get shorter, you can increase the pace or shorten the recovery time between faster intervals.

It would be interesting to carry this over to individual stocks with volatility analogous to heart rate. Shocks such as earning numbers analogous to workouts. I hypothesis "fit" companies are ready to take more risk and have higher expected earnings. Whereas those whose long vols are increasing may be more likely to fall apart if they take more risk.

Anatoly Veltman writes: 

I think that Chair is often faced with an exit problem. Statistics prompt justifiable entry– but then one is prone to take profit too quick, or not be sure what to do about a loser, which only looks statistically better and better the more it's losing.

Therein lies the huge difference between binary outcome in most sports/games, and the investment field. I recall one Palindrome saying: "it's not whether you've picked a loser or a winner; it's more important how much you have ON when you're having a real winner".

An avid observer of track and field legends since watching my first Mexico Olympics live on Soviet TV in 1968 (the black power pedestal protest contributed to airing of that broadcast!), I always attempted to grade medal performance against the world records. I can name dozens of great Olympians, who peaked out during certain Games (sometimes 4 years apart, and even 8 years apart!) — and never held a world record in their event; and vise versa…phenomenal record holders, who've failed to taste Olympic success. But most of them did achieve both — which, again, makes statistical sense.

Alston Mabry adds:

A core "speed rating" question is around the effect of news events such as earnings surprises. The nature of earnings surprises has changed over time, as companies have learned to manage earnings more precisely: "Rich Bernstein Explains Why Missing Earnings Estimates These Days Is Such A Disaster". And then there is an assumption that market efficiency means any true surprise will be reflected in the market within minutes. But is this true?

Jan

8

Surprising candor from a former flexionic bank CEO. Why???

"Blame Fannie and Freddie for Mortgage Crisis: Kovacevich"

Fannie Mae and Freddie Mac exacerbated the 2008 mortgage crisis, and that's why the U.S. government should get out of the home loan business, former Wells Fargo CEO Richard Kovacevich told CNBC on Monday. "If it wasn't for Fannie and Freddie, [the mortgage crisis] would have been a small problem. Fannie and Freddie and other government agencies guaranteed 70 percent of those [bad] mortgages," Kovacevich said in a "Squawk Box" interview. He argued that without government-sponsored guarantees, there would not have been any private money willing to buy the toxic loans that have been blamed for the crisis. "There needs to be a decision that the government will not be in the mortgage business in the sense of a hybrid [like Fannie and Freddie]," Kovacevich said. He did say that if the government wants to be in the home loan business, it should do so through the Federal Housing Administration, which has worked well for a long time.

"Everything else has to be privatized," he said, adding that that can be achieved "by reducing by $100,000 a year the Fannie and Freddie guarantee."

Jan

7

One recently waited 15 minutes after making a big purchase at Barnes and Nobles while they held me up because the computer went down and they couldn't take cash, exact payment, credit card. At the end, they sardonically told me that if I had a complaint about the wasted time, effort and treatment, I should talk to their manager. On the other side, I read in John Mackey's new book Conscious Capitalism about how when a hurricane hit a Whole Foods in Conn, the computer broke and a lower level operative without any feedback from headquarters gave everyone in the store free goods for the 1 1/2 hour that the computer was down. They got millions of good will and publicity as an unintended consequence. A study in the book shows that companies that cater to the customer, and employees and suppliers as well as the stockholders have better performance than the average. Panera and The Container Store are examples. I wonder whether this is a real effect and whether these companies will perform better or worse—- and the former will never get my business again and the latter will. What's your experience and view.

Vince Fulco writes:

My wife works in the textile area of Target, I have tried to look at its operations with a jaundiced eye as a financial analyst would. I've always felt welcomed and well treated there without their knowing we were an employee family.

anonymous writes: 

I bumped into a colleague at Costco today who quizzed me about the recent tax changes. Not sure why he thought I would know, but after 5 minutes of listing the various relevant increases I asked, "Do you have time for more of these?" "Not really", he said, adding "You've already depressed me enough". "What are we going to do, raise fees?" he asked.

In the wake of recession we have not raised fees, and in many cases lowered them. It is better to stay busy and build good-will when people need it, and raise later when discretionary demand increases.

Increased taxes ordinarily reduce demand. But for businesses with existing demand, they are inflationary.

Maybe the FED gets what it wants (inflation preferable to deflation), and the agrarian organizers do too.

Rocky Humbert adds:

The chair asks a very important question; and the implications transcend business. With the caveat that I'm rather better at asking difficult questions (than answering them), I'd pose the question this way:

1. To what extent do people and organizations act in their self-interest?

2. If (1) is 100%, then any act of altruism MUST BE motivated by either reciprocal altruism or goodwill. If (1) is less than 100%, then any attempt to answer (1) is hopelessly complicated using a rational/analytical framework. And I won't go there since it's a moral argument.

3. A paradox arises because except for reciprocal altruism (i.e. keeping your counterparty in business so he can buy your goods and continue to service your needs), there is a irrationality that occurs for any action which isn't in one's self interest (for both the seller and the buyer) For example, if the customer is rational and self-interested, then ANY warm and fuzzy feelings towards a vendor are not rational if those warm and fuzzy feelings arise because of a historical and non repeating gesture (giving away goods during a power failure assuming that the goods wouldn't otherwise spoil.) However, in contrast, convenience IS rational and is part of the value proposition. That is, a vendor who doesn't make you wait in line when the cash register breaks has a superior product at the same price for SOME (not all) customers. And ceteris paribus, that should garner more business (for some, not all) customers *IF* he doesn't have to raise prices for a massive fault-tolerant computer system. If he has to raise prices for a massive fault tolerant computer system, then the customer who doesn't care about waiting in line won't shop there anymore. But the lone vendor who tries to gain a lasting competitive advantage by giving away milk and bread during a blackout will fail — since the goodwill generated by this will quickly fade and there's no lasting benefit to the customer.

Every economics question can be solved by recognizing that: 1) Incentives Matter. 2) Resources are limited. And … then it's simply a question of utility curves. BUT BUT BUT if there is a moral aspect to the question, then all of the rational analysis goes out the window. And that is, I think, what Whole Foods was trying to do.

Jeff Watson writes: 

Right before Hurricane Andrew hit South Dade County and went across the state to hit Naples and Collier County, Home Depot was giving away 4×8 sheets of plywood……just had truckload after truckload, bringing it in to offload it to anyone who wanted it for free to board up windows etc.

Their main competitor, Scotty's was gouging, and charging $40 per 4×8 sheets. In the aftermath of the storm, Home Depot kept their prices down while Scotty's jacked them up. Scotty's did the same thing after Hurricane Charley. Much editorial space was spent discussing this in the Miami Herald, El Nuevo Herald, Sun Sentinel etc. Scotty's reputation suffered greatly and eventually went out of business at the end of 2005.

There was lots of bad karma and my builder friends avoided Scotty's like the plague. Scotty's said they closed all their stores because of the hyper-competitive building supplies market…..this was when Florida had the biggest construction upswing in history. Again, real bad karma. Home Depot is still a viable corporation. Because of Scotty's actions(and that of others), Florida passed a non-gouging law in 1993 which Scotty's still ignored in 2004.

Steve Ellison writes:

In Predictably Irrational, Dan Ariely devotes a chapter to "social norms" (the friendly requests people make of one another) vs. "market norms" (you do x, I'll pay you y). People generally see social norms and personal relationships as being on a higher plane than mere market transactions. In one study cited by Professor Ariely, implementing fines for picking up children late at day care centers actually increased the frequency of late pickups. Before the fines, the parents felt bound by social norms and felt guilty for inconveniencing the day care providers if they were late. After the fines were implemented, a late pickup was reduced to a mere market transaction: I want to be late, and I am paying for extra service.

My guess is that companies such as Whole Foods that serve customers beyond the bounds of how customers expect a profit-seeking corporation to behave elevate themselves on the social vs. market scale and thereby gain much customer loyalty.

Russ Sears writes: 

People are cooperative beings, they want to feel they are in a partnership where one looks out for the other. While the individual is the driver of innovation and change, progress is made by the most connected in ideas. Arts, science and technology thrive is these highly cooperative environments such as the big cities. Ideas are one thing that the sum of the parts can become exponentially more.

If the business really is adding value, then they display it by highlighting cooperation with their customers. Because long term the good will makes them more resilient and able to grow.

Whereas if every transaction is a zero sum game, then the signal to the customer and investor is short term thinking. There is a tinge of buyer beware for the customer and an touch of desperation to next quarters results to the investor.

The entrepreneurs I know who are successful only do it because they love the business otherwise the risk the stress and the heartache are not worth the money or the effort.

I believe Jobs showed the world that at some point it is no longer is about the money, it is about making a difference, giving others what they want and of course "beating" your competitors. If you can do these 3 things well it is like having a blank check written by the world.
 

Gary Rogan adds:

Yes, that's another way of looking at the situation. But Jobs is Jobs, and regardless: when confronted with a situation where a person (or an entire business enterprise) who doesn't know you from Adam is particularly accommodating and friendly to you, you have to decide whether (a) that's just how they are (b) they are doing this to get repeat business as a calculated move (c) they are conning you (d) they saw you and really fell in love with you. The thing is, it could be any combination of these or something else. All I'm saying is that a "they are giving stuff away" or some equivalent to "therefore I will make them by business/partner of choice for a long time" isn't always the most rational thing to do. One really should only feel gratitude to people who are doing it for un-selfish reasons while recognizing that a good businessman will often behave "nicely" as opposed to being a jerk.

Clearly almost all expressions of "good will" and cooperative behavior by businesses are self-serving. The rare exceptions are of the nature of some owner or executive clearly touched by the misery of his customers and/or employees and doing something good for them just because. Cooperative, reliable, and resourceful businesses do add value by not wasting their customer's time and money and not aggravating them, so often everybody wins. Sill in many of these situations have to be analyzed carefully because you are typically not dealing with friends or relatives. Otherwise one can become a "victim" of deception, as someone who buys a company's product because its advertising agency made a particularly effective commercial that is often in no way related to the quality of the product. 

Jeff Rollert writes:

I'd like to share a story that happened this weekend.

A number of you know my hobby is racing sailboats. Well, I'm on a number of forums and they have members that range from the grouchy to super nice and helpful.

About six months ago, a fellow I'd never met or spoken to offered to lend me a sail to test an idea I had been struggling with. There was not a request on when to give it back; in fact it was open ended. After dealing day in and day out with the squids of our occupation, the offer seemed too nice. Something worth $200-$500? Just drive over to my house and you can have it. Really? This is Los Angeles!

Well, in a race this weekend we all got to talking about boats we had owned and one of the guys had the same as mine. We started to compare notes, forums, parts suppliers etc.

It turns out he was the guy who made the offer. I was ashamed at how genuine and nice a guy he was, and what I had suspected.

I only bring this up as a probability point…no matter how pissed you can get at humanity, the percentage of genuinely nice folks is always above zero. I'd forgotten that lesson.

You guys often remind me of that lesson too!
 

Jan

2

The difficulty of getting back in once you have sold in stocks is underlined vis a vis the buy and hold strategy, as well as the fate of short selling, as well as timing— by the fast 50 point move in stocks today.

Gary Rogan writes: 

It seems like generally speaking one should either trade, as in being in and out "often" or buy and hold. Buying and holding except for periodically being out or short seems to be what Victor is addressing, and I have always been suspicious of "market timing". All it takes is getting it wrong once, and you are in a hole that's expanding for a long time.

I'm still curious how Victor was so sure there would be a deal.

Anonymous writes: 

What was the effective date of the STOCK Act to ban congressional insider trading, I wonder. As a staffer, one could have slapped the emini around harder the Khan brothers squash ball.

Victor Niederhoffer replies: 

Let us hope that the profits from such activity were sufficient to assuage any such desires for a few days.

Russ Herrold writes:

The dance is a re-run and in prior seasons, the cliff is avoided. Sitcom writers can re-cycle plots endlessly.

Kim Zussman writes: 

It's the binary conundrum of markets:

Buy the rumor / sell the news (or buy the news)
Buy and hold (or sell and sit)
You can't time the market (but some can)
Stocks beat bonds (except for the last decade)
Printing presses lead to disaster (which may not come in our lifetime)

The President of the Old Speculator's Club writes in:

I heard a Congressman speak recently and have to admit it was an enlightening experience. Traditionally, members display a certain amount of restraint when speaking of colleagues with whom they find grievous fault. In a refreshing departure from good manners, this gentleman took the gloves off and bluntly stated that a goodly number of his fellow representatives are less than bright. The word "clown" came up several times and "stupid" might have been slipped in.

Although he artfully avoided specifying individuals or party, I couldn't help but believe that he, like many in the "beltway", had come to the same conclusion: the arrival of the Tea Party contingent has been nothing short of a national disaster.

Unsurprisingly, the congressman's public and scathing view is shared by the current establishment elite. (It's dangerous to out there and speak your mind if what you say is out of step with the conventional wisdom.) His case is provided with added cover by a host of recently published and similarly themed books ("It's Even Worse Than It Looks", Mann, "Do Not Ask What Good We Do", Draper, "Beyond Outrage", Reich, and "The Party is Over", Lofgren).

However, the "fiscal cliff" isn't a maiden making her debut. We've had two relatively recent encounters with her; so her charms, though formidable, are familiar. Her appearances in '91 and '95 were just as awesome and, as expected, so compelling that one of the parties bit into the proffered apple. Unfortunately, the fruit, which is bitter and often fatal, is the produce of the tree of Folly. On this most recent visit, though, she is confronted by a group so naive and simple that her blandishments have gone unrequited.

In any event, it's apparent that the respect (whether real or faked) House members used to show each other, at least in public, has been thrown over for a newer, more aggressive, in-your-face approach. Long gone are the clever and informed debates which provided a rich mix of facts, history, and truth. It seems important to figure out why this has developed and if, in fact, a functioning government is still possible.

If one studies what the House has been in the past and what it has evolved into, it's impossible to overlook that this body has lost, or given up, much of it's power and authority. The growth of the executive branch (the Imperial Presidency) is one factor. Back in '96 the congress and the president worked long and hard to create the first welfare reform package. Contrary to forecast of terrible consequences, the new programs worked well.

Yet, in one day, an Executive Order by the current president re-established the old, failed programs. Another assumed power has been the declaration of war, and the most recent threat: unilaterally raising the ceiling on the debt.

While the Executive Order has been increasingly utilized to usurp powers constitutionally granted to the House (and Senate), the greatest loss of power has been though Congress' voluntary abandonment of authority to "regulatory agencies."

Figuring that some issues were just to tough, complex, or time consuming, the country has had foisted upon itself the EPA, FDA, TSA, USDA (with 20 sub-agencies within it), the Dept.of Commerce (with 17 sub-agencies), Dept. of Defense (with 32 sub-agencies) and the list goes on and on. Each agency is staffed by unelected individuals, many with their own agendas, who dictate new regulations that possess the force of law. It's understandable that so much work has to be delegated, but to give it to agencies that are unanswerable to the body that created them is inexcusable.

Then, of course, there is "party discipline." Sam Rayburn of Texas, Speaker of the House for many, many years, gave each incoming freshman representative of his party one piece of advice: "If you want to get along, go along." And they did. Those that didn't faced many difficulties: in committee assignments, in getting their legislation to the floor, in receiving party re-election funds, and they'd be high on the list of targets should redistricting become an issue.

Unfortunately, this approach worked, and worked well. As a result, many constituents found that the views they wished their representatives to promote in D.C., took a back seat to the views favored by the party leaders - many of them from different parts of the country with substantially different interests and goals. The "house of the people" became a house held hostage. Matters reached a new low in representative government when the other party adopted the same process.

Then 2080 rolled around and enough citizens, aggravated at the apparent unresponsiveness of their representatives, threw them out and ushered in the Tea Party. A delicate balance has been disturbed and the Dysfunctional Couple, used to newcomers adjusting to them, failed to realize that these clowns - these yahoos, actually believed in what they'd declared. Whether they win or lose, prevail or fail, their chances for another re-election are small. But for a brief period they have served as reminders that doing the people's business is serious business and that a promise made is a debt unpaid.

For a brief period this collection of vagabonds has added a dose of virility to a confederacy of eunuchs.

As to the President's actions in the recent negotiations, he did nothing, offered nothing…he arrogantly summoned everyone back to D.C. Most came back assuming he had a proposition - he didn't - even CNBC's John Harwood was a little taken aback at the presumptuous gesture. Some time back I suggested I was all for giving this guy everything he asked for - and then letting him perform as he has suggested he would. He has received almost everything; now it's time to lead. This from a guy who, in his short term in the Illinois senate, voted "present" on over half the bills that went through. He is structurally averse to taking a position - preferring, instead, to demonize his opponents.

So, first time at bat, he (and his faithful followers), are hand-wringing over what roadblocks the GOP will/might place before a debt ceiling deadline is reached. It's time he quit talking and started doing.
 

Dec

26

Where the interests of signaler and signal receiver diverge, there exist both incentives and opportunity for manipulation by sending misleading information. Deception is the major obstacle to information sharing. And the living world is rife with deception. From the lure that an anglerfish uses to attract prey, to the false alarm that a flycatcher raises to dissuade competitors, from bluegill sunfish males that sneak matings by masquerading as females, to the mimic octopus that can imitate a wide range of poisonous creatures and other underwater objects, from the false mating signals of carnivorous fireflies, to the shame regenerated claw of a fiddler crab, from the chemical mimicry that caterpillars use to invade the nest chamber of ants, to the bluffing threats of a molting stomatopod, organisms deceive one another in every imaginable way in order to attain every conceivable advantage ".

From Carl Bergstrom's Dealing with Deception in Biology

What is needed is a model and practical means for dealing with deception in markets.

Gary Rogan writes: 

Perhaps whats needed first is classifying the different classes of market deception. At the very least there are two very distinct classes: deliberate and evolved. "Deliberate" comes in many flavors, like "flexionic"/insider where some privileged few act on advance information as in the recent "fiscal cliff" related flash crash or "accounting fraud" when a company (or a government agency) puts out deliberately distorted information. It seems like various market patterns that evolve/appear for some internal and often not clearly understood reasons are often not related or only peripherally related to the deliberate types, but still act to draw in the unsuspecting/unduly exposed and provide an energy source to the markets as opposed to benefiting some specific perpetrators.

a commenter writes: 

Good idea, Mr. Rogan. Other categories might be subdivided:

1) company specific deception which affects only a company stock price (HLF)

2) macro-economic deception which affects entire indices (fiscal cliff).

So, in order to beat deception, it is critical for one to fully understand the mentality of the targets (oneself at times when one is the primary target) as well as that of the deceiver.

When we come to model deceptions in markets, modeling the mentality of the crowds is perhaps much less of a challenge than objectively modeling the subjective nature of one's own mentality.

Alston Mabry writes: 

The biggest deception is self-deception: We are much more likely to believe a lie that we *want* to be true. Make a promise, charge a fee. The bigger the promise, the bigger the fee.

Self-deception can apply powerfully to things like chart patterns, or tempting but shadowy cause-and-effect relationships that you can almost tease out of the data. The market displays a pattern. Then displays it a second time. The third time you put a little money on it and score. So the fourth time you go in large, but unfortunately….

Dec

21

I cam across a great blog post about a very interesting paper called "Multiple Victim Public Shootings, Bombings, and Right-to-Carry Concealed Handgun Laws: A Study by Profs. John Lott and William Landes". This is the abstract:

Few events obtain the same instant worldwide news coverage as multiple victim public shootings. These crimes allow us to study the alternative methods used to kill a large number of people (e.g., shootings versus bombings), marginal deterrence and the severity of the crime, substitutability of penalties, private versus public methods of deterrence and incapacitation, and whether attacks produce "copycats."

Our results are surprising and dramatic. While arrest or conviction rates and the death penalty reduce "normal" murder rates, our results find that the only policy factor to influence multiple victim public shootings is the passage of concealed handgun laws. We explain why public shootings are more sensitive than other violent crimes to concealed handguns, why the laws reduce both the number of shootings as well as their severity, and why other penalties like executions have differential deterrent effects depending upon the type of murder.

The results of this paper support the hypothesis that concealed handgun or shall issue laws reduce the number of multiple victim public shootings. Attackers are deterred and the number of people injured or killed per attack is also reduced, thus for the first time providing evidence that the harm from crimes that still occur can be mitigated.

Not only does the passage of a shall issue law have a significant impact on multiple shootings but it is the only law related variable that appears to have a significant impact…A particularly surprising result is how the death penalty is so important in deterring murders generally, but has no significant impact on multiple victim public shootings.

Gary Rogan writes:

I have little interest in guns one way or the other. What little interest I do have is based on the instructive nature of how magical thinking is applied by ideological fanatics to "solve" the problem exactly the wrong way.

1. It is clear that if you ban any kind of widely available gun type today, "the bad guys" will have access to guns for decades because there are currently hundreds of millions in circulation. It is also clear that access to guns will become more difficult for "the good guys". And while it is also clear that there will be SOME reduction in the type of gun violence like the latest incident, that was a very unusual case in that the nut stole the guns from his law-abiding mother. It is not at all clear how widespread such reductions would be given that the nut would still be able to obtain many forms of different guns from the same type of law-abiding source and more typical nuts would get some guns somewhere without any problem.

2. It is clear that when you create "gun free zones" and proudly advertise them as such you create "fish in a barrel" type situation for the nuts, which they find highly attractive both psychologically and practically.

3. It seems obvious that concealed carry permits and specifically having a lot of their holders in the former "gun free zones" will dramatically cut down on the number of casualties. This is due both to the ability to stop the nut and to the observed tendency of such nuts to kill themselves as soon as being even vaguely aware of a confrontation with another armed person. And of course just the knowledge that the formerly "gun free zone" no longer is will make that zone infinitely safer based on the deterrence effect. It would be therefore amazing to watch how the usual suspects immediately start talking about gun control without explaining anything about the linkage between such and the number of victims or even any logic behind their line of thinking, were it not their normal modus operandi. The same "logic" the usual suspects apply to higher taxes on the rich being beneficial, and Bush causing the big recession by his "policies" to which we don't want to go back to, is applied to gun control. This supports the theory I advanced a couple of weeks ago that the biggest thing that rules the world today is "suspension of disbelief".

Dec

4

Why do people with any reputation at stake like to predict major moves in the market? If they are talking their book, it's mostly silly because they can't influence it enough. If it's to take a chance that they will enhance their reputation, I guess it's worth it, once, if they happen to be right. Some have gone to great fame by making that one call and their subsequent bad calls are often forgotten. It must be mostly because they have to say something because of the nature of their business and they can't afford to always be vague.

Nov

29

Shouldn't dividend paying stocks consider reducing or eliminating dividends, and instead use free cash flow for share repurchases? Assuming long term cap gains tax will be less than tax on dividends.

Gary Rogan writes:

They have to consider that many of their holders are sub-250K and many hold in tax-shielded retirement accounts. "Widows and orphans" still rely on dividends to some degree, so there is probably some sort of a Laffer-like curve where the post-tax income total return averaged over all the holders is optimized by a particular dividend policy.

Mr. Krisrock writes:

You can't turn on a financial news program without hearing about special dividends. Companies are also rewarding employees with 15% dividends as a year end bonus. Even better is issuing debt, which is tax deductible and buying back stock when ITS is not at a market peak?

This will likely happen sometime next year…not now. Most liberal Californians haven't figured out how Obama has tactically created the seeds for a republican internal war in 2014. Boehner has made sure his entire house leadership is comprised of supporters, and he can cut a deal that enrages the tea party whom he despises. Now tell me who defends personal property rights, when there is a rebellion among republicans. Obama can get back the house in 2014 simply allowing the brain dead rep establishment to self destruct. They are really that dumb…and he is really smart …he won re-election no matter how he did it.

It would be a waste of corporate cash to buy stocks here and now and the more special dividends from companies like Home Depot, the more we can confirm the worst is coming.

Jim Sogi writes:

Isn't the threat of dividend tax a good way to shake out accumulated cash held by corporations? Wouldn't a better way be to get rid of the dividend tax? Equities would go through the roof.

Nov

29

His view of what cheers people up on the Today show:

MATT LAUER, TODAY: So bottom line, would raising taxes on the wealthiest Americans have a chilling effect on hiring in this country?

WARREN BUFFETT: No, and I think would have a great effect in terms of the morale of the middle class, who have seen themselves paying high payroll taxes, income taxes. And then they watch guys like me end up paying a rate that's below that, you know, paid by the people in my office.

Nov

29

Rome: an Empire's Story By Greg Woolf gives and excellent review of the reasons and history of the rise and decline of Rome's empire which was kept relatively intact for 1500 years. The rise he attributes to efficiency, trade, and military success. The fall he attributes to weak alliances with neighboring countries to rule the provinces, and lack of incentives to produce from the provinces. I find many parallels to the present. The good news is that it took 1500 years to disintegrate.

Steve Ellison writes: 

I am partway through volume 1 of Gibbon's The Decline and Fall of the Roman Empire. There was little incentive for the emperor to rule for the benefit of his subjects rather than for his own pleasure. Rome became a military kleptocracy after the murder of Commodus in 192. The armies knew they were the source of power and demanded an exorbitant price for their support, beginning with the Praetorian guard's murder of Pertinax and subsequent auction of the throne to the highest bidder. Frequently contending for rival generals to seize the throne, Roman armies put more energy into fighting one another than fighting the enemies on the frontiers.

Stefan Jovanovich writes: 

Details, details:

"Romans imagined [the empire] as a collective effort: Senate and people, Rome and her allies, the men and the gods of the city working together." This continued as Rome passed from the Republic to the Caesars, who were kings "even if [Romans] could never bring themselves to call them by that name." It is "a history of remarkable stability. If it was largely true that (as one historian has put it) 'Emperors don't die in bed,' it was also true that the murders of many individual emperors seem to have done little to shake the system itself."

Since "decline and fall" is the current meme, one should hardly be surprised that publishers and their authors want to cash in on the latest craze. (That is all publishers ever do; and authors, poor things, are usually desperate to oblige.) Professor Woolf should have resisted the impulse. He certainly knows better. The "collective effort" he describes is a complete fairy tale. The Empire never even developed a common language; our "classical" education notions are based entirely on the fact that rich people had too know Greek because that was the commercial language of the eastern provinces — which was where the money was. Latin was for the inscriptions on the public buildings and for the official orations and the school examinations but the "common" people continued to speak their own tongues. Even the Army relied on whistles, drums. and flags for its "commands" when it took to the field. This explains why Latin itself became almost instantly obsolete even south of the Rubicon. No one writing about the Hapsburgs, who did manage to keep their own Empire running for a good long while, would ever have offered up such fictions about "court and people, Vienna and her allies, the men and gods of Vienna working together". But, we have enough information to know that the court spoke French in that Holy Roman empire. The beauty of Roman history is that there are so few actual facts that survive that one can make the story whatever one wants it to be.

Jim Sogi writes:

The key is "1500 years". It's not going to fall apart in the next 100, that's for sure.

Gary Rogan writes:

The difference is that they couldn't do state borrowing in anywhere near the same proportion to their GNP as the US can. It also took less than 100 years from the peak, however defined to really difficult times. And as "mr. grain's" article demonstrates in less than 200 years from the peak free people were volunteering for slavery to avoid taxes, an inflation rate of 15,000% was experienced, free employees were essentially made into slaves at their places of work, and women, children, and parents were physically hauled off and abused to get to the tax evaders. All due to overspending and overtaxation.

Also for whatever reason they limited the free grains to a relatively fixed number of people, and the amount was small for quite a long time. Their modern equivalents today with a much more advance education in economics talk about redistribution with such excitement and such lack of concern for where this is all going that would make Nero proud (I mean the part about fiddling while the Rome burned, except they are not fiddling but setting the fires).

Vince Fulco writes:

I am still trying to understand how a society flourishes with reported median family incomes stagnant or below that of a decade ago? And there is no sign the worker is gaining any bargaining power. Sure the govt can artificially tinker with rates reducing the carrying costs but someday existing debt must be paid; at least at the consumer level. It is debt assumption for non-producing overpriced (after debt service costs are added in) consumer goods which will kill this country.

Tim Melvin writes: 

I agree with that to a large degree…..crony capitalism at the expense of everyone else is a cancer in any society….the problem is not capitalism exploiting the workers. it is the complex and intertwined relationship of business and government that does us the most harm. Eisenhower was right.

Anonymous adds:

Tim,

I think the malignancy has metastasized much deeper than that, and now sits in a kind of acid bath (the pending "fiscal crisis') where all else is peeled away and we see it clearly (in fact, the fact that people seem to NOT see this clearly is evidence of its metastastization) and it is this: Our society — at every level — is characterized by a desire for more rules, and an exception of those rules for ourselves.

Talking different tax rates is a carve out. The argument that the elderly should get a carve out. The birth control carve out. The government worker's salaries untouchability as a carve out.

How about when the White House issues exemptions to Obamacare?

Affirmative action is a carve out. All corporate socialism is a carve out. Every bill passed by Congress does not apply to them. I call that a carve out!

The white lady's sinus-snort lament, "This is RIDICULOUS!" always pertains to her being denied her attempted exception carve-out to the rules.

That's the cancer. The cure would take a lot more than Mitt Romney, and likely cannot be cured by a single individual.

History doesn't exactly repeat, usually, an incident is followed by another incident of similar cause but differing results and often differing in duration. I don't think we're going into a 1,000 year long dark ages. I think we're racing headlong now to something far more sudden and shocking, and bigger than any one man or political party can purge from our psyches.

Jim Sogi writes: 

I used to think the revolution was just around the corner, society was fragile and was about to come apart. Not now. Look at NYC and Sandy: that was an amazing comeback. The recession was bad, but the economy is slowly coming back. Things are not bad now. In the 1940's there was nuclear world war. Japan, Germany, Europe came back. Russia fell apart, but now is back. China killed 10s of millions, but came back strong. People are resilient and social systems are strong. The apocalypse is Hollywood and journalistic bogus hokum ballyhoo.

David Lilienfeld writes: 

The same is true of the US post-Civil War. Nothing before or since has had the social and economic impact that that war had. The US is more adaptable than Rome was. As Peter Drucker often observed, the US genius is political.

One of the signposts that Rome was done was when it was no longer able to rely on client states for security. That isn't the case now with the US.

A better paradigm for guidance might be the Persian Empire.

Gary Rogan writes: 

I keep coming back to the debt issue, the current size, and the ability and desire by "the powers that be" to accumulate more at an astonishing clip. Four years ago I predicted a debt-driven collapse that Rocky chided me for so much, and while the timeframe now seems indeterminate, what IS the way out without a currency collapse and all that follows in those types of situations? The bond vigilantes are not too concerned, and they know all, but what is it that they see? Can they see far into the future or are they playing musical chairs? 

David Lilienfeld adds: 

I'm reminded of the comment by Jim Carville, Bill Clinton's political advisor. In a re-incarnated life, he said, he wanted to come back as the bond market. "It can intimidate anyone it wants to."

Nov

27

In a discussion with Janine Wedel, author of The Shadow Elite, we discussed the prevalence of flexionism in other fields besides finance. She pointed out that big pharma has the same revolving door, and intersecting relations between consultants, government employees, university professorships, regulatory oversight, and profit making insider trading that so many of the graduates of my alma mater are so famous for and caused high officials to be fired after the payment of a 29 million fine for a friend. She pointed out that the military industrial complex is replete with such flexionism and pointed to such organizations as the BIA, and the directorships on military firms held by former high ranking generals. The recent spate of insider trading cases for hedge fundists who got information from Drs on the certification committees for drug efficacy, with more than 50 convictions so far shows how rampant this lapse is among Drs.

I immediately asked if romance was always involved in the rise and fall of such flexions and we discussed why pictures of the wife of one of the prime movers in my alma mater's foray into Russia, a hedge fundist, are no longer available on the Internet. And that led to a discussion of Petraeus's downfall and whether there is a invariable relation between flexionism and romance. Rumpole's famous lament "why is it always romance" was discussed. From my reading of economic history, I am currently reading e.g the pc book A New Economic View of American History by J. Atack and Peter Passell, I pointed out that our entire political history from the founding of America is replete with self dealing, flexionism and financial avarice influencing the course of events. We discussed the plight of holders of continental debt, and how relatives of Alexander Hamilton, then Secretary of the Treasury went to the south to buy the debt issued by the continental congresses at 8 cents on the dollar after southerners desperately needed the money for living expenses and were willing to take any amount for their worthless continentals, which Hamilton subsequently convinced Washington to redeem at par.

The history of the two Federal Banks of the United States also was replete with ample opportunities for financiers to profit, and the rise and fall of the Morrises and Biddle in conjunction with the fortunes of these banks, and their role in selling government debt before their fall was discussed.

A discussion of flexionism in Roman times could not be averred, and the self dealing of all the generals who were paid after political careers in the legislature with appointments to govern the provinces where they were expected to rekindle their fortunes with bribes from the merchants in the provinces, as well as the spoils of war was discussed. The Conway Rebellion where the revolutionary war almost ended with the sack of Washington by disgruntled soldiers wanting pay also came into discussion.

The questions arises—- what are the fields and times where flexionism must inevitably arise, and is it good or bad, and how prevalent is it in different economic systems and times.

Gary Rogan writes: 

Discussing the history of the world without self dealing and flexionism is like discussing human physiology without mentioning pathogens and immunity– it would be so incomplete as to not make any sense. Monarchy and aristocracy, the typical situation that humans found themselves in for almost their entire history in centralized societies, are basically codified and/or legalized systems of self dealing. The few attempts at democracy generally degenerated into flexionsims and self dealing with the passage of time. The short recent history of Egyptian democracy (one man, one vote, once) are probably at the short end of the spectrum and the unraveling American democracy is at the other.

It seems like there is no way to avoid self dealing altogether because human nature seems to be irresistibly drawn to it when the opportunity arises, but having a populace that is highly educated, full of enthusiasm and public spirit, and in some sense somewhat uniform in its composition, seems to control it to a degree. There is nobody to police self dealing and flexionism at the top but the population at large. The worst political systems will work better with a quality population, and that's one reason why the history of socialism is so different from one country to another.

Mick Tierney writes: 

On Nov. 19, the chair posted a theory put forward by Umberto Eco and his studies on mass media, culture, and interrupted romance. In respond to this most recent post, addressing flexions, prime movers, romance, etc., I suggest he once again visit Eco and his most recent "fictional" effort: The Prague Cemetery. It's a bear of a book - for the reader must first determine whether the narrators are, in fact, two individual in conflict, or whether it is a single schizophrenic doing battle with himself.

I placed "fictional" in quotes because all the events and participants [except for the narrator(s)] are real - and their exploits really occurred. Since I was to lead a discussion on the book, I spent hours Googling to fact check what seemed to be the familiar ramblings of the conspiracy nut. With the expected exceptions of the conversations, Eco lays out a history that makes it readily apparent that many of the events we once attributed to random occurrence and/or happenstance have been, in fact, orchestrated by individuals whose names you will most likely not find prominently mentioned.

His history covers most of the European countries as well as Russia. In his narrative, there is not a single country, nationality, religious or fraternal organization that does get libeled (although contrary to Russell Baker's contention, he doesn't even address wealthy white, Episcopalian males, much less slander them).

It's a monster book and not an easy read — if you're easily offended ignore it. If you want to witness an interesting account of the real causes behind "inexplicable events," it provides some interesting insights into powers that have always existed and that today's manipulators are, in fact, relatively ham-handed in their machinations.

Nov

27

Did others notice that the media lavished fawning attentions on the incumbent this time as he swooped in for a post-Sandy look-see, versus the complete opposite, total opprobrium, against W when he humbly visited the post-Katrina landscape?

From the President of the Old Speculator's Club:

Having spent over 35 years in advertising, I look for campaign themes and whether or not they're effective. Once a successful one has been developed, it's important to study how it can be maintained, tweaked, or revamped to remain relevant. Frequently, this entails being somewhat less than completely forthcoming. The scriveners of the editorial department looked down upon us for this practice.*** (example at bottom)
Now they and their buddies who have been co-opted by the political establishment (hello, Messrs. Moyers, Stephanopoulus, Axelrod, Carney, etc. ), pretty much follow that same playbook. They take what's working, beat it to death, quickly abandon that which is not, and if it cannot be abandoned, it is re-fashioned into something that originally came from the other party (with years and years of congressional records, easy access to old speeches and videos. It's near impossible to NOT find a politician who didn't flip-flop on most issues…Ron Paul may be the exception but look what happened to him).

But there is one significant difference. When advertising a consumer product or service, all that is required is enough customers to make an acceptable profit — this number may be (relatively speaking) a very small percentage of the population. Historically, Rolls Royce, Remy Martin, Rolex, and Louis Vuitton have done very well with a small customer base. Chevy, Gilbey's, Timex, and Martha Stewart, on the other hand, need far more customers to turn a comparable profit.

Better quality goods, marked-up accordingly and marketed smartly ("at 60 MPH all you can hear is the ticking of the dashboard clock") will do very well, even in times of economic adversity. Goods of lesser quality, need a far broader audience and one more concerned with cost than quality or durability. Little wonder them that politicians require (by marketing standards) a staggering "50% plus 1" - one wonders that if it were not for the "two-party system," if anybody could ever get elected.

And here's where the current "rub" comes into play. Though the final result has been characterized in many different ways, the final numbers make it a very slim majority for the incumbent — slim enough, in, fact, that any one of several special interest groups (African-Americans, Hispanics, Roman Catholics, gays, pro-lifers, eco-friendlies, educators, union members, etc.) can claim their votes were the deciding factor.

In my old business, all we had to do, once the sale was made, was deliver the promised product. (If we didn't we could be prosecuted.) It's going to get real dicey when these various groups present the bill for their services (some already have). With a cupboard that's almost bare, the real fun is still ahead of us.

This is the post-Sandy problem that will have to be dealt with and the WH is going to need a magician more than a czar or mouthpiece.

***(I once received a nasty note from the Home Guide editor who chastised me for writing a nice review of a "terrible" restaurant. Well, of course, I wrote a nice review - they were a paying advertiser and I received, in addition to a free meal and copious amounts of gin, $30 tax-free - at the time I was making about $180 a week, my tax bracket was 28%, and I was paying close to a full week's salary in child support - so a free $30 was an incredible windfall. In any event, I pointed out that I had used about 400 of my 800 words raving about the establishment's use of anchovy stuffed olives in their very fine martinis. Another 250 words were devoted to the magnificent ambiance, prompt service, and large parking lot. What remained went to its pastoral location, extensive hours, and drive-out instructions - not a word about the quality of food. And, honestly, the food wasn't "terrible," but the Editor possessed a finer palate and a large enough salary to satisfy it…I got by at Franksville…with lots of sauerkraut and chili on top.)

Nov

26

It's instructive to read the comments to this NYT blog post "Is Rush Limbaugh’s Country Gone?" which notices with glee the ascendant coalition of victims and their rising power. There are themes that emerge by seeing the same memes repeated, such as:

1. The rich have brought this upon themselves by making it impossible for a regular person working a regular jobs to support themselves and their family.


2. Socialism isn't so bad, and as we move farther away in time from the Soviet bogeyman as it's positive aspects are severely underappreciated by the rich.

3. Captial gains rates are the biggest giveaway to the rich.

4. Rush Limbaugh should not be allowed to speak. All he does is peddle treasonous rants grounded in hate.

5. "We" allowed the rich to take more of the nation's wealth, so "we" need to make sure they share it for the good of the people.

6. The immigrants are well justified in their expectations for various societal benefits such as good free public education, roads, bridges, free health care, etc.

A couple of days ago Rush Limbaugh himself agreed with the conclusions of the blog entry itself, but of course not the positive point of view of the results. The most interesting part of the post is the numerical study of how much capitalism is despised by many sub-groups and how well socialism is liked.

Nov

20

Finger off the dike in France at Moody's.

Gary Rogan adds:

If brevity is the soul of wit than this:

Moody's Investors Service on Monday lowered France's sovereign rating by one notch to Aa1, stripping the country of its coveted triple-A rating. "France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labor, goods and service markets," said Moody's in a statement. The ratings agency also expressed concern over France's uncertain fiscal outlook and noted that its resilience to future euro-shock is becoming more difficult to predict. The rating outlook remains negative.

is much less preferable to

"The problem with Socialism is that sooner or later you run out of other people's money".
 

Nov

18

There should be a statistic average absolute close to close move divided by high -low and another statistic average absolute open to close move divided by high - low.

Iit would tell how well the strong have done about scaring out the weak during the day only to have them eating crow and wishing they had done nothing during the day, i.e. the importance of sanguinity and gravitas in market play.

Anatoly Veltman writes: 

PIVOT has been widely used for decades = (H+L+C)/3

The most popular use of it is: if the next session is trading above, then PIVOT is a support area. Conversely, if next session is trading below, then PIVOT is resistance area.

PIVOT's strength took considerable leaking with onset of 24-hour sessions, as opposed to prehistoric DAY-ONLY sessions. The reason: of course, every price traded on volume IS more meaningful than every price traded on a few lots.

Over the decades, at least two distinctive intraday set-ups where also developed, for cases of overcoming PIVOT early in the session, and for cases of overcoming PIVOT late in the session.

Also, I found Weekly, Monthly and even Yearly pivots to be useful.

In any case, despite the ease of coding the conditions for algorithmic PIVOT trades, I found that best uses of PIVOT were by layering a second indicator into the mix, and sometimes even a third. I never had the resources to code that myself — but I'm pretty sure it has been accomplished by now; including by a number of shops that I had tutored.

Gary Rogan writes: 

Not knowing any of this stuff myself, I'm curious how something this simple can work when you have quantum physicists programming ever more sophisticated algorithms and I'm sure some of which are of the learning and self-changing variety. Even the simplest control theory is orders of magnitude more complicated than this and so are rudimentary digital filters. Without giving this more than ten seconds of thinking, if I were to code up something like this I would at least do a continuously adjusting filter that would backtest the coefficients for each of the three components to something other than one while still adding up to three, variable time windows for back testing resulting in multiple variable windows rather than some fixed monthly, weekly, yearly periods, and variable coefficients for however many windows I would wind up with.

Nov

2

The origins of credit are in the financing of trading voyages, specifically in Venice. That was basically a way to invest capital in productive enterprises, as of course is any other form of credit extended with the intention of finding a profit by creating value. Credit for consumption is arguably equivalent to the second oldest form of credit which is financing wars by the kings, and that came later once the credit making machinery got deeper and more geographically distributed following the trade it was financing.

Credit for consumption is almost always a Ponzi scheme of sorts relying on the incomes of the borrowers rising with time, but once in a while it's not when the borrowers pay back and the lenders cease and desist for some rare reason. But as history has demonstrated, sooner or later lending for consumption (or wars by the kings) ends badly because the income streams always start falling or disappear at some point if you wait long enough.

Oct

26

What are the popular phrases used in our business. Things like "risk on" and "challenging" and "restructuring". It always amazes me how book value of a company can decrease while its operating earnings go up.

Gary Rogan writes: 

"Risk-adjusted returns" and "risk tolerance", which seem highly presumptive.

Vince Fulco writes: 

"A rising tide lifts all boats"

"the fed/bernanke put will protect you"

"Fools dance but the greater fool is the one on the sidelines watching them dance…"

"Esp. If they are earning ZIRP"

Pitt T. Maner III writes:

There are two phrases that seem to be in more frequent use lately:

1. "jumping the shark" which has an interesting origin from the "Happy Days" TV show in 1977:

'In its initial usage, it referred to the point in a television program's history when the program had outlived its freshness and viewers had begun to feel that the show's writers were out of new ideas, often after great effort was made to revive interest in the show by the writers, producers, or network.


The usage of "jump the shark" has subsequently broadened beyond television, indicating the moment in its evolution when a brand, design, or creative effort moves beyond the essential qualities that initially defined its success, beyond relevance or recovery.'

and

2. "thrown under the bus" which evidently was first used by sportswriters around the 1990's.

"It's unclear where the phrase came from, but there's no doubting it's having a heyday. There are bus-throw references in the late '90s, mostly in professional sports. (Players who don't get their contracts renewed are often said to get you know what under you know where.) The phrase turns up in politics in 1999, according to a database search, with its maiden voyage courtesy of a press secretary for a candidate for mayor of Philadelphia."

Perhaps in some ways the revived usage of these (and many other) turns of phrase are indicators of overall public sentiment.

Ed writes in:

fiscal cliff, confusing alpha with beta, risk management, proprietary formula, diversify, flight to quality, short japan, market bubble, gold bug, tin foil hat theory, perma-bear, bullish, bearish, front run the fed, market master, trading guru, market cycle, ETF portfolio, bond maven, high frequency trading, flash crash, smart money, front run, market anomaly, wave theory, cash is king, cash is trash, quantitative easing, QE, money printing, wealth effect, hard money, we are bankrupt, offshoring, the 1%, responsible for 5% of NYSE/CME/CBOE volume, carried interest, deep value, momentum trade

Oct

3

"Matt Damon's Anti-Fracking Movie Financed by Oil Rich Arab Nation ":

A new film starring Matt Damon presents American oil and natural gas producers as money-grubbing villains purportedly poisoning rural American towns. It is therefore of particular note that it is financed in part by the royal family of the oil-rich United Arab Emirates.The creators of Promised Land have gone to absurd lengths to vilify oil and gas companies… Since recent events have demonstrated the relative environmental soundness of hydraulic fracturing – a technique for extracting oil and gas from shale formations – Promised Land's script has been altered to make doom-saying environmentalists the tools of oil companies attempting to discredit legitimate "fracking" concerns.

Pitt T. Maner III writes: 

One of the major ceramic proppant companies just put in a 52-week low. The specialized fracking "sand" business might at some point be an interesting area for further research.

David Lilienfeld writes: 

Yes, I was thinking of them and also the niche international business, in general, of designing, producing and expertly injecting fracking sands and proppants into formations. CRR had a pretty good run from July 2009 to July 2011. It's interesting that they have plants in Russia and China. But the swoon, as you say, may continue. The following idea appears to be making the internet rounds (one would think fracking will play a role in these future worldwide developments): 

The relative fortunes of the United States, Russia, and China — and their ability to exert influence in the world — are tied in no small measure to global gas developments," Harvard University's Kennedy School of Government concluded in a report this summer.

Jack Tierney writes: 

Several years back we had a thread related to a coal mine cave in that resulted in numerous deaths and extensive studies to determine the cause(s). A significant portion of the blame fell to "seismicity." The conclusion was that continued use of high explosive well below ground level had a significant enough impact on the earth's composition to create tremors - some serious enough to escalate into earthquakes.

At the time I as a big fan of coal and the study and subsequent developments didn't help my positions at all. Another energy sector I liked was involved in obtaining power through an Enhanced Geothermal System. This involve injecting cold water at very high pressure down to the "hot rocks" below. Though some ""shear" was expected, the reactions received exceeded expectations. Enough so that Switzerland abandoned the idea. Continued seismic events at on-going systems are watched closely and the equities of companies involved in the process (the poster child is Orman [ORA]) have done poorly.

With those developments in mind and ever aware of the not inconsiderable power of the environmentalists opposed to this method, I have re-established those coal positions. Any adverse event substantial enough to even hint at congressional hearings could put a real damper on these current darlings and their numerous fans. And coal would once again be the most abundant and readily available power source for this country's power needs.

I took a flyer similar to this way back in the '90s. Older market types will recall Bre-X and the scandal that surrounded the "seeding" of the gold samples which indicated a huge resource. If I remember the stock went over $100 and might have surpassed $200 (things get foggier as I get older). In any event, after the responsible geologist threw himself out of an aircraft in a successful suicide attempt, the stock was closed to trading.

However, the CEO of the company screamed bloody murder, claimed it was a rush to judgment, and that the results were legitimate and all was well. And the exchanges relented and trading resumed…with stock at 2 3/8 (yes, stocks did trade in fractions). I assumed as most did that the whole thing was, in fact, a hoax. But trading had been re-instated by the responsbile overseer and for a couple of hundred bucks per round lot, the potential upside was enormous - so I made the bet, and lost. But I'd do it again. Maybe I did.

Oct

2

The Fed gave a vigorous defense of their policies today. One wonders if there is anything that would ever convince them that their policies were and are wrong. For example, if the more they QE it, the worse the economy gets, and the more intractable the employment situation gets. There is something terribly wrong with certain banks laying off 30,000 operatives while at the same time receiving hundreds of billions of emollients in form of investment, loans, purchase of assets, flexionic information, favored deals, guarantees, bailouts, favored nation treatment in regulation and the Good One knows what else, and maintaining and building their 2,500 man trading rooms and CIO's. One mechanism that would cause all such transfers of resources to these favored flexionic institutions to create discommodiation in everyone else, would be the loss of incentives that creates in those not favored. But it goes much deeper than that.

Gary Rogan writes:

I call this "the Krugman Principle": when a government intervention fails it's always because it wasn't big enough, never because the idea was wrong.

To quote from a Credence Clearwater Revival song (although a little outside of its intended topic): "And when you ask them, "How much should we give?" Ooh, they only answer More! more! more!"

anonymous writes: 

When it comes to social "insurance" there is a point of diminishing returns. The argument for insurance goes, if you buy insurance, you will be able to take more risk elsewhere. And likewise with social insurance, if you don't have to worry about starving in your old age, you don't have to save as much, and can invest the savings in riskier endeavors such as starting a business and you can spend and consume more in your youth. However, if the benefits are too generous, threatening either collapse of the whole social insurance system or massive unknown changes, then the reverse is true.

Likewise the same is true for the government backstopping every corporation that is to big to fail.

It is my contention that the public has become aware that the current course is unsustainable both for the flexions and social security.

Hence the saving rate and lower consumption will continue (slower speed of money). But these are the very things that will enable the fed to say at least "we have done no harm" from a short sighted view.

Oct

2

If the average welfare recipient receives something on the order of $43,000/yr, and the average American's salary is $46,000/yr, the personal discount rate is approximately 6.52%.

There's no initial capital laid out to get on welfare, just a lot of forms and standing in line; But many welfare recipients don't really forgo income to stand in line, so I'm using $0.

Given that the Presidential term is 4 years, the total welfare benefit over those 4 years is $172,000; applying the simple NPV, is a single vote "worth" approximately $156K?

Gary Rogan writes: 

A single vote, for some specific person, is worth ANY amount of money to that person if they aren't the ones paying for it. The now violent riots in Spain and the free phone lady and the $16 trillion deficit are all consequences of that one simple fact.

Sep

6

I disagree that the Fed is the major long term source of how governments are affecting the markets. This is a short term, old school way of thinking. Not that a trader can ignore this.

The major source, I believe, is benefits to seniors and the uncertainty that surrounds them. This is a global issue. The current projectories are clearly unstable, but the politicians have turned it into brinkmanship maneuvering of Euro and budgetary fiscal cliffs.

If in the 80s we conquered inflation by finally understanding wage expectations, in the 21st century will we conquer deflation and societal extreme risk aversion by benefit expectations? Is there an answer? Are we doomed to politicians promising and giving in the short term more than is possible in the long term for the vote? If so, where and when must it all come crashing down?

Gary Rogan writes:

You say in the 80s we conquered inflation by finally understanding wage expectations. I thought inflation was conquered by raising interest rates by a huge percentage. Is that not the case?

Russ Sears replies:

Yes, that was "how" it was accomplished, I am suggesting "why" it had to be done that way. It was the wage price spiral or "inflation expectations". They had to convince people they were serious in lowering inflation long term. Not flood the world with $ every time it was politically expedient to do so.

Gary Rogan adds: 

I realize there were inflation expectations and they were blamed for inflation, but fundamentally there was just too much money being created. I don't think we disagree, I just learned to think of inflation expectations as being derivative to the money supply. Whatever the details of inflation creation, you cut the money supply and inflation will be gone sooner or later. Less money = lower inflation, whatever people believe.

Rocky Humbert writes: 

If anyone can demonstrate with any degree of quantitative rigor

(1) How politics can be quantified.

(2) How politics can be predicted.

(3) How either of these things can be useful to investing in an objective way, then I will embrace political discussions wholeheartedly.

But before you folks try to go down that path, I have to point out that if you own stocks, you should pray for Obama's re-election. (hah)

David Lilienfeld writes: 

The assumption on the Dem vs Rep analysis is steady-state, i.e, the structure of the economy is steady-state. In the age of globalization, that's probably not true anymore, so the analysis, while interesting, isn't informative about what the future might hold. Further, I don't think it will much matter which party wins the Oval Office economically since both parties are going to try to spend like crazy. The alternative is to control the deficit, which may have long-term benefits but which will have short term political pain. In an age of instant gratification, I doubt that the politicians of either party are willing to take the chance that their prescription for the economy will show its benefits before the next election. Just as Wall Street analysts live and die by the next quarter's earning, so too do politicians. Call me naive, but spend and let someone else figure out how to deal with the consequences has become as American as apple pie. I see neither political party providing any basis to suggest otherwise.

Sep

5

If one presumes that a ZIRP is a form of command economy, without complicating the question with other similar restraints, haven't the current structure of global markets just become state sponsored speculation? That would certainly explain the increase in correlations.

I've been thinking about the line that divides investment from speculation. Prior to this administration, I considered the difference to be based on time window and interest/dividend cash flow differences.

Anyone's thoughts?

Stefan Jovanovich writes: 

To avoid real work I have been reading Sumner's History of American Currency; it is a delightful reassurance that "state sponsored speculation" began as soon as Washington left office. The present may be dreadful, but it is hardly unusual. I would argue that the present "command economy" is, in fact, far less under the thumb of the government than it was before ZIRP. Is there anyone on the List who thinks that, freed from the shackles of the Federal Reserve and the Treasury and the alphabet agencies now guaranteeing home loans, the U.S. single-family housing industry would boom and passbook savings rates would go back to 5%? Roosevelt's legalized theft of American's specie savings had terrible consequences for the American economy because it represented the complete triumph of state sponsored mercantilism. World trade literally evaporated. That is hardly the situation now. The Federal Reserve, ECB, and Banks of England, Japan and China can tinker with the maturities of their IOUs all they want and the national Treasurers can hint broadly at the need for a strong (weak) national currency; but the markets call the tune.

Gary Rogan writes:

Let's say you discover that on a particular day the stock market is likely to sell of based on historical patterns, so you short the market. In a different situation you find a promising young company that you believe will create a product that will sell in the billions several years from now so you buy the stock of that company. Wouldn't the first example be more of a speculation and the second one more of an investment? To generalize, could speculation be betting on the market participants' behavior, generally in the short term, and investment betting on the underlying fundamentals, generally longer term? 

Sep

2

One of the great regularities that I have observed from a long and not uneventful career in trading is that whatever governments want, the governments get. If they want stock prices to rise before an election, or oil prices to decrease or commodity prices to decrease they get it. They have so many trillions to work with, so many entities that can be called on to increase the perks and power of the governmental entities. There's the EU, the IMF, the central banks, the what have you. It always amazed me that the palindrome was able to overcome the Old Lady on the pound. All HM Government had to do was tell the private banks to charge 200% interest to the palindrome on the leverage. In those days, presumably the private banks were more independent, but now their very survival, profitability, and existence is dependent on the good will of the governments with the direct investments, the bailouts, the purchase of bad assets, the cost of borrowing reserves, the fines, the regulations that permit their existence unless they agree to further the "Idea". The whole thing must be quantified. And a subset of governmental market reactions must be found that are susceptible to predictions based on specific times, and events. (I think).

Art Cooper comments:

I agree that that is correct, what governments want, governments get, but that's merely the first stage. The second stage is that those groups/powers which have the greatest influence on government get what THEY want from government in those matters which are most important to them — that's who government serves. If Traveler's Insurance wants the repeal of Glass-Steagall so that, post-merger, they can continue all operations in a new Citigroup, then Glass-Steagall will be repealed. Special-purpose legislation seems the primary purpose of contemporary government.

T.K Marks writes:

I've often pondered what you said about the palindrome myself. My only conclusion was that he had to know that his position interests were favorably aligned with enough sovereign interests to pull it off. Or else Greenspan and his monetary brethren the world over would be very wary of the precedence of one private concern successfully staring down a central bank to the point of capitulation. And then basically reveling in the adulation.

Gary Rogan writes: 

And that's an example of "knowing what's going on in the world" and making money from it. He seemingly makes these highly complex "let's reason it out" calculations and bets on them. Not long ago Victor related a story about Palindrome wanting him to bet on something using his reasoning and Victor retorting that he had to do what his numbers were telling him, or something like that.

The few times I listened to him drone on about globalization or how Europe will or will not solve its problems he sounded half-insane, but it evidently still works for him. Of course he now has a lot of influence, so there are self-fulfilling prophecies possibly at work.

 

Aug

24

A common mistake that stock people do I think is to pay attention to the increase in sales numbers. What does this have to do with future profits? I would think there is zero correlation given the earnings change since sales are so easy to manipulate by such things as discounts, pre-orders, and incentives for early buying, and reducing inventory et al. How did this ridiculous emphasis on the sales increase become as or more important than earnings relative to expectations in affecting stocks after the earnings report? I recently met with a pairs trading outfit and gave them 100 reasons I don't think it works, but it was from the seat of my pants. The main reason was of course that it goes against the drift. It hedges against the 10,000 fold return.

Gary Rogan writes: 

If sales increase while profits are decreasing, that's a bad sign. However when profits increase while sales are decreasing, this may be very good, but it can't go on too long. Sales trends gained influence as a counterbalance to profit growth being fudged. When you have profits, sales, and cash flows all increasing in unison and indebtedness not increasing, that's as good as it gets. 

Jeff Watson comments: 

Profits increasing while sales are decreasing are usually a sign of increased productivity, better inventory management, better management of labor, and better management of capital. Although Gary says this scenario can't go on too long, it really can go on forever. 

Gary Rogan replies: 

Well clearly it's mathematically possible to decrease sales by .1% per year and increase profits by .1% per year close to forever so "too long" was perhaps a bit harsh, but at some point in the real world gross margins become so high as to make further advances impossible due to competition or substitution. My statement was prompted by not being able to recall a real scenario of sustained profit growth and sales decline resulting in a good outcome having looked at hundreds of income statements, but I've never made a study out of it nor have I looked at multi-year trends. When customers are buying less of your stuff year in and year out that usually means they are not excited about your stuff, because they don't like it but perhaps in this case because the price is too high for them to use more of it. When customers get into the habit of using less of your stuff, that's hard to fight. 

Jeff Watson adds:

The Chair is 100% correct. Going back to Sears as an example…their aggressive pricing will only squeeze their retail operation out of business(if continued long enough), as prices this low are unsustainable in the long run. If a store has a 30 percent increase in sales after implementing a big sale, but it's gross profit goes from 22% to 6% or less, is that a good business plan? Even though Sears is not increasing labor to handle the increase in sales, the model is still badly flawed. I understand that one of the most important things in retail is buying right, but I suspect that most of the things Sears is selling is a loss leader. Maybe they are subscribing to the old cliche, "We might be losing a little money on each sale, so we'll make up for that with the increase in volume."

Russ Sears writes:

Coming from the world of insurance, when things sell unexpectedly well the actuaries double check their pricing. The agents and the market will quickly spot when you are selling $1 or risk coverage for 99 cents. When I started, before rate books were online, a printing error cut-off the $1 handle of 70 year old women term life insurance rate per $1,000 (this was highest age we sold term to). The month after the book went out we had more 70 yr. old women apply for insurance than we had in the past several years combined.

In other words sales increases often indicate increase in claims volatility. Sales increases make me wonder if management really knows what they are doing. One wonders if this rule holds for the retail and stocks in general. 

Carder Dimitroff adds: 

I may be naive, but in some sectors I believe the top line could be critical for long term investments. I'm thinking of regulated and capital intensive companies like electric utilities, gas utilities, water utilities, pipeline companies, transmission line companies and MLPs. In a different way, I'm also thinking of non-regulated utilities, such as independent power producers, refineries and REITs.

In all these cases, if the top line falls, the bottom line is plagued by fixed costs, such as interest, ad volerem taxes, depreciation and amortization.

The second derivative of revenues in such cases is capacity factor. Low revenues suggest low capacity factors. Low capacity factors suggest troubled assets and long-term challenges. The assets could be partially stranded by market conditions.

An example is marginally efficient coal plants. With low market prices for natural gas, many coal plants find themselves out of merit and not dispatched (zero earnings for producing energy). When natural gas prices return, marginal coal plants are again deep in the merit order and they are dispatched frequently or continuously.

Julian Rowberry writes: 

An internet marketing equivalent of over valuing sales figures is over valuing social media subscribers. Twitter followers, facebook likes, page views, ad clicks etc are all very easily manipulated.

Leo Jia adds: 

Here is my two cents regarding growth vs non-growth.

The present value of a business without growth is much lower than that of a similar sized growing business. So one obvious question to any business owner is whether he would like to receive more money or not if the business is to be sold today. The answer is obvious. But one may counter: since he is making good profits on the business, why would he sell it today? Well, isn't that the beauty of modern finance produced through Wall Street? To sell it today, the entrepreneur can collect today all his future earnings projected based on the best periods of his business performance, and with that reward, he can move on with his life, rather than be tied up by the business which may turn sourer later and cause him to suffer.

Why would Wall Street care more about growing businesses? Those people who bought out the entrepreneur have an even higher reward outlook than his and would seek higher profit on the investment.

Art Cooper writes: 

An example of this currently in the news is Hormel Foods, described in the article "Spam Sales Boost Hormel's Profit" on p B4 of today's WSJ.

The article notes that Hormel's Q3 earnings rose 13%, led by strong growth in products such as Spam and Mexican salsas, continuing a trend of higher YoY earnings. "Even so, rising commodity costs and shoppers' resistance to higher prices are pressuring its profit margins, which could affect its results in future quarters."

HRL's price has been roughly flat for a year.

Aug

9

It would be interesting to opine on the extent of amateurism in other markets. We have quite a few experts on particular markets here.

Gary Rogan writes: 

It would also be interesting to hear opinions on the strengths/weaknesses associated with professionals vs. amateurs. There are two well-known supposed professional (that is, institutional professionals) weaknesses, which are, 1, professionals get graded every quarter, so it's dangerous for them to execute strategies that have high drawdown probabilities, and 2, professionals get graded against their peers, so it's better to lose with everybody else than to take a chance on a generally winning strategy that once in a while loses when all the peers are winning. 

Aug

8

Article of the Day: "Billionaire Democrat Jeff Greene Fears Revolt of the Poor"

The man who made his fortune hedging against the real estate market– and since 2009 accumulating mortgage-backed securities– still wants to represent the poor, improve their lot, convince his rich friends they should pay more taxes…

Pressler draws a picture of Greene, 57, worth an estimated $2.1 billion, as a man who lives in fear of a populist revolt, a plundering uprising of America's "poor people." As a member of the country's richest 1 
percent, Greene claims the nation's wealthiest people, people like 
himself, should pay more in taxes willingly– "buy a little democracy 
insurance"– because one day, "if you have 50,000 angry people coming 
across the river, you think you're safe?"

Pitt T. Maner III writes: 

The revolutionary route into Palm Beach would be across the Southern Blvd. bridge which spans the intracoastal waterway (not exactly a river, but close enough). Fortunately for Mr. Greene, Donald Trump's Mar-a-Lago would be the first mansion encountered by the envisioned, angry hordes.

The only invasion activity seen at present are the wondrous sea turtles that are laying eggs in good numbers on the Atlantic Ocean beach side. The turtle hatchlings begin their life cycle in Florida and follow a general circle around the Azores to Florida and back. They are the endangered species and the "farmers" who are important to the ocean ecosystems.

Aug

3

This is a very interesting comment from El-Erian…

My thoughts:

So while markets have been conditioned to expect ever greater central bank intervention whenever the data weakens or sovereign spreads spike in Europe, the cost-benefit equation within the Fed has gotten considerably trickier. There is now much greater appreciation that the policy response, no matter how imaginative, can do little on its own to address decisively America's challenges of too little growth and employment, too much long-term debt and too great a political polarisation.

So, this time around,the Fed decided to talk the talk but not walk the walk. It is unwilling to do anything now, also reflecting a desire to keep dry whatever policy ammunition remains in the event that Washington is unable to deal with the fiscal cliff and Europe takes another turn for the worse. And while it signaled a willingness to do more should conditions deteriorates, I suspect that it wishes this to be in support of other policy measures rather than substituting for them.

The Fed's attempt to overcome its policy dilemmahas little chance of succeeding given the degree of political dysfunction in Washington. It is only a matter of weeks until, once again, Fed officials will feel compelled to act, and despite full knowledge that their measures will have limited effectiveness in delivering desired outcomes.

Most fundamentally, what is being illustrated again in all this is that what the US faces today is as much a political problem as it is an economic one.Until the political system steps up to its strategic leadership challenge, America will risk the trap of policy purgatory.

Aug

2

My Goodness, the market is up a reasonable amount overnight, very much unchanged from Wednesday close, and there were many very positive things in the fed statement. "They will be monitoring the situation closely", which usually means an interim intervention. Remember, "the threat is worse than the execution". The statement of the Fed had many threats that they would intervene to buy assets with the slightest provocation. There was nothing bearish about what the Fed did, and only 10% expected the Fed to do something different. All this talk about throwing O to the wolves is non-market talk, like me talking about the chip industry when I know nothing about it. "The wish is father to the thought".

Gary Rogan writes: 

How can we judge by the market reaction whether the Fed did "all they could"? Of course in any rational universe the lack of immediate drastic action will be judged positively, especially with a slight delay, because just about any QE3 at this point is likely to be counterproductive. It also not THAT fantastic to suppose, and that has been done recently several times, that any conclusions about anti-O intentions will themselves be interpreted positively by the market.

When just yesterday Geithner was urging the Congress, not in so many words but clearly implied, to go on some sort of a wild spending spree to take advantage of the low borrowing costs, while paying lip service to long term solutions, would it not be reasonable to suppose that he would want the fed to undertake some major mortgage purchasing program? When Schumer asked for and DeMint warned against more quantitative easing two weeks ago, would it be hard to guess which one of them would be more satisfied with the Fed's immediate action or lack thereof?

If there is some fantastic jobs report announced on Friday and 300K jobs are created than it will be clear that that was the rationale. The actual ADP trend was down, so I'm not sure how today we can say with certainty that the Fed was being absolutely as helpful to the regime as it could be.

Jul

18

I recently read the wiki page about The Endowment Effect.

Basically, it says the one values his possession much more than others value it.

Thaler conducted the following experiment. He randomly gave some participants a mug, which sells for $6 in a store. He then asked the ones now owning the mug to give a minimum price below which they would not sell the mug, and asked the ones not having the mug to give a maximum price above which they would not buy the mug. It turns out that the owners valued it for $5.25, while the bidders valued it at $2.75. He concluded that the very fact that the persons owned the mug made them give it a higher value.

Very interesting research. But I wonder if the conclusion is as that simple.

First, I wonder what would happen if the owners were asked to buy another mug. How would they now value it? Since it is not a critical item to have and they already own one, it is reasonable to believe that they would bid an even lower price than the bids from those who didn't own it, isn't it?

Second, what about selling short is allowed in the experiment? If the people who didn't own the mug were asked to price it if they would sell it short. I bet their price would be even higher than what the owners offered, and very likely be higher than the $6 store price.

Any input on this, please?

Gary Rogan writes:

Leo, I'm not sure it's productive to attempt to extend these "effects", and there are many of them, beyond their original definition without doing actual experiments. This particular effect seems to be as simple as "defend what's yours harder than you would attempt to get the same thing from someone else", one of the ancient evolutionary developments. Primitive (as well as advanced) animals demonstrate the same effect when fighting for territory, that's why the challenger loses most of the times. Of course someone who has a relatively useless (from their original standpoint) mug to begin with doesn't want another one. Personally I find it more interesting to think about the practical value of the original effect. In the behaviorist books it's supposed to manifest itself by "holding on to losers too long". Every time I read this I always think about whether the logical conclusion is that a rational person should always sell "losers". Sometimes they bring up the tax loss effect, and that's fair but it doesn't get to the heart of the matter. Considering this question, and all the robotic trading that goes on, how would one take advantage of this effect? 

Pitt T. Maner III writes: 

The self-storage business might be an area where this effect is felt most strongly. There is a lot of rent money being paid (by baby boomers and those who have left houses) and property used to store old things instead of buying new.

Rocky Humbert writes:

This is a fascinating subject for exploration. Being only slightly tongue-in-cheek, I wonder what effect negative real interest rates have on the willingness of people to hold onto "junk" ? To the extent that "the cost of carry" (i.e. monthly rental fees) are small, hoarding is a rational behavior. Also, there was an article in the WSJ last week discussing the effects of "clutter" on marriages and home life. Lastly, there may be a "depression-era" and "aging demographic" effect occurring here. In the situations where I've (sadly) had to empty out elderly relative's apartments, I've discovered that depression-era people hoard useless things like return envelopes from bills, archaic car and doorkeys, memorabilia from bygone days, etc. I think that there are many interesting factors at work in this trend — and there is market-related utility in thinking about them.

Jim Sogi writes:

It's really hard getting rid of one's "junk". There is a weird attachment to the stuff. Its almost painful to throw stuff away. Then there's the issue of getting rid of the junk, and then needing that item the next day. Feng Shui has some good tips on clearing the clutter. There must be some sort of hardwired effect causing one to collect stuff. Look at the bag people pushing around carts of junk.

Craig Mee writes: 

I'm with you, Jim, and in the tropics, clutter, dirt and smells brings mosquitoes, which is a very good reason to keep things clean.

On a side note. I've had a lot of trouble with mosquitoes, though I went to a friend open air villa the other evening , and when dusk hit, no mosquitoes ? I looked around and put it down to a) everything was white, walls , furniture, coverings, a well cared for garden, two ceiling fans, (some sea breeze) and importantly I thought …lights under the table we were sitting at. ie everything was clean , tidy, and white, with air.

Further, I read once, if you haven't worn clothes for a season, toss them. That's certainly worked for me.

No doubt those who make money in one particular stock , get attached, (you see it)…it clutters their mind, and they will drag any positive out of fundamentals, value, whatever to get back involved. Got to clear the clutter, or put it out of sight, to free the mind.
 

Rudolf Hauser writes:

In considering the impact of the pure psychological effect on value from ownership, one should not ignore the economic effect. The cost of the purchase is not just the purchase price of the item but the value of all the effort that went into finding the item in the first place and how difficult it might be to be able to buy it again. Then there is the risk of the replacement being defective or other problems in the acquisition thereof that might happen. One also has to consider the potential cost of needing an item and not being able to acquire its replacement in time to meet that need. As an example, I once wanted to buy a new ink eraser to replace the one that wore out. I then found that I had to run around to seemingly countless stores to find this inexpensive item –an effort countless times more expensive in opportunity cost than the price of the item itself. Needless to say, when I finally found the item, I purchased a whole box full to insure that I never would have to spend so much in search costs again for that item. Nor would I have sold those again except for much more than I paid for them.

As for the psychological impact, say one has purchased an object of great beauty at a price that subsequently appreciated considerably. The new higher price might be one at which one would not consider it prudent to buy given the overall state of one's financial resources even though it is an item one might wish one could buy. But already possessing it one has the excuse for buying it via not selling it because one already had done the deed in effect. When an item is not unique or rare and is easily replaced when a new one is needed, one would not suspect that same tendency to value the item in possession more than the same item not in possession. It would be interesting to see if this effect still persists in that case and how it compares to the former.

A stock would be of the latter type at least in small quantities. With larger quantities there is always the uncertainty as to how much such purchases might impact the price, which would the economic reason as opposed to a psychological reason. A psychological reason might be the emotional difficulty of making a decision that one is not anxious to repeat, ignoring the fact that with an investment an implicit decision has to be made every day as to whether to continue to hold or not. The difference is that to sell or purchase is an active decision whereas to hold can be a passive decision. In effect holding is also a way of putting off a decision.

Jul

16

I have been thinking a lot about the difference between investing and speculation. In my opinion they both rely on other people's action to hopefully change the price of things you have an interest in in the favorable direction. Investing relies more on them agreeing over time with your perception of their value, and usually over the relatively longer time frames, and speculation on them moving the price in your direction for any reason, and usually over a shorter time frame. Clearly the two intersect where realizing value is concerned, but the difference in time frames seems the most important.

I'm wondering if anyone else has any different definitions/distinctions.

Jul

13

Perhaps someone can explain this one for me:

Facebook is valued at an astronomical amount. Its revenue base is, basically advertising. But FB is sustained, use-wise, by kids and young adults ( <30 ), who at one time had a fair bit of purchasing power and/or influenced significantly what a typical family bought.

Today, however, that demographic group doesn't have that kind of purchasing power. So what's the appeal for advertisers in supporting FB? Is there any data to suggest that ad buys on FB have a higher ROI than other media venues?

If not, is FB just a lousy investment, or a good one because these things are temporary?

Anatoly Veltman writes: 

Also, consider the theory of reflexivity in the case of FB, of self-perpetuation. I notice that my 11 y.o. daughter has gained self-confidence (and self-absorption) via FB-ing.

Those kids flaunt their "social edge" over the older purse-holders, and pull on purse-strings with ever-increasing zeal.

Like Henry Ford said, "I'll pay my workers enough to buy my cars", FB is fostering its own consumer channel.

Gary Rogan writes: 

The hope with large end-user software companies has always been that they (a) create dominance in their particular specialty (b) use this dominance to figure out as yet unpredictable way to monetize way beyond their current valuation (c) use this dominance and their speed of execution to stay ahead of adverse end-user trends. If often hasn't worked out this way, but of course when it does you get outsized returns.

Stefan Jovanovich writes: 

For the most recent quarter FB generated roughly $.5B in EBITDA - the same result that my favorite submarine with screendoor investment - AMAT - produced. FB did it with 1/4th the number of employees and 40% of the revenue. Does that justify a valuation 5 times what the market now pays for Applied Materials? Yes - if the belief continues that network effects will predominate in social media as they have in paid search. The world will need the production of foundries - both steel and silicon - but it will only pay a premium for businesses that promise that their profit margins will increase on marginal sales because there is no used/distressed inventory out there to compete with the "new" products. The answer will be No only if the world of corporations and teenagers decides that Google+ is a better way to sell their virtual images to the world. (Note to file: since those of us here at Chaos Manor now buy and own stocks as if they were cars and houses - i.e. once we find one we like well enough to buy, it is usually a decade and more before we even think about selling, these comments are only for people - all 3 of you - still willing to attend early morning mass at the church of Buy and Hold.)

Peter Tep adds: 

Above all else, Facebook is just a huge time sink and besides being a networking tool, is another place for people to gloat and boast or climb the social hierarchy — meant in a non negative way. With so many kids using it and literally connected to it 24-7, it's probably going to be a good investment if Facebook finds more ways to market to it's users on an even more emotional level. Has anyone seen the series posted on Ritzholtz blog about this?

I guess it is a great investment because it keeps people emotionally connected, like a great movie is playing out in front of them and they are part of it. If Facebook refines its marketing strategies even more using its users' data, then I guess the sky's the limit.

Jack Tierney writes: 

David asks some important questions regarding FB and its value. I agree that the current price is astronomical, but have very little knowledge of the operation — I am not a member and, barring any unforeseen developments, will not join. I have followed FB for sometime and have not joined because of the incredible amount of information they can gather regarding your personal history, preferences, and affiliations.

That very knowledge, though, explains why this could be a very rewarding investment. Back when I was still employed I did some work with the "research and marketing" groups. One of the first puzzling discoveries I made while going over some data was that, although our newspaper regularly received a huge amount of national food advertising, the relatively small markets covered by the Miami Herald and the Milwaukee Journal, received more.

It was explained to me that both cities were unique in that they were split almost evenly demographically. The wealthy, well-to-do, and upper middle class occupied one half of town, those not that well off, the other. This gave General Mills, Coca-Cola, Proctor & Gamble, etc. ideal platforms from which to launch new products, different packaging, innovative couponing programs, size and container preferences (12 oz. cans vs. 16 oz. bottles).

These two cities gave marketers some valuable insight into buyer preferences…yet it was no where near good enough. The Holy Grail, what each individual preferred, was not only impossible to discover, but impractical to reach. That may now be achievable with FB.

While many who are members argue that they reveal very little about their preferences, few are aware of how much their "friends", directly or indirectly, reveal about them. The most memorable story sent to me regarded an English woman who had been "on the dole" for a couple of years, receiving whatever that country's monthly stipend is for an unmarried, unemployed woman with two children. Someone from Inland Revenue (apparently the equivalent to our IRS) decided to check up on her. Rather than checking her page, he started with the pages of some of her friends.

He happened to come across one that featured a several month old picture of the woman in question, relaxing on a beach in some exotic, expensive European resort — with her new husband. Her friend also happened to mention how fortunate she had been to have an employer who let her take a month long paid vacation.

Well, the outcome was not a pretty one. But the story illustrates that if a "friend" should just happens to mention you're a pizza lover, expect to get an uncommonly large number of pizza promotions - from Pizza Parlors in your very own neighborhood. (How did they know???)

If FB plays this right, they could pull in billions. Marketing has always been about reaching the maximum number of potential buyers for the least cost. From what I've read about FB, this is within their reach. If they follow through, or allowed to follow through, their reach is incredible and I would consider buying.

J.T Holley writes:

I'm 41. I choose to "like" The Jefferson Theater so that I could see the feeds/updates of concerts that were being booked. I got notice that they were having a Southern Rock Band "Blackberry Smoke" play on July 25th. They also said that if you "liked" the announcement then you would be put into a drawing for free tickets. I won. I have two free tickets and allowed them (they asked) if they could say that I won.

GM and all others that don't understand the power of FB are foolish. It reminds me of A. Miller's "Death of a Salesman" and Charley's wise words:

"The only thing you got in this world is what you can sell. And the funny thing is that you're a salesman, and you don't know that." Charley

and he best double negative ever to be used in writing when Charley addresses Willy (foreshadowing).

"Nobody's worth nothin' dead." Charley

Google became the yellow pages.

FB is becomin' greater than the yellow pages.

It's a tectonic shift that many aren't willin' to accept or grasp. I'm nobody and humble and I get it.

Dylan Distasio writes: 

While I think your example is a good one of what Facebook COULD monetize, they are far behind Google on most advertising metrics and have a very low click through rate on the ads they do allow. It's understandable, Google is in the business of ads and has been at it for longer. Zuckerberg seems hesitant to admit or embrace the fact that FB is also in the business of advertising.

And the fact that Google is a yellow pages should not be scoffed at. It is a large part of why their ads in search work and demand higher prices. They are for things people are looking for and highly targeted.

I think with the amount of personal data Facebook has, they have great potential to monetize ads. The big question is whether they are interested, and if so, will they be able to execute.

The current issue of MIT Technology Review has a great article on a team at FB that is looking at the bigger picture in sociological terms of what they can do with the data. While their explicit goal is not focused on monetizing the data, some interesting techniques for doing so may come out of it indirectly.

Facebook has to be careful about how far they go in using people's data in the interest of monetizing it, and has to build a more sophisticated toolbox of ad types and techniques if they want to compete with Google. While they have certainly reached what appears to be critical mass as a social network, people can be fickle with their allegiances, and are happy to jump ship to something else when they get bored or feel slighted. FB will be forced to walk the same tightrope Google does if they want to seriously compete with them.

It should be an interesting couple of years watching this unfold. That said, I think based on the current view of things, FB is tremendously overvalued unless they are willing to start heavily exploiting the data in their possession. I'm not sure Zuckerberg is willing to, and he controls the company with 51% of voting shares. He's now a billionaire and can run his own agenda for quite awhile at the shareholders expense. As an example, I would question his acquistion of Instagram for $1 billion dollars but I guess time will tell. It will help them in the mobile space where FB is currently very weak, but we'll see if it was worth a billion to buy a company with no revenue.

Jul

12

Corn had a horrific report earlier today. It rallied early, but sold off sharply. Buying opportunity or reason to jump ship…that's the conundrum. The mistress of the market sometimes plays games to separate us from our money.

Gary Rogan writes: 

I just came across this snippet:

"Corn prices fell in today's pit trade despite a bullish corn production forecast by the USDA due to dry/hot weather. CNBC suggested that one of the reasons for the slide was that the USDA will help farmers with the drought."

Can this be actually a cause of a sharp sell-off? How would anyone know to sell so quickly?

Also a more general question: what is the general lesson here, don't act on any news?

Bud Conrad writes:

I used to call myself a grain trader. The game was to predict the USDA numbers, then to see if you are more right than the consensus predictions. There is no secret that the Midwest is hot and killing corn. The question is how much?

If you know something that the market or the government don't, you have a chance. So today the government confirmed the well known situation. It common to see the markets "Sell the news". The question is whether it will continue to get worse (stay hot) in the future. Any few day of rain before July 4 can turn things around. At this date it looks like permanent loss.

I have no positions, but am sorry that the last month was a pretty good run on the situation that I should have seen. Aren't you afraid that the broker could be stealing your stash? I'm not reopening my futures accounts because of the lack of protection, which may be what the government wants, so prices won't be driven by speculators.

Jul

3

As Anne O'Connell, a professor at University of Cal Berkeley, said "there are important cases in which the chief justice has to put the court's interests above his own ideological or jurisprudential views. This was one such case."

One would suggest that the court acts to survive and prosper like the badger or any other organism subject to incentives and emoluments.

Gary Rogan writes: 

We may never know whether he wanted to keep getting invited to all the cocktail parties or they made him an offer he couldn't refuse, but he did change his mind at the last minute. In either case, a man with a lifetime appointment somehow has to side with card-carrying communists while making basic mistakes (like a tax law cannot be challenged until the tax is actually collected, and several others), and redirects trillions of dollars of economic activity. All this to make sure that the rest of them with lifetime appointments and no known personal threats of any kind have no chance of being marginalized? Never has so much been sold out for so little even if this subhuman was threatened. 

David Lilienfeld writes: 

Two comments:

1. It's significant how many in our country have as low regard for the SCOTUS as they do. Even more so when one has a Senator questioning whether the court has any standing to rule something as being constitutional or not. The dysfunctionalities present in our government are manifesting at the SCOTUS, and the populous is none too pleased about this. Given that we live in the iPhone Society, one might wonder when the populous would expect anything else.

2. At the time Truman desegregated the military, 65 percent of the country opposed the action. When Brown v Board of Ed was decided, 60+ percent of the country opposed integration of the schools (though this was to change rapidly in the wake of the decision). Courts and politicians are political animals, but they are also leaders–or at least at times in the past, have been leaders. Unfortunately, as we have been without political leadership for sometime, it isn't surprising that this case was decided in such a manner as to defy just about any and all expectations. (There are a lot of people on Intrade who got hosed in this decision).

Rocky Humbert writes: 

Have you even read Robert's opinion? I did. He didn't do any favors for the left in it; he takes a swipe at Wickard and he is very clear that upholding the mandate should not be construed as any expansion of government power. Essentially, he wrote that if it walks like a duck, talks like a duck, smells like a duck, then it's a duck. Substance over form. He blew away the government on every other substantive argument.

In the future application of this ruling, I believe that his opinion won't be used as opening the door further to govt intervention; quite the opposite is true! But unless you read the opinion, you won't know this and the MSM won't report it. I find it disappointing that the court ruled this way, but as I noted yesterday morning, this was not an easy decision and the opinion reflects that.

I find it reasonable for you to quarrel with the substance of his opinion only after you have read it. But judging from your comment, you haven't. And you comment is vacuous and snarky.

Read the opinion and then comment on the substance.

Gary Rogan adds: 

This ruling is a tortured conclusion looking (and failing) to find reasonable arguments as far as the "tax" portion of it is concerned. What is being taxed here?

It was sold as a mandate and this legal genius finds it to be a tax. If someone sells you a duck claiming to be an elephant, and you find that it's OK because you have a license to sell ducks instead of finding fraud, you are not operating in good faith. Especially if the duck isn't even a normal duck but some mutated monster resulting from an unfortunate breeding of a duck with a goose.

He cuts one type of power found in the "living breathing Constitution" by progressive activists and adds another power of similar flawed pedigree. He did no favors to the left? He SAVED the damn left, to continue their abuse of the Constitution and the country. This man is a snake.

Garret Baldwin writes:

"It was sold as a mandate and this legal genius finds it to be a tax."

Respectfully, it was sold as a mandate to the American people and to representatives in Congress. But when it went to the high-court, it was sold as both a mandate and as a tax. There were two arguments provided on behalf of the Administration. One was that the mandate fell under the commerce clause. In essence, Congress was ruling that it could create commerce in order to regulate it. They were creating a program that forced people to buy something, and that would fall under the clause. Could Congress then make you buy anything it wanted, became the question.

Roberts ruled that down. Even Sotomeyor disagreed with that logic.

But then the issue of a tax did in fact come up in discussion. Though the President said that it wasn't a tax on ABC in 2009, the administration argued in front of the court that the mandate fell within Congress' taxing power… but attempted to argue that it was not a tax… They argued that PENALTIES are within the reach of Congress' taxing power, but that this was not a "revenue generating policy" which is what a tax technically is.

What Roberts ruled is that Yes, this does fall under Congress' taxing authority, but you're not allowed to call it a penalty. It's a tax. Congress can tax whatever it wants, soda, medical devices, and even inactivity. For the optimistic on the right, and for people who have being saying this is a tax all along, the ruling isn't necessarily the worst in the world. First, it shuts down Congress' ability to create markets under the guise of the commerce clause. This was especially concerning for me because I feared they would try to create Cap and Trade through similar means. Second, Democrats are now the "Tax Party", and Roberts has given Romney ammo. This is a tax. And the President swore that no new taxes on the middle class would hit them. There are 21 new taxes in this law, and seven of them directly impact the Middle Class.

"It you think healthcare is expensive now… wait until you see what it costs when it's free." PJ O'Rourke

Rocky Humbert writes: 

This will be my last post on this subject, so Mr. Rogan et al should feel free to label me a "snake," "commie," or whatever choice epithet that he uses for people who don't agree with his self-declared (and as yet unproven) "superior" weltanschauung.

I am starting to see non-legal analyses on the the web, which may over time cause the currently-celebrating liberals to realize that by bringing this case to the Supreme Court, they have opened a Pandora's Box which they will rue. Sure, you can bitch and moan that they didn't strike down the ACA. But this ruling will have a much more important effect in the months and years ahead in terms of LIMITING government. Sure, I had hoped that they would strike the ACA down, but I'm starting to believe that what Roberts did here may be vastly superior IN THE LONG TERM.

If Mr. Rogan can turn off his kneejerk reaction for just a moment and read the following URL, I think he will begin to see that Roberts may have just proven Voltaire's Maxim: "The perfect is the enemy of the good." It's quite possible that in 50 years, the historians will look back and see this as a defining moment when the pendulum which started in the 1930's begins to swing back.

While I believe the ACA is bad economics and bad policy, I believe that the precedents which this ruling establish (and to which lower courts will be bound) are vastly more important and more supportive for freedom and long term prosperity. I am hopeful that as today's scoreboard and November's election fade from memory, the lasting positive consequences (for those on the right) of this ruling will come into focus.

Jun

30

To what extent did the 20% rise in the grains in the two weeks preceding the beginning of this week, presage the upward move of 50 points this week in S&P? How to quantify?

Jeff Watson writes: 

Grains were oversold a couple of weeks ago because many players thought Greece would leave the Euro, and China's economy might crash.

Gary Rogan writes: 

It seems rather unlikely that China crashing would affect its demand for grains much. Perhaps some substitution from animal feed to human consumption. I had read in the past that its demand for basic foodstuffs is pretty inelastic, and in fact this demand becoming such is what really led to the upheavals in the Arab world as there was a huge new inelastic customer entering the market thus leaving the low-end elastic customers in the dust ready for partial starvation. It also seems strange that Greece's fate would have any appreciable demand on grain demand. Oil maybe, but not grain.

Jun

26

White House Press Secretary Jay Carney on Sunday:

We look forward to working together with President-elect Morsi and the government he forms, on the basis of mutual respect, to advance the many shared interests between Egypt and the United States…We believe in the importance of the new Egyptian government upholding universal values, and respecting the rights of all Egyptian citizens – including women and religious minorities such as Coptic Christians. Millions of Egyptians voted in the election, and President-elect Morsi and the new Egyptian government have both the legitimacy and responsibility of representing a diverse and courageous citizenry.

Mohammed Morsi on Saturday:

The Koran is our constitution, the Prophet is our leader, jihad is our path and death in the name of Allah is our goal.

Jun

21

In a recent trip to the Netherlands, I noted the weakness in the Dutch real estate market. This brought back a memory of a speech by Alan Greenspan in Cambridge, referencing a PhD thesis, that a loss on the value of one's home (nest egg) had twice the impact on consumer spending as an equal loss in the stock market (risk capital). According to Behavioral finance, "errors" like this are a natural tendency of people, and hence persist (are not averaged out) by Mr. Market. In principle, a shrewd investor can take advantage of these market inefficiencies.

The problems with Dutch real estate, similar problems in Denmark, not to mention Spain, do not bode well for European consumer behavior to my mind, possibly for years to come. Does anyone have any thoughts or data on this?

Secondly, my hypothesis regarding the origins of the real estate problems in the US (also possibly Europe, Japan?) has to do with the "baby boom", (the overreaction to the loss of good men in WWII.) One definition of the baby "bubble" are people born between 1946 and 1964 (average 1955), which makes the average baby boomers roughly 57 today. My hypothesis goes like this: as the baby boomers retire, or approach retirement, they shed risk assets or assets they are overleveraged. In this case real estate. As this process ends or mitigates, the real estate market should improve, with dramatic consequences for US consumer behavior. (not tremendously original, I know.)

My question in this: Does anyone have any data on the demographics of people shedding assists, particularly real estate, related to retirement? That is, a graph hopefully showing the peak of asset shedding by people in their 50's and 60's?

Thanks in advance for your thoughts, criticisms, or data,

-balloon-boy

Andrei Kotlov writes: 

Andre,

Two quick remarks (but no data) :

(1) Curtailed consumer spending is good for the economy (current consumption destroys capital; production is [mostly] in anticipation of future consumption).

(2) The U.S. housing bubble was caused by the easy-money policy of the Fed; rather, that policy ensured that *a* bubble would appear; other factors (e.g., acts of Congress) directed the easy money into the housing specifically. What you describe (shedding of real estate by the baby boomers) could explain the *burst* of the bubble—though, in my opinion, the burst occurred primarily because the Fed [temporarily] reversed its easy-money policy.

Cheers,

Andrei

Jack Tierney writes: 

I don't know that your hypotheses will hold up. I agree that Boomers, and more significantly, their parents, will want to shed assets - including homes and equities. I believe Boomers, like current retirees will find it easy to sell their homes (or condos) IF they're willing to take a significant haircut. Despite what real estate cheerleaders might claim, there's no getting around the facts (from the Fed) that between '07 and '10 the average American household experienced a 39% decline in net worth. The following two years have seen no improvement. Traditionally, those most likely (and financially equipped) to purchase a single family home are college-educated professionals. Unlike those of other past generations, these will be populated by graduates who carry significant amounts of debt - and their creditor is the most relentless, and unforgiving, collector imaginable - the Federal government. Since these debts cannot be negotiated down, expunged by death, or bankrupted away, they will be paid down before capital accumulation can begin. As a result, the cohort most likely to support a resurgent real estate market will be, at best, delayed in bringing it about. Even then, there is and will continue to be a contraction in wages. Significantly, the post-Boomer generations (Gen-Xers and Millenials) will be, relatively speaking, financial beggars. We must remember that the technological advances we can't stop raving about came about as all business advances do - to reduce the cost of production…and wages are (or used to be) a big cost of production. Those few who have been able to overcome the "math is difficult" meme and obtain an education (and degree) in a handful of specialty fields will continue to do well…and will become home owners assuming they have also learned to save…a problematic assumption.

Another cohort, which will include a significant number of college grads, will fight for positions that offer something a little better than above average incomes…they may become home owners but their zip codes, like mine, will not be noted for country clubs, cotillions, or Chris Crafts. A similar cohort, but one slightly less fortunate and/or ambitious, will contain a fair representation of graduates from every level, and their lives will be marked by a payday-to-payday narrative. Some in this group will never repay their education loans and either move in with family members or migrate from one transient hotel to another. They will not contribute to a real estate boom or consumer spending. The final group will be composed of the poor - working and otherwise. I have no idea how big it will be, but am sure it will be substantial, it will be urban, and it will be restless. Public housing will be the order of the day but among its residents there will be those who recall the "good old days" when various government sponsored programs were numerous and sufficient. Some will recall the wealth that existed, how quickly and inexplicably it disappeared, and the culprits (real and imagined) who destroyed it. The primary concern of the government, whatever form it may have taken, will be, as it ever is, to maintain docility.

While these developments might well result in "dramatic consequences for US consumer behavior," I doubt we'll ever see a housing market or the level of consumerism like that we experienced following WW II. It not only requires great wealth, but a great concentration of wealth. The kind that exists only when your major competitors have destroyed their manufacturing bases not once, but twice, in three decades - and yours remains unscathed. Under those circumstance you can build homes or automobiles with varying degrees of quality, pay substantial wages, and still have an incredible boom.

Andre Clapp responds: 

Hi Jack,

Alas, I think I agree with you. Looks like we're in for some tough sledding for at least another decade, maybe longer. Not to sound too much like the writer of "Generation X", but I think that the argument can be made that this older generation (including me) has very much "borrowed" or "stolen" from the younger generation. (Pay as you go SS might be an example of this. The high cost of healthcare, the national debt, etc.)

In this sense, I am somewhat sympathetic (often unpopular in financial circles) to the inflationary monetary policies of the Fed and the ECB. Although I agree that printing all this money amounts to "confiscation" of wealth from Savers and bond holders, I think it may be morally justifiable as a politically feasible way to transfer wealth from the older to the younger generations. At least give the younger generation some motivation to work, invest, and take some risk, as opposed to moving in with their parents/grandparents and playing video games all day. I believe we have seen the later in Japan, which to my mind decided to let deflation run its course (and protect the savers and bond holders, which of course are predominantly the older generation.)

What do you think of this?

Also, it is notable that despite the trillions of dollars that have been injected into western economies by the Fed and ECB, it has yet to produce meaningful inflation… Any thoughts on this? Is the psychological impact so great that no amount of monetary easing will produce inflation? Can't push on a string kind of thing?

I couldn't help noticing that the Danish government recently sold bonds at a negative yield.

Best Regards,

-Andre

Andrei Kotlov writes: 

Andre,

Two quick thoughts:

(1) Inflation (money printing) amounts to enriching those who stands by the printing press (the gov't) and confiscation from those who are removed from the printing press, in proportion to their distance. The savers (the older gen) will suffer just as much as the future lenders (the younger gen) who will pay the higher rates.

(2) Money printing has not lead to 'meaningful inflation' *yet* because it has been done concurrently with the naturally-occurring deflation (caused by the contraction of credit).

Gary Rogan writes: 

To advocate as "morally justifiable" the despicable activity aiming "to transfer wealth from the older to the younger generations" is itself not morally justifiable, regardless of how much the younger generation is expected to benefit.

Also another reason why this activity hasn't resulted in inflation yet is because the Fed is paying banks significantly higher than the market rate to keep their excess reserves on deposit there. Sooner or later this music will stop, and there will be a flood of inflation that will be declared "unexpected" for months on end, just like the number of unemployment claims has been.

Russ Sears writes: 

For a bigger picture that takes finance into the picture look at the census data on home ownership before and after the bubble .

The meal for a life-time I believe is in the anatomy of a bubble contained in the home ownership percentages.

Ownership rate in the US was 63.9% in 1990 with the magic of Mortgage Backed Securities, the Fannie and Freddie programs this was raised to 67.4% by 2000. Then came the push into sub-prime and this was raised to 69.0% by 2004… It hoovered at this unsustainable level a couple years where the greater fool seemed to take over before the dam broke in 2007 with a drop of 0.7% (68.8%/2006 to 68.1%/2007) and the QE fix was in to keep it from continuing the crash and clearing the market. The home ownership in 2010 still stood at 66.9% off 0.5% from 2009. I suspect your conclusions are correct that with the lose of government subsidized financing the ownership rates need to get back to closer to 1990 levels.

However, looking at the numbers it would appear that the older ages have continued to value home ownership.. Those aged 65+ followed a similar path of the overall demographic until recently. (76.3%/1990; 80.4%/2000; 81.1%/2004
80.9%/2006)

With the lower rates they appear to be the ones that currently are taking advantage of them to purchase housing. going from 80.1% in 2008 to 80.5% /2009 and 2010)

This group may very well continue to drop below to the 1990 levels once the rates are not being stimulated.

However, as an actuary well aware of the risk of out living your wealth, I would argue that the home ownership is many elderly household's main hedge against long term inflation. Plus the nostalgia of setting roots and maintaining an inheritance. They would need to be clearly convinced deflation is here to stay before they give up on home ownership.

Gary Rogan writes: 

Andre, I'm not sure which intergenerational theft mechanism you mean (one could argue that say Social Security is some for of that type of theft or whatever), but regardless:

Just talking about returning wealth to its rightful owner is communist rhetoric and implies collective punishment for a class of people. There is no justice in making a group of people pay for something they didn't individually undertake. There is no justice in making members of this group pay out of any proportion to how much each of them supposedly "stole". There is no justice in an unelected and unappointed (for this purpose) body extracting this retribution, especially without even a semblance of due process. There is no justice in this body using a totally spurious explanation because it's politically convenient for undertaking this sort of justice.

Of course as a practical matter, this is just theft in order to make the constituent banks whole and to impose taxation by more palatable means mainly to support those in power staying in power. Nobody has any intention helping the younger generation. But to me, justifying collective theft as collective punishment or justice is simply abhorrent.

Jun

4

An interesting list of favored stocks as of year end 1928 appears in Common Stocks and the Average Man by George Frederick, 1930.

Allis-Chalmers , American Can , Atlantic Refining , Fleishmann Co , General Motors , Liggett and Myers B , Montgomery Ward , Paramount , Famous Lasky , US Steel , Woolworth .

These were recommended for buy and hold, and the kind for George Baker, who made more in one day than all the gold miners in history, with his method of buying good stocks and holding them and living on interest. It is interesting to note, that as far as I can see, almost all of them went bankrupt or close to the same in the next 90 years.

The book by Frederick and the comparable one by Ralph Badger, a professor at Brown, (Badger on Investment Principles and Practices, 950 pages), although not 100 years old are both highly recommended as being much better and much more helpful than the average treatise of today, or 30 years ago, especially those like Graham and Dodd.

Steve Ellison adds: 

From the same era, I reviewed The Art of Speculation by Philip Carret on the dailyspec a few years ago. At the time I wrote the review, the phenomenon of "stocks carrying themselves" had not occurred in nearly 50 years, but that bullish condition did occur beginning in late 2008 and has been in effect ever since, as evidenced by the backwardation in S&P 500 futures. As Mr. Carret wrote, "Borrowed money is the lifeblood of speculation."

Jim Sogi writes:

I remember as a young kid my savings account at Seaman's Saving Bank paid 5%. I had a ceramic savings container for coins that was a merchant seaman in whites of the era. I vaguely recall that my stocks also normally yielded about a 5% dividend. My father's advice at the time was to use your rear not your head, and sit on the stocks. That must have been in the late 50's.

Funny thing is now, again, dividends seem almost attractive with SP yielding over 2%. Some utilities are yielding 4.5% and don't seem to have the volatility of bonds nor industrials.

Gary Rogan adds: 

It seems like the SP yield is way below its historical norms, so while
it has been rising it has a long way to go to make it all that
attractive.

Of course given what "they" have done to the fixed yields they are
pretty attractive but sooner or later as we all can feel the fixed
yields will not stay low or negative even in Denmark and Switzerland
forever.  If they find a way to leave the dividend taxes alone, no doubt
sooner or later the yields will come back to historical averages, so I
don't think SP is attractive on that basis.  I do firmly believe in
sitting on stocks for a long time.  The point that was recently made
about all the old favorites having gone BK has a counterpoint: if you
diversify enough into high yield stocks, a small but noticeable
percentage of them will be bought out every year and that combined with
the stream of dividends will overcome the BK factor over the years.

As far as the bank savings accounts are concerned, I remember fondly how the banks and s & l's were engaged in a rhetorical war over, was it, 1/8th of a percent mandated difference? "You could spend that 1/8th of a point crossing town" was what one commercial said. It's pretty crazy how they "deregulated" the banks but left this one innocuous little Fed behind the scenes and now all savings yields are 0 and all the banks of note are TBTF. To me the moral of the story has always been: if you have FDIC in place all "deregulation" is a joke, but somehow the joke isn't funny to those guys and they don't like talking about moral hazards. You don't even get toasters these days.

Jun

4

Quote of the day.

"The weak job report confirms that the US is vulnerable to a European situation that is going from bad to worse" said Mohamed El-Erian, CEO of Pacific Investment. Query. How did they let him out of Harvard with all these self serving, self interested ideas and talking of book.

Gary Rogan writes: 

It's an interesting statement in that it's mostly true, or could be, but it distorts the cause and effect and shifts the blame. The weak job report confirms that erratic, Marxist/radical and pro-flexionic policies destroy economies, but as a side effect they do also make economies more vulnerable to external shocks. As to whether it's more important that the US is vulnerable to the European slowdown or the European economies are vulnerable to the insatiable appetite of the US for consuming all available lending capacity in the world (while of course killing themselves at the same time), that's an open question. 

Vince Fulco writes: 

Perhaps while job tsar, Immelt, found boll weevils in the domestic silos.

Jun

1

One would hypothesize that the euro seems symbolic of the stability of the entire EC. The world has an idea in its grip. That the purpose of life is to give to the needy, and take from the producers and wealthy. For this idea to fail, would involve the loss of many jobs in the EC, I think. All over the world, flexions, politicians and do-gooders will take whatever money they need and give it to the EC to keep those jobs and the symbol of those jobs in high spirits and prosperity. This is how, I believe, Nock would analyze the situation. And I believe it is sensible. However, I don't know anything about macro factors of any kind, and my views are just those of a devotee of Nock, and a believer in the flagitiousness of flexions. 

Gary Rogan writes: 

That was a very interesting statement "the euro seems symbolic of the stability of the entire EC." The question to me always has been this: besides the symbolism, why does the stability of the EC matter so much to the euro? I can understand Greek and Spanish depositors bailing out of their banks and moving into dollars of Swiss franks or whatever, in addition to euro-based deposits in Germany and elsewhere, yes that depresses the euro and it's a clear practical effect. But in and of itself, why does Greece being a part of euro matter so much? Who really cares about where Greece is or what currency it uses? Even if you can't hold this house of cards together, if the whole system disintegrates, these euros at some point will be exchanged for new German marks and french franks.

Is the fear that everyone, especially non-local citizens will take a big haircut on the deal because the governments will find a way to screw them (and their citizens to some degree as well)? I do also understand that the French and German banks wind up taking in the shorts on their PIGS loans, this will hit the euro if they have to provide a ton of liquidity, but I still fail to understand why the stability of the euro zone is so important.

To me this all speaks to the ephemeral nature of modern money where it doesn't really mean anything at all and it's all a confidence game based on the sequentially building chain of loans, starting with government obligation turned into money for no good reason other than some history. The euro projects value right now is really only to the German so they can push their products on the starving underachievers without them having any ability to depreciate their currency, but when the damn thing falls apart, you sill have all the European countries still in existence, so what's such a big deal about the stability of the zone?

May

8

The Upas tree was a terrible tree according to Erasmus Darwin that was so poisonous that it was able to destroy all life of any kind for 15 miles around it. Who and what are the Upas trees of the market?

I would say that Madoff and Abelson and the conglomerates and real estate slumps are Upas trees, and in increase in rates, perhaps the first change in direction is also quite lethal. The signal of unbridled interference and flexionism galore as in October 08 would also seem to be a curse. The lyrics to "I've got a little list" from Mikado go through the head. The hoodoo, the parson and the albatross from O'Brian go through the head as does the report "there's a little shadow on this x-ray. Probably nothing to worry about."

What would you add? I would like to say Buffett but I refrain.

Victor Niederhoffer adds:

One Upas tree regularity is the tremendous move against the weak player when he she one is being squeezed out of position. The MF, the Societe General, and the Thailand moves are examples of that. One wonders what the other side of the coin is. What are the apple trees of the market, the benevolent things that cause it to go up. The book "The Man Who Planted Trees" is a very good one for all to read describing how a French man who planted apple trees brought a village to life from death by first stopping erosion. And then providing shade and food and respite from the heat. The oak tree is also a benevolent tree providing food and shelter for countless species and Cervantes mentions the cork tree "whose benevolent fruit provides shelter for beauteous maidens without any thought of its own welfare". What other trees? What's good for the market. Many of the things that are good for the market are bad in the short term but good in the long term. Like a decline in oil prices. The prospect of a decrease in the service revenues is also very good. What are some benevolent and some more destructive things for markets?

Tim Melvin writes:

High junk bond defaults that clear the weak players and reallocate assets to stronger hands come to mind as a short term negative that is a long term positive.

Laurel Kenner adds: 

Obamacare and Dodd-Frank are the two worst and most dangerous pieces of legislation ever introduced into the American field, and have the potential to turn into giant ruinous Upas trees. They are only shells for unknown future rules put into effect by people whom neither the electorate nor Congress will be able to control. They have no sunset, no funding limits, and no restraint on their bureaucracies. 

Steve Ellison adds:

I would nominate an inverted yield curve. An inverted yield curve pinches the flexions' net interest margins. 6 of the last 40 years began with inverted yield curves: 1974, 1979, 1980, 1981, 2001, and2007. None of them were good years to be an investor in stocks.

Kurt Specht comments:

European debt concerns and related debt market convulsions are frequently sited as short term drivers of overall market action.  

Ken Drees adds: 

I was about to opine about the benefits of the upas, even something so deadly has good parts and then I tried to fold that into a Madoff or an MF Global and couldn't come up with any quick relationships of how a bad market tree can bestow something positive other than a lesson to be learned. Other than a lesson to future investors, sometimes positive regulation comes out of these dark trees.

From wikipedia: 

It is a fairly low source of timber and yields a lightweight hardwood with density of 250-540 kilogram per cubic metre (similar to balsa). As the wood peels very easily and evenly, it is commonly used for veneer work. The bark has a high concentration of tannin which is used in traditional clothes dyeing and paints. In Javanese traditional medicine, the leaves and root are used to treat mental illnesses. In Africa and other Asian nations, seed, leaves and bark are used as an astringent and the seeds as an antidysenteric. Most famous to Africa and Polynesia are the strong, coarse bark cloth derived clothings- which are often decorated with the dye produced from the bark tannins.

The plant is often grown purposely for shade or shelter around human dwellings as it provides excellent dense shade from the tropical heat. The leaf litter is an excellent compost material and high in nutrients- often spread around local gardens, which must be grown distant to the antiaris due to its extremely dense canopy.

Recently, the plant had allegedly been used by retired Tanzanian pastor Ambilikile Mwasapile to allegedly cure all manner of diseases, including HIV/AIDS, diabetes, high blood pressure, cancer, asthma, and others.

While found to be harmless to humans when boiled in accordance with Mwasapile's mode of creating a medicinal drink out of the bark, it allegedly was undergoing testing by the WHO and Tanzanian health authorities to verify whether it has any medicinal value. However, conflicting reports suggest that the plant in question is not indeed Antiaris toxicaria, but rather Carissa edulis.


Poison Humans have long used poison for hunting and warfare. Antiaris toxicaria is most famous for being employed as a poison for arrows, darts and blowdarts. In Javanese tradition, Antiaris toxicaria is used with strychnos ignatii. The Antiaris toxicaria latex sap has the active components of cardenolides (chemicals with cardiac arresting potential).

The latex, present in the bark and foliage, contains a cardiac glycoside named antiarin, which is used as an arrow poison called upas: Javanese for poison, but, commonly to the poetic (non literal) quality of many Javanese words has a duality of meanings- watchman, messenger and courier.

In China, this plant is known as Arrow Poison Wood and the poison is said to be so deadly that it has been described as "Seven Up Eight Down Nine No Life" meaning once poisoned a person can take no more than seven steps uphill, eight steps downhill or nine steps on level ground. A visitor to South Kensington Museum in 1881 noted a picture of a Upas tree and wrote in their diary 'a picture of the Upas tree the most poisonous in the world any one fall down dead before they can reach it.

Gary Rogan writes: 

It turns out there is a poem about this tree by the traditionally the most famous Russian poet:

The Upas Tree
by Alexander Sergeyevich Pushkin

Deep in the desert's misery,
far in the fury of the sand,
there stands the awesome Upas Tree
lone watchman of a lifeless land.

The wilderness, a world of thirst,
in wrath engendered it and filled
its every root, every accursed
grey leafstalk with a sap that killed.

Dissolving in the midday sun
the poison oozes through its bark,
and freezing when the day is done
gleams thick and gem-like in the dark.

No bird flies near, no tiger creeps;
alone the whirlwind, wild and black,
assails the tree of death and sweeps
away with death upon its back.

And though some roving cloud may stain
with glancing drops those leaden leaves,
the dripping of a poisoned rain
is all the burning sand receives.

But man sent man with one proud look
towards the tree, and he was gone,
the humble one, and there he took
the poison and returned at dawn.

He brought the deadly gum; with it
he brought some leaves, a withered bough,
while rivulets of icy sweat
ran slowly down his livid brow.

He came, he fell upon a mat,
and reaping a poor slave's reward,
died near the painted hut where sat
his now unconquerable lord.

The king, he soaked his arrows true
in poison, and beyond the plains
dispatched those messengers and slew
his neighbors in their own domains.

May

7

Aggregates and Averages, Individuality and Interventionists

By Stephen Mauzy

 
John Cowperthwaite, financial secretary of Hong Kong from 1961 to 1971, was the rare bureaucrat: a free-market noninterventionist inured against the hubris of grand economic scheming.

Cowperthwaite ventured into Hong Kong in 1941, joining the colonial administrative service after studying economics at Cambridge. Returning to Hong Kong, in 1945, Cowperthwaite was directed to determine ways the British government could boost Hong Kong's postwar economy.

A man blessed with exceptional instincts, Cowperthwaite determined that the best strategy to keep Hong Kong recovery's moving forward was to enervate the interventionists by disarming their most important weapon. When asked to name the one reform that swelled his pride most, Cowperthwaite replied, "I abolished the collection of statistics."

Cowperthwaite knew that statistics provided the raw input for interventionist mischief. He also knew that an organic, messy, free wealth-producing economy is too confounding and too replete with innumerable combinations of human action to be improved by mere mortals.

Rare is the bureaucrat and other overhead who will acknowledge such an obvious limitation. Cowperthwaite could; most can't.

article continues…….

May

7

My teens say facebook is yesterday–hope the IPO isn't a "fail" as they call things that suck, or do not work. 

Facebook IPO Status Update:

The stock now could go public at a lower price. Moreover, new uncertainty about the Menlo Park, Cal., company's growth prospects may temper some of the feeding frenzy that was expected to take place on the stock's first day of trading — currently scheduled for May 18.

Craig Mee responds:

Agreed. Looking at explosive movers and shakers like Google, Facebook is a different animal. Google gets the job done, but Facebook is more part of a trend or coolness factor that can be side stepped as quick as the share/message/like buttons allow. What's more, the site, especially the log in page, looks kind of old school. You can buy things, but you can't buy coolness, once you've lost it.

Russell Sears writes:

My daughter says it is because Facebook has been taken over by all the whiners, posting all the time and losers playing games. It seems the only acceptable use is keeping Grandma up to date. Hence if you admit you use it, you are the sucker at the table.

Gary Rogan writes:

In addition to the inherent instability of any high tech company, this one adds the delightful dependence of its success on the what most of its customers think of most/some of its other customers, usually a characteristic associated with trendy fashion retailers and night clubs. Compared to this one, Groupon that made another all-time low today at significantly less than half of its initial trading range is the rock of Gibraltar.

Apr

17

I offer the following question only because I would appreciate some constructive criticism.

Free markets work well for short term investments, such as publicly traded commodities and equities. The free market falls down in long term investments because they lack liquidity and price discovery for investments lasting 5, 10, 15, 20, 30, 40 or 50 years.

How is a utility to finance capital improvement projects under such circumstances? I'm finding every investment organization I've talked to is unwilling to participate in a US deregulated power market asset because they cannot hedge their investment.

Today, few are financing power plants in deregulated regions because there is no bankable offtaker. The result is few power plants are being built in these areas.

What is the Austrian School's take on this challenge?

Henry Gifford responds:

As for deregulated electricity markets, I think what is currently called "deregulated" is different from what I think of as free market. I will use the California deregulation as an example.

When California deregulated the electricity markets, they formed three new state government agencies, one with monopoly power to sell electricity at the wholesale level. I have no idea what the other two did. The agency signed long term sale contracts with local utilities, and bought electricity from both in-state and out of state (California is a net importer) suppliers on the spot market or on short-term contracts. I repeat - they signed short term purchase contracts, and signed long term sale contracts for set prices. The agency made a few billion dollars of profit in a few years, as buyers were barred by law from buying from anyone else (remember, I am describing deregulation), and the state bought for a lower price than they sold for.

The inevitable happened - short term prices rose above the prices they had contracted to sell for. The state government did the inevitable: they passed price control laws, barring their suppliers from selling at a price that would be unprofitable for the state government (remember, I am describing deregulation). Out of state suppliers refused to sell at the lower prices, so the California governor asked the president to pass price controls for suppliers outside of California. The president did not do this. Meanwhile, suppliers went unpaid. I repeat - the state agency did not pay for what they had bought. Instead of paying, the state demanded to first investigate their allegations of "unfair profits" while the bills went unpaid. As out of state suppliers who were owed money were getting investigated, they refused to sell power to the state, and the lights went out. (repeat: I am describing deregulation). This gave deregulation a bad name for a generation, spawned the usual anti-freedom documentaries, and because the arrangement was called deregulation, free markets were also given a bad name. But, I don't think a government monopoly is a free market, and have never met anyone else who does. Instead, people just keep calling it deregulation and saying deregulation doesn't work, and the free market doesn't work, including many people who know the deregulation involved formation of monopolies, price controls, etc.

Now if you reread the description above, and think of the position you would be in if you were a producer of electricity in California, or were considering becoming a producer, or financing a new power plant, your lack of enthusiasm would be understandable, but have nothing to do with failure of what I think of as free markets, long term or short.

The statement that free markets fall down in long term investments is I think inaccurate. Lack of liquidity is priced into investments that are difficult to sell.

 I don't know what "price discovery" is. Real Estate is rather illiquid, but prices for most transactions are a matter of public record, and advertised prices for comparable properties are always available.

I would invest in an electricity producing plant in California if I thought the price was right. With some looking I would tell you what that price would be, which I think indicates there is no lack of price discovery for long-term investments.

Gary Rogan writes:

 It seems in retrospect that combining regulated rate utilities with unregulated power assets is asking for trouble. It's the same kind of trouble as defined benefits pension obligation funders eventually always have to face: when you promise something definite far into the future but the source of funds for your promise is indefinite, this has to blow up sooner or later for many participants. Nothing is ever really guaranteed and some percentage of attempts to make such promises will either run out of money or will have to ask the government for help. Some bonds in the "real world" become worthless, and some insurance companies promising life-time annuities go belly up.

There must be a long and complicated history of how natural regulated monopolies came into existence, but I bet they were accepted too easily. The real cost of energy cannot be projected too far into the future, and in what I would consider a "fair" world nobody would be guaranteed any particular rate of return, and anybody would be allowed to compete for the end customer's business, with property access rights of course being in private hands is so historically determined. Investments in new sources of power would only be made when the benefits were outrageously obvious or the investors were unwise. Even the wise investors would of course sometimes striker out. That's free market, and that's what delivers an ever increasing standard living. That said I will always look for monopolies to invest in where I can find them at reasonable prices. You have to somehow deal with the unfair world.

Tyler Cowen adds:

Maybe political risk is the worry.

If the market is pricing a Monet painting, or a forest, it seems quite well to account for the services yielded decades into the future…
 

Apr

15

I'm very skeptical about ANY credible way to reliably value small and moderate tech companies. Scalability (in both directions) is a part of it. How do you value something that can be multiplied by 0.99 or 100 in short order? Having (or not having) complementary technology to someone else is another problem. For all you know, Instagram may have two competitors that didn't get chosen, but were close, and as a result their valuation got affected by perhaps a factor of 10 or more. The nature of this type of competition could even be such that there was a choice of different, unrelated technologies that some fixed (but knowable by an outside observer) amount of money was to be spent on, so these "competitors" could not be determined by any reasonable means. Then there is the effect of bugs, flaws that only get discovered with time, etc. Couple that with the subtle nature of tech management skills and technological ebbs and flows, and a myriad of other factors, and the whole thing looks hopeless to me.

Rishi Singh agrees: 

Agreed,

I think attempting to predict the next big tech winner can be incredibly difficult and similar to picking "the next big penny stock."

The question I'm trying to dig into is established software companies -what separates AAPL from MSFT. Is GOOG heading in the direction of MSFT ( http://www.forbes.com/sites/robenderle/2011/10/27/steve-jobs-final-lesson-to-me-microsoft-google-and-obama/)? We could compare Microsoft today from 1998 or Google today from 2005. What can tech companies do to become better?

How do we backtest Steve Job's ideas of focusing and simplification to see if that's what separates successful tech companies, or is there something else?
 

Apr

9

This is a review of the new book Alger Hiss: Why he Chose Treason relying on relatively newly declassified historical evidence about the Soviet spy Alger Hiss who was instrumental to the creation of the United Nations as well as several New Deal policies.

To those who doubt that the US can be controlled by a conspiracy, especially foreign-controlled, this should shed some light on what is actually possible in the real, not imaginary world of nefarious and anonymous Wizards of Oz. This also sheds light on how no amount of evidence no matter how obvious and undeniable will convince the left that there is treason in their ranks and in fact they themselves are involved in it.

"Why exactly were the intellectual elite so determined that Hiss was innocent? His accuser, Time magazine senior editor Whittaker Chambers – originally Hiss’s Soviet handler and author of the classic “Witness” – presented compelling written evidence. However, the intelligentsia were intent on supporting one of their own. They ignored the facts, a willful blindness that helped contribute to a polarization still in place in our country today.

Thirty years of intelligence analysis gives Shelton the expertise to approach the story from many different angles, especially:

* Her persuasive argument that communism and fascism are not polar opposites, as has so long been claimed, but highly similar ideologies.

* How Hiss’s central role at the Yalta Conference and the founding of the United Nations are examples of the significance of Soviet intelligence recruitment of high-level Americans who could influence U.S. foreign policy in their favor.

* Why the silence surrounding the implications of Hiss’s espionage continues—and why apologists fear that smearing his name would undercut New Deal policies and the United Nations. Shelton doesn’t just detail the body of evidence pointing to Hiss’s guilt; she suggests new layers of meaning in light of the current political landscape.

Today, the importance of understanding Hiss’s ideological commitment has never been more vital. His advocacy of collectivism and internationalism still resonate among the political elite, making this book an important and timely analysis of American thought at this critical juncture in our country’s life.

Stefan Jovanovich writes: 

It is a measure of our European bias that the discussions about betrayal by the State Department always focus on the part of the globe where the spies did no damage and ignore the part where the damage was immense. Regardless of what Stalin learned from his spies, the boundaries in Europe were going to be what they were. The Russians lost more men fighting the Battle of Berlin alone - nearly a million casualties - than the American and British armies lost on all front - North Africa, the Balkans, Italy, France, the Lowlands and Germany itself. The Patton speech in the movie is great theater, but it is complete nonsense. By 1946 the U.S. had 1 1/2 divisions east of the Rhine; the Russians had over 100.

Where the spies did immense damage was in the East. By persuading Truman that the Kuomintang had "lost China", they enabled the Chinese Communists to win. 2 expensive Asian wars later, we are still paying the price of that betrayal.

Gary Rogan replies:

My main point was that some spies are more than spies. When a spy is able to affect major wide ranging policies he has partially subjugated the country he is working against instead of just supplying the information about troop movements, etc.

My observation today is that essentially NONE of the foreign policy initiatives of the United States benefit the United States as a whole. It is also my belief that if you consider the interests of a few financial oligarchs, Saudi Arabia, China, Russia, and the cause of "global governance" in approximately this order you will figure out what steps the US is likely to take in any given situation.

For instance, Libya was easy: the head of the country was a personal enemy of the Saudi King, and "global governance" would benefit, so it was a decision to invade for no real American interest of any kind.

Syria is harder, because there Saudi and Russian interests conflict with each other and also with "global governance". Iran is really hard, since there Saudi interests are semi-ambiguous and conflict with both Russia and China. Removing the missile shield from Poland is easy since it benefits Russia.

Whether assisting the oil industry in Brazil, looking for some probably long dead murderous warlord in the middle of Africa, choosing what to do or not to do in the Middle East, Eastern Europe, giving some Alaskan islands to Russia, or doing anything anywhere else in the world there is no longer any discernible "American Interest" of ANY kind, misguided or otherwise the I can see. It's always what benefits one of the other major players.

 

Mar

28

From Politico's Morning Energy:

The EPA today will announce its greenhouse gas rule for new power plants, advancing a regulation that - if upheld - promises to change the way the U.S. gets its power.

The proposed standard would generally require that new power plants emit carbon dioxide at a rate comparable to or better than natural gas-fired power plants, which emit about 60 percent less greenhouse gases than coal plants.

In essence, that means that new coal-fired power plants will have to capture their carbon dioxide emissions - either for storage or, in many cases, to send the CO2 to oil and gas drilling operations where it can be used to help extract fossil fuels.

But the rule also includes a phase-in period, sources knowledgeable of the rule say, so that coal plants that are ready to build may move forward. The impending announcement was first reported Monday by The Washington Post.

Carbon capture is not a practical option. This rule will be the end for coal and it will also put an end to simple cycle gas turbines. This proposed rule seems to put the US in a box; reducing the capacity of base loaded power plants at the same time reducing peakers. If upheld, I don't see how this will end well.

Gary Rogan writes: 

From the summary:

"The EPA in 2009 found that by causing or contributing to climate change, GHGs endanger both the public health and the public welfare of current and future generations."

Another offering to the false god.

Ron Schoenberg writes: 

If the loss of Arctic ice, the decline in glaciers, the unprecedented extreme weather events such as eight serious droughts in the last ten years in Texas, tornadoes in January, the last decade's global temperatures being the hottest on record, the accelerating increase in sea level, unprecedented wildfires in Russia and other parts of the world, unprecedented droughts and floods in Australia, unprecedented insurance claims due to weather, if all of this fails to convince you of the seriousness of climate change, what would it take to convince you?

Like the mythical frog in the pot slowly being brought to a boil, you might get cooked if you fail to see what is happening. I'm genuinely interested, what would have to happen for you to decide that you needed to jump out of the pot? I'm not asking you to agree that it's happening. I'm not asking you to say there's a pot being brought to a boil. I'm just asking what would have to happen for you to admit that climate change is actually occurring.
 

Stefan Jovanovich responds: 

Of course, the climate is changing; that has never been the question. The debate has been over 2 issues: (1) the loss of individual liberty for people who will have unelected authorities regulating the details of their lives in the name of "saving the planet" and (2) the cost to the poor and ordinary (sic) people of the world who will need the energy produced by fossil fuels if they are to have any hope of seeing their children become secure enough to afford ecological sensitivities.

The central fact of the climate (formerly known as "global warming") debate is that there are no longitudinal data sets for terrestrial temperatures that can be cross-checked much before 1780; for sea temperature the records are not available globally much before the 1870s. All the other "facts" on offer - the hockey stick, etc. - exist only in mathematical models. The first rule of any prescriptive science is "do no harm". The cures offered in the name of "saving the planet" will prevent people in most of the world from ever getting drinking water as potable as the stuff people have in their radiators right now (excluding the anti-freeze). Without the pumps fueled either by oil, gas or coal-powered electricity and the plastic piping, there is simply no way. Fortunately, people seem to be much more aware of the choices than they were when the Brave New World was first put on offer at Kyoto.

Charles Pennington adds: 

It's worth noting that the most prominent physicists (as opposed to "climatologists") who have actually waded into this issue have tended to be on the skeptical side. These include:

Ivan Giaver (Nobelist)

Will Happer (heavy hitting Full Professor at Princeton)

Freeman Dyson (Feynman collaborator who probably should have gotten the Nobel for work they did together)

These guys were already so prominent when they spoke out on this issue that it was impossible to blackball them, but younger, less powerful scientists would risk being shunned if they spoke out–as the Climategate emails demonstrated.

Gary Rogan writes: 

Yes, the increase in atmospheric concentrations of CO2 is an undeniable fact.

And yes, the consequence of adding more CO2 into the atmosphere is unknown.

100 ppm is one molecule in 10,000. Try to visualize 10,000 of anything and think about the effects of adding 1 to it. Conversely, if it has 3 of something, than adding 1 more could be significant. Yet we hear that other participants in that 10,000 are really important, like water and methane molecules. The oceans are also exceptionally important in both diluting and releasing CO2.

Every time I hear about some "unique" phenomenon I can visualize many other "unique" phenomena of unknown provenance or importance. Unique phenomena don't prove anything, especially if one side is highly motivated to tie these unique phenomena to the outcome they seem to be highly interested in for good or bad reasons.

Many are convinced that this is obviously true. I believe this is utter nonsense because of the political circus and evidence of fraud that surround it, but it certainly is not as implausible as many totally faith-based things because people really are releasing carbon into the atmosphere in significant quantities. All I ask for is from some predictive ability of this line of thinking before I agree that bankrupting whole industries and impoverishing millions if not billions is called for. "Can't you see, it's all around you" is not enough for me.

Mar

22

I haven't read all of Mr. Mee's letter on buying the worst but let me say that I completely recant and disavow all my conclusions about buying the worst individual stocks. My conclusions were not based on a prospective files but on compustat files. They didn't take proper account of survivor bias in many different ways nor did they uncover the 1000 fold gems that Gilespie used to like to buy. Dimson has a paper saying that buying the best is better than buying the worst, and he is a very careful researcher.

Stefan Jovanovich writes: 

There seems to me one occasion when the worst are the best — when the companies' futures as enterprises are flexion calls. As Mr. Einhorn said recently, "if the market capitalization of the equity is less than half of the face value of the debt, the stock remains in an option area"; buying those options can be profitable if one knows the central bank's is about to flex its rescue muscles. Buying $1 stocks in 1939 (after Germany invaded Poland) is another way of putting it. This is hardly a plan for sustained investing; over time the worst do come last, as the Chair says; but the longshots can be worth the bet if there is a near-certainty that the jockeys on the lead horses have all had instructions to pull back on the reins.

Gary Rogan writes: 

The well-publicized "magic formula" really says nothing more than both the price and inherent quality of the business are important, and some weighted average should be used for stock selection. If you can find something that's outstanding in both, as opposed to either outstanding in one of them this will pay off.

Yesterday I finished reading Great by Choice by Jim Collins and Morten Hansen and if I were to distill what's it saying about what it takes to outperform the market by 10x is that (a) you need to be good enough inter terms of both creativity and paranoia (b) more importantly you have to pace yourself for consistency, not moving too fast or too slow almost without regard to the external environment (c) have some sort of a detailed internal recipe that you maintain but also adapt to external changes as opposed to either not having a recipe or sticking wit the present version too long.
 

Mar

15

This is a really fascinating article about thefts, sales, and exchanges of the Tide detergent, but it seems like it's evolving into some sort of primitive street money.

Here's a related parallel: A thriving black market appeared, with Kent cigarettes becoming Romania's second currency (it was illegal and punished with up to ten years imprisonment to own or trade any foreign currency), used to purchase everything, from food to clothes or medicine.

George Parkanyi writes: 

Well … I have a fair amount of gold right now. Should I diversify into detergent then? Are you guys long the regular, or the new-and-improved?

And how do you pitch it to clients? "Has a low beta, AND fights stains!"

Or report the closing markets … "May concentrated cold-water was down 3 cents today in active trade … Elliot-Wave theorists say this is the second leg of a major rinse cycle."
 

Mar

12

The other day I heard somebody say:

"Assuming the future behaves the same as the past, I reason that this way makes my funds efficiently used".

I wanted to say, my experience is that the past is never like the future so we waste valuable time and skills on a false postulate.

As I see it, it is better to have a core strategy to deal with equity drawdowns, etc –based on logic–as opposed to a strategy based on the past real results or back tested as that is for the most part a make believe world since it never happens quite that way again.

Gary Rogan writes: 

Larry's statement seems to be exceptionally profound in what it's saying and in the unambiguous nature of what it's saying. Speculation seems to be about predicting the future. Is there anything but the past, in some sense, that can guide us towards correctly predicting the future? If so, and if it's not similarity, what is it about the past that can help predict the future?

John Netto comments: 

There are ample proverbs espousing the merits of both deriving information on events which have taken place before us, as well as the the complexities in attempting to accurately predict the future due to the inherent uniqueness of the time we are living. As a speculator in the financial markets, sports arena, and poker, it's my experience the answer lies somewhere in between. For me, the ability to extract alpha is how well I can ascertain what qualitative aspects are unique and execute a strategy from there.

Two sayings which are both contradictory and complimentary:

"Past is not prologue" "Those who do not learn from history are doomed to repeat it"

Gary Rogan writes: 

There are many ways to use the past, such as:

1. Under similar circumstances, Security A behaved a certain way during a statistically significant percentage of the time. I will therefore bet that Security A will do it again under similar circumstances.

2. In the past, a certain class of securities had a certain trajectory under similar circumstances. I will therefore bet that this new Security B, which seems fit to be a member of this class, is statistically likely to follow this trajectory close enough to bet on.

3. In the past, when people were this excited/depressed/confused you could bet with them/against them and make money. Let's do it again.

4. The past rarely repeats under these circumstances. Let's bet against the past.

I'm sure there is an infinite variety of similar observations. Yet in every case the past was used SOMEHOW. There is nothing but the past as the basis for human knowledge, and that's why I was so fascinated by Larry's statement, especially because he is a master of his game.

Craig Mee writes: 

Running a stop with any position, regardless of the backtest, is both logical and prudent.

Stefan Jovanovich adds:

When the British and French were forced to give up their remaining military strength in the Arabian Peninsula and the eastern Mediterranean - abandoning the base in Aden, being forced to withdraw from their assault on the Suez Canal, the U.S. did not replace them on the ground. The great fear was that "the loss of the Canal" would result in "the oil weapon" being used against "the West". The actual result was the development of supertankers that by-passed the Canal entirely and increased by an order of magnitude the ability of the oil exporters to ship their crude to Europe and Asia. At the height of the Suez crisis the inflation-adjusted price of crude (using the 1947 nominal price of $15 as the baseline) rose to $18 a barrel - higher than it had been during the Korean War. A decade and a half later - even as U.S. supplies went from 40% of world production to 10% - the inflation-adjusted price fell by nearly a third, hitting a low of $13 in 1972 after production began flowing from the North Sea discoveries.

I find myself wondering if the U.S. eventual withdrawal from Afghanistan and the withdrawal from Iraq already largely completed will not have the same paradoxical effects as the Anglo-French withdrawals did. I realize that this question is completely irrelevant to the questions that anyone trading in commodities has to answer; but those of us in the bleachers are interested in what the professionals on the field think will be the effects of the closing of America's 25-year military misadventures in Southwest Asia.

Larry's maxim: "it never happens quite that way again" - certainly applies to political history. This is the second time in my lifetime that the American public has lost its belief in the virtue of our allies. Last time they were wrong; this time they are right.

 

Feb

24

Greece has been "sold"; should America be for sale?

A footnote to the Greece default/restructured bonds is a detach-able coupon that pays an amount based on future Greek GDP.

See this article for more details.

Interestingly, Professor Shiller recently proposed (in a recent Harvard Business Review article) that countries should replace their sovereign T-Bills with "shares" that represent earnings of their economies. Read this article. Should other countries go down this path, it will open a Pandora's box of unintended consequences, incentives and problems.But first things first. If the USA does an IPO, will it be a "hot" deal???

And, does it give new meaning to "selling America short…"

Rudolf Hauser writes:

This idea strikes me as very stupid. GDP is not a reliable measure containing many assumptions and imputations. Such an instrument would give governments a strong incentive to cheat and the GDP is an easy measure to manipulate if so desired. It is also a number that is constantly and often significantly revised. How would the instrument handle this. Would investors who were overpaid have to return some of those funds? Aside from more modest revaluations every year, major revisions in the methods of calculation are made every number of years along with benchmarks based on more extensive surveys which are not conducted every year. For how many decades would such adjustments have to be made? Any investor who trusted the honesty of such instruments should have his head examined.

Rocky Humbert writes: 

One notes the large and relatively liquid market for global inflation-linked bonds..which are also vulnerable to gov't tampering and revisions.

I agree that there are many consequential problems with selling what is essentially floating rate debt, with the coupon linked to GDP…too numerous to type on my blackberry…

However, I have total confidence in Wall Street's ability to underwrite, and Mr Market's ability to "value" these securities (just like they did with subprime CDO's based on arcane and idiotic models.)

Gary Rogan adds:

Some day there may even be a pan-european agreement that Greek GDP was actually negative and investors are required to compensate the Greek government for the privilege. If they can rule that a default is not a default but an agreement to pay less, anything is possible.

John Floyd writes: 

In fact there actually used to be. I do not think it exists any longer, a traded market in a few major econ. Indicators such as employment, CPI, and a few others I believe run by some of the banks ( DB and perhaps GS) in para mutual style betting. I don't believe the total payouts ever got very large though.

Rudolf Hauser responds: 

Unlike other economic indicators, the non-seasonally adjusted CPI figures are not subject to revisions. That is what makes them useable in legal contracts. It is true that adjustments for quality changes allow for some manipulation, but it pales in comparisons with the assumptions that are made in calculating GDP. The revision problem alone is enough to make it an undesirable instrument even if the government statisticians are perfectly honest and unbiased in their calculations.

Other traded indicators were in essence just bets on what the government statisticians would report on the next released indicator. That is different than an instrument that will have a life of many years or even many decades. A short term trader has no reason to give a damn about true fundamental values -only about what the price will be in the short term, which only depends in small part on fundamental values. That is not true of a long-term investor. As to the markets knowing how to properly price securities, if that was so you would not have so many major losses (or gains) in securities seen so often in history.
 

Feb

22

Here is an amazing spectacle. Everyone knows that the house must win and the players, over time, must lose. And yet casinos flourish all over the world. Nor, contrary to the standard arbitrage argument for efficient markets, does the smart money, the house, end up with all the capital in the world while the dumb money, the players, go broke losing the capacity to sustain inefficiencies in the market. To the contrary (and contrary to one of Jarrow’s assumptions) there is a continuous source of wealth for the house to keep winning; the dumb money is constantly replenished.

From the fantastic article: "How Big is Almost?: or why the finance professoriate is clueless about managerial effectiveness"

Stefan Jovanovich quotes from the paper: 

"The paradoxical notion that uncertainty is absolute, that randomness is an objective quality, first and foremost of nature but by extension of social and economic life as well, has been rampant in our time. It was at the heart of the Copenhagen debate over the direction of quantum physics. It drove Keynesianism and Marxism and Smith’s replacement of the entrepreneur with that invisible—but oh so heavy—hand. It drove centuries of absurd debate over the relative importance of “capital” and “labor” as if they were objective fungible commodities with capabilities separable from the particular capitalists and laborers who wielded them."

"(t)here are men who consistently hit the bull’s eye at 300 yards and men who never hit it once. There are baseball players who hit .300 over a career and those who ride the bench. There are engineers with dozens of important patents to their name and those who never amount to much. There are farmers who prosper year in and year out and those for whom the weather is always bad. And generally we say the successful shooters and hitters and engineers and farmers are “good” at their jobs and the unsuccessful ones less good. We do not generally say (unless we are feeling envious), “Oh, they were just lucky,” or “they were breaking the rules.”

Can securities markets be so special among all markets, among all the arenas of our experience that in them alone diligence and skill and judgment and even raw talent do not correlate with good outcomes?"

"Randomness or “incomplete knowledge” is a subjective phenomenon. Different observers will have more or less knowledge and more or less uncertainty as a result. Moreover we can gain knowledge by dint of hard work, natural talent, and sometimes luck. We can be well prepared or poorly prepared to make a decision, discover special relativity, or buy a security. Even our best efforts to increase our knowledge may be insufficient. We may know a lot but not quite enough. We may fool ourselves about our positive expectation. There is no guarantee that our search for knowledge will bring us close enough for success. But neither is there any basis for a dogmatic ssumption of failure—or futility."

"We celebrate successful investors with other successful entrepreneurs as risk takers. This is true in the sense that the successful investor, like the entrepreneur, routinely makes judgments in the face of uncertainty. Nevertheless, the essential job of both investors and entrepreneurs is to reduce that uncertainty. Successful investors make money not by accepting risk as a given, as Modern Portfolio Theory tells us to do, but by increasing their ****

chance of making good decisions as compared to the less informed, less diligent, less talented. Admittedly how good investors, or entrepreneurs, do this is not entirely obvious. Edison helpfully told us it was 99% perspiration and 1% inspiration, but he was distinctly unhelpful in explaining how we might come by that crucial 1%. The progress from the objective uncertainty of a coin flip to sound judgment or even inspired creation is only partly a matter of quantifiable factors like more research or better math. Psychology or character or knack or what you will play an enormous role. Ultimately it does seem to matter not only what the investor or manager or entrepreneur."

Easan Katir writes: 

This is the most articulate rebuttal of the random walk theory ever! Thank you for posting.

If the heat of debate contributes to global warming, then this long conversational thread alone may have raised the earth's temperature a degree or so.

Gary Rogan writes:

It still all comes down to how predictable and persistent someone's ability to outperform SOMETHING is. Whether or not the mathematics of price movements are distinguishable from brownian motion, which they clearly are, this whole never-ending argument is about whether outperformance is reliable enough to (insert your own criteria here, like "bet the house"). The world is a confusing place, for instance Victor seems to really like "Random walk down wall street" year clearly he does other things besides putting everything into some total world ETF. Even if someone has stellar history, how can you ever know that starting tomorrow they will be on a long losing streak that will either reverse all of their gains up to now or make them quit the game?

 

Feb

15

This is how to keep a market busy:

Google Trends: Greece bailout and also this.

Victor Niederhoffer comments:

There is optimism about Greece.

Feb

13

1. It is remarkable to have a streak of 30 consecutive days go by in the SPU's without a move down of 1/2% or so broken like it was on Friday. The way it was broken with an up from open to close after a down open of 1%, yet down on the day is equally remarkable. It shows to me that the recent spate of 15 days with a vix below 20%, and volume below 2 million contracts is causing strains in the underpinning of the market, as there's not enough happening to cause the public to lose as much as it should to keep the wheels of commerce going (although less would seem to be required when the market goes up 15% without a single down day of consequence). It also shows the infinite creativity of the market. One notes also that this is the longest stretch of daily S&P moves without a decline of 0.5% going back at least 15 years.

2. How many times does the market mistress pull out of the hat "Greek Deal Falling Apart" one day and cause massive public selling and then the next– "Greece Parliament Approves Austerity Plan". It's happened about 10 times, and countless billions by the public has been lost. You'd think that the same old overreaction to bad news gambit would not work so many times in a row, but …. we're close to a 50, and I guess anything goes until we get there.

Gary Rogan writes:

I could never figure out why the market (as opposed to some of the participants) is interested in keeping the wheels of commerce turning. It the wheels are not turning, someone other than the public is losing more than their "fair share" to use O's favorite expression, but how does that translate into a market counter-reaction?

Vince Fulco writes:

I am waiting for the deliciously ironic day when our President points to ”the markets” as evidence his policies are working. I still haven't heard the Fed's announcement of their estimate of SP fair value as they like the market up, up, up and are releasing so many other targets. Let's call a spade a spade…

— keep looking »

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