Apr

10

 1. If an agrarian reformer without the agriculture is in the driver's seat, does that mean you should steer the car for bullish highways for gold and bank stocks.

2. Who would have thought that ducks are as smart as the floor traders, and at the slightest movement of voice, smell, or reflection will veer away from your blind at the speed of light or the speed of a HFQ slipping ahead of you.

3. All books by the former intern at the Brothers will be engendered by a foundation of hatred of the rich and envy. How would this affect in reflection his book on the statistics on baseball.

4. The continuously adjusted corn contract hit a low of $1.80 in June 2010 and reached a high of $7.00 inSpe 2012 and went down again to 4.2 in Feb 2014, and is now playing footsie with $5.00

5. The kudos being handed to Smith for breaking the 3 point record is a horse from the same garage of ephemeral moves always being harmful to shortsighted people.

6. What are the transformations of markets like the Laplace transform in math that make it easy to unravel their basic structure and path?

 7. The best restaurant in the US is Brushstroke on Duane street, but it takes the life of a Methusala to finish the meal there.

8. The SPU is very high relative to the Nikkei and this is presumably bullish for Nikkei as was the recent leading movements in the Tel Aviv 25 bullish for SPU.

9. What are the most recent humorous remarks by the Chairwoman that should be added to the 1.4 million adulatory references on Google of her past humorous remarks.

10. If there was one person from history that I would like to sit on a log with and learn from, it would be Francis Galton. One wonders if he was as good with the buying and selling of stocks as his cousin Darwin who filled out a questionnaire in 1869 saying that the timely buying of stocks was his greatest talent.

David Lillienfeld writes: 

I’d go for Richard Feynman. My father told me that in addition to the intellect, Feynman had a wicked sense of humor in high school (and he apparently ran circles around the Columbia math PhDs then teaching at Far Rockaway High). 

anonymous writes:

 Speaking to both HFT and Laplacian transforms, some of the bid/ask action from HFT algos look spot on for the triangular wave, square wave, sawtooth, and step functions. Catching the price with a sawtooth and moving it with step function.

Steve Ellison writes: 

A propos of your third point, there is a hint on the book jacket of the library-owned copy of Moneyball in front of me at this moment. The last sentence on the flap goes: "He also sets up a sly and hilarious morality tale: Big Money, like Goliath, is always supposed to win … how can we not cheer for David?".

Gary Rogan adds: 

The full title of the book is Moneyball: The Art of Winning an Unfair Game. The man himself is a son of a community activist and lives in Berkeley. The richer he gets, the more he hates his own kind and the side represented by his other parent, a corporate lawyer.

Apr

9

 Kenneth Roman is the former Chairman and CEO of Ogilvy & Mather Worldwide. He is author of a book about his firm's buccaneering founder, David Ogilvy. The following eighteen lessons in leadership are inspired by Ken's book The King of Madison Avenue: David Ogilvy and the Making of Modern Advertising.

1. On principles (borrowed from J.P. Morgan): "Our policy is only first-class business, and that in a first-class way."

2. On professional standards: "Top men must not tolerate sloppy plans or mediocre work."

3. On setting lofty goals: "Raise your sights. Blaze new trails. Compete with the immortals."

4. On knowledge: "Suppose, your gall-bladder has to be removed this evening. Will you choose a surgeon who has read some books on anatomy and knows where to find your gallbladder, or a surgeon who relies on his intuition?"

5. On focus in an organization: "If we are to prevent the eventual disintegration of our world-wide church into a Tower of Babel, we must continue our evangelism, make sure that every office is headed by a member of the True Church, and not by a stranger and, never again entrust the supervision of offices to outsiders or lay brothers. This errors leads to schism, balkanization, apostasy, bankruptcy and ultimate disintegration."

6. On size in an organization: "If God is on the side of the big battalions, and that seems to be the case, the path of wisdom lies in becoming one of the big battalions."

7. On committees: "Search the parks in all your cities, You'll find no statues of committees."

8. On mergers: "Clients never like mergers. They hate them. They don't like their accounts being sold. I don't blame them. If my doctor said he had sold his patients to another doctor, whom I had never met and must consult for all future health care, I wouldn't jump up and down with joy."

9. On acquisitions: "Finance aside, I have always thought [acquisitions] a rickety way to grow. Good agencies are never for sale."

10. On hiring: "If you hire people who are smaller than you are, we shall become a company of dwarfs. If you hire people who are bigger than you, we shall become a company of giants. Hire Big People, people who are better than you. Pay them more than you pay yourself, if necessary."

11. On meritocracy: "No spouses. No nepots"

12. On corporate culture: "We treat our people like human beings. We help them when they are in trouble. We help our people make the best of their talents. Our system of management is singularly democratic. We abhor ruthlessness. We like people with gentle manners. We admire people who work hard. We despise and detest office politicians, toadies, bullies and pompous asses. The way up the ladder is open to everybody. In promoting people to top jobs, we are as influenced as much by their character as by anything else."

13. On minimizing office politics: "Sack incurable politicians. Crusade against paper warfare."

14. On compensation: "Pay peanuts and you get monkeys.

15. On checking expense accounts: "Even the Pope has a Confessor."

16. On firing people: "I think the most cruel thing you can do to people, especially I am sad to say, to men, is to fire them, to put them in a situation where they don't work. Always do your damndest to avoid condemning people to the hell of unemployment."

17. On losing clients: "Clients come, they go, they come back, we'll get a new one. The only thing that can affect who we are as a company is if [the Chairman] feels any less committed."

18. On clear and honest writing: "People who think well, write well. Woolly-minded people write woolly memos, woolly letters and woolly speeches. I believe in the dogmatism of brevity."

Stefan Jovanovich writes: 

I hate to argue yet again with an Eddy Top 10 but the central fact of David Ogilvy and his successor's careers is that they allowed two kids from Stanford to swallow their entire business. The Mad Men were terrible snobs– even worse than their publisher and broadcaster vendors. As a result they lost out on an opportunity that the inventors of their business– Wanamaker and Stewart– would have jumped at the chance to develop. Ogilvy is also wrong about canning people; it is usually the kindest thing you can do to people if they cannot do the job. We all fail; the illusion of schooling is that somehow that law of nature can be repealed.

Richard Owen writes: 

Interesting analysis Stefan! Indeed one of the anecdotes from Ken Roman is

Following a hostile takeover of his agency, Ogilvy was in the audience when the chairman of the acquiring company was asked what was next after buying J. Walter Thompson and Ogilvy 3: Mather. He had completed his goals, was the answer, and planned no further acquisitions. From the middle of the audience came a stage-whispered comment from the founder: "Just like bloody Hitler after Czechoslovakia."

Ogilvy states various things about firing people: I guess it was something along the lines of striking a balance, having long term vision, and being humane. Indeed, he encouraged one colleague who's passion wasn't advertising to pursue wildlife matters, and as a result became one of the pioneers of the WWF.

Gary Rogan writes: 

In a significant percentage of cases "cannot do the job" is too definitive of a conclusion. Also, obviously people are often let go not because they cannot do the job, but a lot of other factors. It seems like not being too random in getting rid of people even if you can easily get away with it is a mark of a humane person.

Apr

9

 One has been wrestling with the question of whether there have been excessive numbers of migrations in markets, and whether they are predictable, and what consequences they have for other markets. The book Great Migrations by the National Geographic Society, which I visited in Washington recently has been very helpful in generating ideas for me in this regard. What do you think is relevant and useful here, and what is the purpose? One of the purposes of migrations and markets is movement. Yes, there must be movement to generate the friction and losses and excessive trading that provides the wherewithal to pay for the massive infrastructure and costs of keeping the system going. But why back and forth, if it exists above randomness, as it is instinctual and so necessary for survival in so many species.

Anatoly Veltman writes: 

In the 80s-90s futures markets that I dabbled in, one peculiarity was a seeming pre-cursor of a big daily move in one commodity by another, oftentimes fundamentally non-correlated! The trading floor at 4 World Trade Center, depicted in D. Amiche's Orange Juice debacle "Trading Places", was shared by pits as varied as Coffee and Platinum. A number of prolific personages owned a Gold-colored Badge, allowing them to step into any and every pit and trade. It happened quite often that guided by noise-level alone, such local speculators would migrate to Sugar albeit for one day - while their decades-long specialty was Gold! That wasn't a surprising move by a trader; surprising was the next-day jump by that trader's own market! There was a lot of psychological, herd and greed factor involved; but also there was an interesting exchange-finance angle to this pattern, where even a collapse in one pit might provoke a melt-up in another. You see, all locals and their sponsoring firms were in a financial leverage melting pot. Thus, cross-margin liquidation might be a rule of one random big day. Winding down someone's Long stock-index position could also mean blowing him out of his Short Cotton position!

The reason I specified this took place in pre-electronic era is that exchange individual position limits were much looser then. Today such cross-margin liquidation would more likely ensue from over-the-counter derivative portfolio losses.

Ed Stewart writes: 

 1. Prior highs and lows and the edges or recent trading ranges are often feeding grounds.

2. Climate change is real (beyond simple cyclical patterns) so at times overshoots are required as the migrants must reset their bearings to balance their need for energy with what exists in the environment.

3. During a warming period the migrants must travel further north, during cooling period they find nourishment at a lower latitude.

4. Sometimes the migratory species gets confused and ends up at unusual locations, which can then become a ritual do to simple mimicry and the chance identification of a favorable stopping point.

5. Migratory movements are related to survival (feeding, reproducing, not freezing) not for their own sake as they are risky and require substantial resources.

Gary Rogan writes:

Some Northern European migratory warblers have dramatically adjusted their migration patterns from wintering in Africa to wintering in the UK (they breed in Germany and other Central European countries). This provides a great example of adjusting to every-changing cycles. It's interesting to consider the fate of many other warblers who tried to winter in various other places or too early in the UK vs. the tremendous benefit to the first pair that made it back from wintering in the UK alive. It's also interesting that once warblers started doing this 10-15 years ago, this has lead to what seems like a separate evolutionary path, where now the warblers that winter in Africa don't readily mix with their UK-wintering counterparts.

Apr

3

 Bubble might be the most overused term in finance. It seems that if any asset price goes up, somebody will say it is a bubble. I think of a bubble as being an event of extreme price increases accompanied by widespread behavior that would be considered irrational in normal times. As Eric Falkenstein pointed out in the excellent article cited below, fraud becomes rampant, too. Valuing money-losing Internet startups on eyeballs in 2000 was irrational in hindsight. So was giving $700,000 no-doc mortgages to anybody who showed up. The only comparably insane activity that I am aware of today is building whole cities of empty buildings in China.

"A Batesian Mimicry Explanation of Business Cycles"

[B]usiness cycles are best understood though the framework of Batesian mimicry, an endogenous mechanism for booms and busts thru a misallocation in the horizontal structure of production. In ecosystems, Batesian mimicry is typified by a situation where a harmless species (the mimic) evolves to imitate the warning signals of a harmful species (the model) directed at a common predator (the dupe). …

… In an expansion investors are constantly looking for better places to invest their capital, while entrepreneurs are always overconfident, hoping to get capital to fund their restless ambition. Sometimes, the investors (dupes) think a certain set of key characteristics are sufficient statistics of a quality investment because historically they were. Mimic entrepreneurs seize upon these key characteristics that will allow them to garner funds from the duped investors. The mimic entrepreneurs then have a classic option value, which however low in expected value to the investor, has positive value to the entrepreneur. The mimicry itself may involve conscious fraud, or it may be more benign, such as naïve hope that they will learn what works once they get their funding, or sincere delusion that the characteristics are the essence of the seemingly promising activity.

Gary Rogan writes: 

The thing about bubbles, they can only be definitively identified in retrospect when it's useless for any practical purposes. Is Facebook with P/E of 100, P/S of 20, and P/B of 10 a bubble? Is Facebook paying $19 Billion, more than 10% of its market cap for a company with $20 million in revenue a sign of a bubble?

anonymous adds: 

I have never understood the "only identified in hindsight" notion. I think I have been reasonably good at identifying bubbles. Most of the traders I have known, If I look back, i think have been decent at identifying bubbles. The real problem is that identifying bubbles has nothing to do with profiting off of them, and that creates confusion.

The real problem for those who want to call a "bubble" and benefit from it is that there is almost never a mechanism for arbitraging the situation other than by participating in, and thus perpetuating, the bubble. That is why it becomes a self-reinforcing process. People claim not to know things are not irrational because that is how one saves face or reputation after the music stops. Before the music stops, everyone hopes to be quick enough to find a seat.

To switch the topic, or perhaps an analogy, in Atlas Shrugged Rand had the heroes use a very interesting strategy to change the social order. Rather than "fighting" the system, they accelerated the system. That was a good strategy. I think this same type of ordering process occurs at times in financial markets. At times, the fastest way to end a bubble or pop a bubble is to accelerate its growth - the underlying process is too strong to fight or go against. 

Apr

2

 1. When you got out for lunch, the market will take a big move in your favor that you were too slow on the trigger to capture. Your wicked friends will stay glued to the screen during that time, knowing the big move in what would have been in your favor is about to happen.

2. When you switch your position size down after series of big losses, you will hit 5 winners in a row, which will not compensate you for just one of the big losses you took.

3. The bonds will rally big on a economic number like GNP, but stocks will go down sharply and the explanation will be concerns about interest rate increases.

4. The big basketball game will feature a comeback the previous evening that is exactly like what happens in your market, and your team won't make it to black nor will you.

5. Whenever you have a big loss, and it turns around and goes to break even and you get out with a hootenany of relief, the market will go at least as far in your favor if you held as your were under water before.

6. Whenever there is serious morbidity in your family, you will lose many days in a row.

7. After a tremendous decline, the market will percolate around near unchanged for a day or two until you give up hoping for a rise, and then it will have a huge rise in your favor.

8. After a series of lucky trades in your favor, you will increase your size and the market will give you a tremendous beating. The same thing happens with basketball teams when they hit a lucky % of threes in the first half. When they try the same thing in the second half, they will make only 10% of them, and will go on to an ignominious defeat.

9. The worst trader on your team will be the one that defends you after a big loss and says that everyone should rally behind the boss, he's been trading the longest. Imagine the ignominy of having Smith the worst player in the league, and the cause of all the Knicks woes, defending Woodson and saying all the team should rally behind him because he works so hard.

10. Your wife will come in and look at the roller coaster chart of your swings on the day, and suggest "why don't you get out of half". You won't listen to her and you'll double up, and you'll be so ashamed you'll quietly sleep in the dogs kennel that evening.

11. The more time that passes from your early days as a speculator, the better you were (in your own eyes).

12. When you're long the grains in the summer, and you spend a weekend in the Hamptons, the sun will shine brightly all day, and a light rain will fall at the end of the day.

13. When you go out for dinner, the person next to you will be talking about his youngest daughter bought Netflix and Tesla and made millions on them.

14. After getting out of positions successfully on a swing during the day, you will try it the next day, and by the close if you had held your position you would be a rich man.

15. When you're long the market over the weekend, war will break out, or John Kerry will be reported to be visiting the Mideast or Russia to put out a fire.

Please add to the list.

David Lillienfeld writes: 

Vic, if it makes you feel any better about it, I often wind up having to sleep in the kennel, and that's without a trading loss. And we don't even have a kennel.

Gary Rogan writes: 

David's tale of woe reminded me of the old definition of Metaphysics: it's like being in a dark room and looking for a black cat that isn't there. Either that or the waterbed joke: you know it's going to be a bad day when your waterbed has sprung a leak and then you realize you don't even have a waterbed.

But for me what's guaranteed to happen is this: if I buy a little of some stock, I will have a nice gain, if I buy a lot, I will have a big loss.

Ed Stewart writes:

 The malevolent invisible hand guides ones trades when the in-laws visit. Suddenly your position size is 3X the norm, getting bigger, and at just the wrong time.

George Parkanyi writes: 

16. When you sell or short a stock - a takeover announcement will happen the next day (that happened to me twice - sold Robert Simpson; shorted General Instrument).

17. When you go from theory to practice, your well-researched and tested system will immediately bleed money, and will only start making money (without you) when you stop using it.

18. The positioning of your stop-loss order is irrelevant - you WILL be stopped out within a few cents of the low/high, and the market WILL go roaring the other way. (This is the only sure thing in trading.)

19. You will apply logic, reason and critical thinking to the market. You might as well have thrown a dart.

20. In exasperation you will eventually just throw a dart. Your position will go against you.

21. You will continue trading anyway, because your DNA has failed, permanently locked in the "I can do this" switch position.

Craig Mee writes: 

As soon as you mention a position to
anyone (some more so than others–for example, Vic's Hoodoos) the
heavens will open and you can kiss it goodbye.

Ed Stewart adds: 

Another guaranteed to happen item. Far more often than should occur by chance an invisible hand keeps you in the loss by a few ticks. At this point if you get out with a planned time based exit, most often prices move quickly in what would have been your favor. If you stay in, it does the opposite. And a related item, if you get out with a day-trade profit, it keeps going in your favor for days. If you swing trade it, the reversal was just a blip in the previous trend and you are soon dunked underwater again. My thought, and I could be wrong, is that much of this is real, not imagined, and is a more distant effect of the adverse selection problem with limit orders.

Mar

10

 Sir Harold Jeffreys recommends that the simplicity of a model be counted as the number of degree, the order, and the sum of the absolute values of the coefficients of the differential equation that models. He believes it is an immutable law of science that all great discoveries fall into a sum less than 7 or so . (See Ackermann [8 page pdf] for review and critique).

I wonder if the moves of markets can be modeled usefully in simple laws like this. The simplest solutions of an exact equation are

y dx + x dy = 0 which derives from xy = c and dx/x + dy/y = 0 which derives from ln ( xy) = c

Which markets move like that during a day or week and can useful predictions about the continuation of this relation for further parts of the period be made? Are there other simple models which work like

x (y)(y) = c or (x)(x)(y) = c

that are just a tad less simple that work as well.

On another note, a visit to the Drexel Museum of Natural History reveals the interesting fact that even though the lion is classified as the king of the jungle, old lions are often eaten by hyenas and leopards. One can see that playing out in the corn belt and those businesses that rely too heavily on yoga.

The beaver on the other hand, one learns often sends a seasoned emissary to help his colleagues build a new dam before returning home.

Gary Rogan writes: 

I'm having trouble thinking of any reasons why the markets should behave like simple laws of physics or simple differential equations. Conservation laws in physics are fundamentally based on the symmetries evidently present in our universe and also on the constancy of the amount of some quantity integrated over any surface enclosing it's source. Why would any of this be relevant to the decisions of millions of people and computers, all in the presence of a great deal of noise?

Anatoly Veltman adds: 

Yes, reflexivity theory is more appropriate. For instance, Ukraine is a negative — but only longer term. That's because trade wars, etc, cause stagflation, which is a long-developing process. US equity prices are more likely to suffer from credit contraction, and that's why China woes are way more significant. But US equity players will only begin catching up to this reality after China's drop gains speed.
 

Feb

17

 The cat parasite Toxoplasma gondii, which can cause blindness in people, has been identified in Beluga in the western Arctic. The discovery by University of British Columbia scientists has prompted a health advisory to Inuit people in the region who eat the whale's meat. Researchers say it is an example of how the warming of the Arctic is allowing the freer movement of pathogens.

Gary Rogan writes: 

Beware of Global Warming: it now causes blindness in the Inuit people. I bet there is also a link to the non-randomness of the down-for-the-year to up-for-the-year transitions. Researchers say Global Warming is ultimately responsible for anything (a) random (b) non-random.

Feb

17

 This is an interesting video about how the introduction of wolves led to less deer, which led to more vegetation, higher trees, more beavers, and more birds, which eventually led to changes in river flow. Pretty surprising.

This could be relevant for us on two levels:

1. Introducing new legislation will create many many many unforeseeable events. Maybe this could be an argument for smaller government intervention in business?

2. Introducing new legislation or new financial products or new institutions can completely change the landscape of the markets and contribute to the principal of ever-changing cycles (destruction of old profitable opportunities/creation of new profitable opportunities.)

Gary Rogan writes: 

There are almost never totally certain explanations in these situations, because of the number of variables and the inability to know so many things or to go back in time to be sure. It is funny though to hear some of the explanations every day about some market with only the relationship to some favorite factor changing (the markets are rising/falling/staying flat today as/in spite of/while/etc. something else is happening). The truth is rarely does anybody know for sure, and those who know aren't talking.

Feb

6

 Hypothesis: inflation is rampant but hidden by federal subsidies. Prove me wrong or prove me right. If I am right I will go into politics.

Jim Sogi writes:

This seems to be what Gross at Pimco is saying as well. Credit growth fuels asset price. Credit deflation may result in asset deflation. Seems to be what is affecting stocks.

The alternative theory is to follow the Fed's explicit explanation that the Fed is preventing deflation, and that removal of the stimulus will allow prices to deflate. This as they say is the greater risk.

Ed Stewart writes:

That makes sense to me. Credit growth or fed asset purchases have created asset price inflation relative to the rest of the economy, which is known as "the rich getting richer".

Deflation of assets is harmful as it impacts the money supply that leverages off of asset prices via credit. Kind of a different dynamic than what most people think of when discussing inflation based in consumer prices. One thing Mises said that I like is that money creation is never neutral across the price structure. It enters in specific ways and impacts specific prices relative to others. I used to think someone must understand how these things work, I now wonder if it is that things change enough such that understanding is not possible.

Gary Rogan writes:

Presumably asset inflation is related not just to the growth of the money supply (a large portion of which sits as excess reserves right back at it's point of origination and isn't contributing to anything other than bank earnings) but also to the intent of the Fed. Otherwise why would relatively tame tapering result in some deflation even while a huge amount of money is still being printed?

Feb

5

 The mocking press about Sochi accommodations shorts the many thousands of workers who made a great effort to create a venue where none existed previously. Given the well known corruption and central command government in Russia, expecting 5-star hotels by journalists, athletes, or spectators was never realistic.

"Journalists at Sochi are live tweeting their hilarious and gross hotel experiences"

Putin bears much responsibility for the mockery so far, because of his ego, vested interests, tsarist regime, and hostility toward the West. Probably Gorbachev would have been given more slack, and would have rightly approached such a task more humbly. No doubt Mexico, under similar circumstances, would have been given a full pass.

There are many who believe we in the US are living under an increasingly repressive and controlling government. Russians have lived like this for a thousand years. One of their few permitted joys is pride over national sports. I for one hope they have reason to cheer at this Olympics.

Tim Melvin writes:

Mocking press my flaming ass. This is the Olympics and Russia committed to providing world class accommodations in their bid package. The rooms are not finished and some have no water. At least one hotel is telling people not to use the water on skin as it is dangerous. Do you think for a minute it would be this bad if Austria or South Korea had won the bid? If it was never realistic they should not have won the bid. Period.

Gary Rogan writes:

It's amazing how corrupt the whole world has gotten: very little of importance is done for the right reasons. Nobel prizes, Olympic venues, Global Warming. It used to be that individual countries and locales were corrupt, and that's still going strong, but globalization has led to global corruption. Everything is Kabuki theater of one form or another.

Feb

5

One wonders if the stooges, the puppets from the centrals will be hauled out to make reassuring comments about the health of the economy and the resonance of the qe's. After all, small people in emerging markets might be hurt and the idea that has the world in its grip will come into play. Trading it from that cynical world view has not been entirely unprofitable the last two days. But it was entirely unprofitable on Monday. However, it often takes a day for the puppets to receive their marching orders.

Rocky Humbert writes: 

I note a Bloomberg news story from this morning that the INVERSE VIX ETF (XIV) had a record inflow of money last week — the largest amount since the ETF started trading in 2010. This tells me that the market has become conditioned to extrapolating the behavior of the past five years.

I believe that among the biggest challenges in investing and running one's models is figuring out when the game has changed (or "ever changing cycles").

I am not making a prediction about when the game will change. But the risk is rising substantially. Conditions precedent for the game changing are (1) "Everyone" is conditioned for the same behavior; (2) High leverage in the system; (3) Rich valuations and/or optimistic assumptions; (4) Subtle changes in monetary conditions and/or other related expectations; (5) A long period of time since things looked really scary. (FWIW NYSE December Margin levels are at records fwiw.)

Think back a few years — what were you thinking then? How many people laughed at "Green Shoots"? Why do people believe the bankers now? But they didn't back then? What is different? I'll predict that we don't have another financial calamity. But to quote the wisdom of Roseanne Roseannadanna, "If it's not one thing, it's another."
 

Bill Rafter writes:

For the next shoe to drop you may want to look at my post of last week.

Gary Rogan writes: 

When I said we'll see 5% down I was using every one of those reasons other than 4 that I don't understand other than slightly lower QE. The margin leverage chart is the scariest thing in the world if you are looking for scary things.

Feb

3

Using SPY (93-2013), here is comparison of return for 1st day of month (close last day of prior month to close first day of new month) vs. all days in the period:

Two-sample T for 1DOM ret vs all dat ret

                      N    Mean    StDev  SE Mean
1DOM ret      250  0.0029  0.0136  0.00086  T=2.8
all dat ret     5270  0.0004  0.0122  0.00017

For 1DOMs following a down month as we just had, checked 1DOM returns when the prior 20 trading day return was down more than 2%.  Here again compared to return of all days in the period:

Two-sample T for 1DOM <-2% vs all dat ret

                           N    Mean   StDev  SE Mean
1DOM <-2%      60   0.0012  0.0200   0.0026  T=0.32
all dat ret        5270  0.0004  0.0122  0.00017

>>not as good

As to whether 1DOM has become DUM, attached is a chart of mean 1DOM return by year.  Recent years 2008 and 2011 have undermined the pattern (the last year on the chart is 2014, which represents one data point = 1st day of January)

Gary Rogan writes: 

A steep multi-year rise making equity values fairly expensive, buying on the dips always having worked in recent past, and then a reduction in liquidity. Three was no other specific catalyst for the equity markets to unravel, but it was an end of an era: the enthusiastic dotcom era, and this is the beginning of the end of the era of "the market goes up because the Fed will always save the day, so any bad news is good news".

Steve Ellison writes: 

 Three years ago, I posted on a variation of this idea that was published by Norman Fosback in 1976 and added stats from 2005 to 2010: http://www.dailyspeculations.com/wordpress/?p=5867 . When an idea has been known this long, it would be surprising if it worked at all. There was even an ETF a few years back that was only going to be invested on the 1st of the month. I don't know if it has survived.

I found that, over a very long period of time, this idea could still lead to good returns, but there were periods lasting a year or more when it did not work. As Steve Irwin found, the crocodiles hate you and might be waiting for you at the same spot you jumped in last time.

Jan

29

 One is accustomed to the contumele of certain parties, especially when I point out, as the loose cannon Mr. Kora, who could ruin us all by posting such good stuff, shows that 8 or 8 such events led to substantial profits, a point which one intentionally omitted so as not to self destruct the list. But one is very surprised on a list with so many free market devotees, albeit a conservative here and there, that one doesn't consider the right of a personage to better himself. If an immigrant can gain gainful improvement and housing in this country, why in the world should we stand to prevent his pursuing his happiness and bettering himself. And of course it's good for both parties.

Jordan Neuman writes: 

The Chair is correct of course– ceteris paribus. Unfortunately, it is not ceteris paribus. For example:

In 2009 (based on data collected in 2010), 57 percent of households headed by an immigrant (legal and illegal) with children (under 18) used at least one welfare program, compared to 39 percent for native households with children.

Immigrant households' use of welfare tends to be much higher than natives for food assistance programs and Medicaid. Their use of cash and housing programs tends to be similar to native households.

A large share of the welfare used by immigrant households with children is received on behalf of their U.S.-born children, who are American citizens. But even households with children comprised entirely of immigrants (no U.S.-born children) still had a welfare use rate of 56 percent in 2009.

Source.

Gary Rogan writes:

I would like to add that eventually these immigrants start to vote and they vote, by a huge margin, for big government because (a) to them it's a significant net benefit (b) they know of no other way of thinking about the role of the government. Additionally, they are used as pawns by said big government in every way imaginable to maintain itself as the master of us all. And additionally, large flexionic business absolutely love these immigrants because they work for less (good) but as their families are subsidised to an enormous degree by the taxpayers, these business do not bear the full brunt of their cost. As these flexionic businesses are enormously powerful with the government, being flexionic and all, this creates an almost unbeatable coalition of government and crony capitalists to import a certain kind of immigrants to the detriment of us all. 

Greg Rehmke writes:

Research supporting the benefits of immigration to the U.S. is compelling. Welfare programs continue to be expensive and distorting, but vary by state. "Generous" welfare in California is more expensive and damaging to immigrants than Texas programs. But recent studies show the services provided and taxes paid by immigrants (legal and illegal) outweigh the cost of welfare programs including govt. education.

Immigrants run or are key technology people in half of Silicon Valley tech firms, for example. But even low-skill immigrants free U.S. workers to concentrate on higher skill jobs. Immigrant workers in hospitals and nursing homes provide key services.

Here is more information from Ben Powell on Liberty Fund site.

I have links to various articles here.

Stefan Jovanovich comments:

Qui bono? As long as it is that marvelous construct — the economy, "immigration" always wins; and the trivial question about whether or not people are following the Constitutional rules for naturalization can be conveniently discarded. When the question becomes who pays for the price effects of competition from illegal immigrants, obfuscation is needed. But then what else are "studies" good for if not to tell ordinary Americans that their common sense is not good economics.

I do wish Greg would read the footnotes. Mr. Powell is distorting the truth beyond all recognition when he writes that "George Borjas is probably the most established academic critic of immigration. But even he admits that immigrants create net benefits for the native-born." What Professor Borjas actually stated was this:

"The evidence indicates that the wage of the skill groups–defined in terms of educational attainment and labor market experience–that experienced the largest influx of immigrants grew most slowly over the 1960-2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3-4 percent for every 10-percent increase in the number of workers that can be attributed to immigration."

I have come to the conclusion that Libertarianism is, at heart, a theology that wants ownership of property, including the property of citizenship, to always be subordinated to the idea of liberty. Yet, at the same time, people should not be free to exercise the freedom to truck and barter in credit. We are back, once again, in the world of Fourier and George Ripley and Brooks Farm.

Greg Remkhe replies:

I can’t speak for libertarians or economists in general, and I don’t believe economic gain is the most important thing. I think justice is. People have rights and deserve freedom and justice before the law. Welfare state programs and business regulations distorted the immigration process for California in ways very different from Texas. Texas government policies are more open to enterprise and its booming economy is putting latin american immigrants to work. Welfare is harder to qualify for in Texas and enterprises are easier to start and expand.

It is important to separate the consequences of immigration from the consequences of dysfunctional U.S. immigration policy (and distorting state welfare and business regulation).

New competition benefits consumers,but can challenge or hurt existing producers. Immigrants are producers in the labor market and where they compete with existing producers–American workers–they challenge and can hurt both unskilled workers and high-skill tech and engineering workers.

But the challenge part matters too. Imported cars from Japan challenged U.S. car companies to improve their cars. Many U.S. firms met the challenge of imported goods and improved to regain market share and also export. The tens of thousands of immigrant workers employed by U.S. firms helps them compete overseas, and that helps U.S.-born workers in those firms.

And now U.S. companies like Boeing, Ford, Apple, Dell, HP and others are global with goods and services produced by a mix of U.S. employees plus employees and subcontractors overseas. Plus Honda, Toyota, VW and other foreign car companies invest billions and employ hundreds of thousands of U.S. workers, engineers, and designers.

Robert Guest’s “Borderless Economics ” is I think one of the most compelling discussions of the dynamics of the new global economy.

The benefits to the U.S. from immigration and from outsourcing is one part of the story. But the benefit of immigrant entrepreneurs returning home to energize China’s and India’s economy is another major benefit. Hundreds of millions have been helped overseas by the return of inspired entrepreneurs trained at American and European firms. And these now wealthier producers and consumers in China, India, Brazil and Mexico now buy more goods and services from American companies and workers.

All that said… I must agree that a combination of crummy schools and corrupt government in Mexico and other Latin American countries shapes new immigrants, legal and illegal who come to the U.S. to live and work. Crummy schools and corrupt governments in the U.S. make matters worse.

Someone noted that we don’t need to make a wall around the U.S. but instead to make a wall around the welfare state. Over the last couple years, I’ve been recommending the Krieble Foundation’s Red Card proposals. They argue that Mexican working in the U.S. now and those who wish to come should apple for a worker visa Red Card that provides documentation and insurance, but not access to welfare programs.

Jan

28

 In a poisson distribution the number of events, e.g big declines in a time period occurs with a specific average rate, regardless of the time that has elapsed. For example, the average number of big declines per month is two. How likely is it to have 2 declines in the month, 3 declines. The time between such events, follows an exponential distribution. What is the distribution of time that elapses between such events? The time between events has a mean of 1 / the average rate, e.g. 1/2 a month in the above example. The variance is also 1/2.

Mr. Vince proposes that the rate and average elapsed time changes conditional on what has happened in the most recent period, a very good proposal, which can be modeled most practically by the use of survival statistics that all here are familiar with, i.e. what is the average duration between declines based on what the most recent event has been. Vince proposes that one look at the likely variations in that time, which may be skewed to the near term or long term.

Rocky Humbert writes: 

My stats are rusty but I believe poison specifies an average time between events (lambda) as a parameter and further specifies that's the actual time between events is random. Others please correct me, but I believe volatility in stocks experience clustering and so the independence assumption of poison is violated.

Ralph Vince writes: 

I'm talking about modelling the times between declines of x% with the fishy distribution, determining lambda. Then testing various past time windows vs futures ones to find a window length such that lambda settles and converges.

Gary Rogan writes: 

Why would it be a reasonable theory that a process where actual sentient being react to a previous decline in some way resemble a process where every event has no informational connection to not only the prior event but any other?

Ralph Vince replies: 

Why not? Has dependency been proven here?

Jan

23

I have been thinking about trying to use the 5 Whys Method to analyze trading errors on my account (and then check the "images" tab for actual users' examples).

But the exogenous events (Black Swans, terrorist actions, bad actors with undesirable or stupid agendas, etc) that are beyond a small investor's control, for example: Das Fed; China changing its economic or monetary policies seemingly at whim; whale trading errors; etc., leads me to think that without either (1) an ultra conservative approach that isn't going to yield much investment return, and/or (2) insurance like put-call strategies that I admittedly know little about, a simplistic equation might look like this:

P = G + D *a * b,        or    [1]
P = G + D * e              

where:
P = investment profit
G = growth of investment
D = dividends (if applicable)
(a) likely risks I know about that are possibly going to occur, and
(b) unknown risks I don't know about that might or might not occur
(a) and (b) collectively = e … an acceptable amount of uncertainty ("Implementing Six Sigma" by Breyfogle III, 2nd ed, Wiley, page 1029)

roughly translates to:

Investment Profit = growth of investment share price + dividends if applicable * risks I know about that are possibly going to occur (beta-likely things) * unknown risks I don't know about that are possibly going to occur (exogenous things)

I view these 'e' uncertainties of the market/s as gravitational-like-affecting forces, similar to a planet (the Market) and its multiple 'e' moons affecting the planet tides. Then, if one doesn't know the orbits of the moons (see 'a' above) and/or their respective orbits are random / erratic (see 'b' above), the 'e' effects exert influences that push and pull the market.  Sometimes the direction is good, sometimes not. 

Which all reminds me of the Chair's recent Lotak Volterra equations information, and a lecture during a university optimization class where Dr. Pugh (Indiana-Purdue Fort Wayne chair of Engineering Technology Dept) went through a very similar discussion about "Why Things that are Normally Stable Suddenly Change".  He was diagramming essentially identical graphs using Hare and Fox populations.

Leo Jia writes:

Why 5 whys?

Welcome to the list, Rich.
 

Jan

23

 WSJ today has an article that's critical of companies that do big share buybacks. It features quotes from Chanos, who says he's shorting some of the buyback companies. Much of it seems wrong to me.

HPQ is cited as an example of a buyback disaster — "if only" HPQ had just invested in real opportunities instead of those buybacks. I thought though that HPQ's problem wasn't the buybacks, but the high-priced acquisition of a software company that turned out to be fraudulent. Obviously they would have been much better of if they had used that $15 billion to buy back shares.

The main target of the article though is IBM, which seems like a particularly bad choice. IBM's earnings have grown by a factor of 3 over the last 10 years while its share count had dropped 35%. Furthermore, IBM is one of the few companies to have reduced its share count even during the 2008/2009 period–the count went 1385, 1339, and 1309 million in years 2007, 2008, 2009.

anonymous writes: 

I think your analysis is quantitatively accurate, but the typical bottoms-up analyst has a much shorter lookback period than you do, 5 years at most, and with good reason.

The fact of the matter is that IBM has had extremely low/negative "organic" revenue growth for several years. The CSFB analyst has made the most consistently cogent representation of this argument, and "FCF conversion attributable to shareholders" (FCF post-financing, post-M&A) has been ~70% of earnings and falling … and FCF conversion has deteriorated every year since 2009 as a fundamental analyst/PM myself (of internet stocks).

I would never use a lookback beyond the current management team, and probably 3 years or less. I suspect Chanos keeps an extremely close eye on FCF conversion combined with -ve organic revenue growth, and sees aggressive corporate buybacks within a rapidly deteriorating fundamental backdrop as a form of management corruption, in which management chooses to invest excess capital in juicing their own stock options, instead of reviving the company's longer term prospects. This is endemic of "blue chip" tech conglomerates that no longer know how to generate organic growth.

I am not quite as familiar with HPQ but i strongly suspect it's a similar thesis.  I was totally bewildered by Buffett's decision to load up on IBM in 2011 as were a lot of people who covered IBM. It violated every one of Buffett's own rules.

Side comment: since Chanos is compensated on "negative alpha" instead of absolute return (i.e. if the market is +20% and Chanos's short portfolio is only 10% against him, he is "up 10 percent on the year") he has the luxury of fighting these longer-term wars against these kinds of companies.  It's very hard to fight a stock that's buying back 10% of their float per year, which probably makes them more attractive to shorts who can take a longer view.

Gary Rogan writes: 

Stocks (or rather companies) that can't go organically but don't shrink are like perpetual bonds, but with an upside option in that someone can buy them for the cash flow. At the right P/E they can make a lot of sense.

 

Jan

17

 With apologies to "The Moody Blues"  (Nights in White Satin)

Fries dipped in statin,
Never reaching the end,
Burgers I'm eating
With a Lipitor blend.

Steaks grilled with Zocor,
Always hungry before,
Just what the foods are
I can't eat anymore?

'Cause I love them,
Yes, I love them,
Oh, how, I love them.

Gazing at omelets,
Altacor in my hand,
Just what I'm going thru
They can't understand.

Mevacor Ice Cream,
I have shared with a friend,
Cookies and Lescol
I will try in the end,

And I love them,
Yes, I love them,
Oh, how, I love them.
Oh, how, I love them.

Jan

17

 Since you're talking about PEs, I will crosspost this bit:

Listening to Ed Hyman on Wealthtrack. Hyman says he thinks 2013 was like 1996 and that the next few years may turn out to be like the late 90s, as in: +20%, then +30%, +27%, +20% - he specified those percentages - which would mean for the S&P:

year close
2013: 1848
2014: 2218
2015: 2883
2016: 3661
2017: 4394

If you also plug in the earnings growth %'s from the 1998-2000, you get these stats for the S&P:

year: earnings, pe
2013: 107.45, 17.2
2014: 116.60, 19.0
2015: 117.08, 24.6
2016: 136.67, 26.8
2017: 148.44, 29.6

Considering Ed Hyman's comparison to 1996, one can't help but think, "yes, but"…back then we were looking ahead at the interweb and all its spinoffs, and investors thought tech companies would post astonishing future earnings, resulting in the fact that in early 2000, the top 20 firms in the QQQ had a combined PE ratio of 83. The future looked bright.

In the current world, what big factors could drive up the market PE to something like 30, as in the previous post? Two things come to mind in the macro sense:

1. "Developing" countries, especially India and SE Asia, really loosen up the regs and start to take off at an even steeper rate of ascent. Global GDP follows and grows at twice its "normal" rate.

2. A period of serious inflation.

What else?

Gary Rogan writes: 

Being able to map this year on some other years for the purposes of predicting the next few years sounds like wishful thinking. Multi-decade returns from this point on are likely to be subdued because this is somewhere between a "fairly valued" and relatively expensive market. This means little in the next few years, which are relatively "short term" for this purpose, and nobody really knows whether trend following or trend reversals will predominate. And since a number of surprises that will affect the treasury rates are in store, some of which will depend on the actions of a few men and one women, these short-term guesses are likely to remain nothing but guesses. 

Jan

2

 It would be interesting if the all seeing eye could see the reasoning behind all the typical reactions to a number like ISM manufacturing or employment. Let's say it's like 57.4 up versus 57.6 like today's number. First a rise in S&P because it's down. That means the Fed is less likely to taper. Second, a rise because it's only down 0.4 and it's still way above 50. Third, a decline because it means that the economy isn't strong. Fourth, a rise as the flexions cover their short. They were told the number was going to be down but most of them didn't get the exact number and it's only down a little. Fifth, a decline as the economic forecasters alert their readers that the number was down. Sixth, a further decline because Germany is down a tremendous amount more than the US. Many other cross currents also. All ephemeral and designed to unleash the weak from their chips.

Gary Rogan writes: 

It seems like reacting to any news of that nature in any way is counterproductive unless you had the information in advance. And yet 'everybody does it'. Why do people feel compelled to act on information even if they don't know what it means (relative to the reaction that has already occurred by the time they can act)?

Craig Mee writes: 

There was an ex deputy treasure secretary on CNBC Asia yesterday, (he may have held the top job for 4 days and I missed his name). His insights were little better than the rhetoric from a standard middle range company CEO, however he did appear straight down the line. Possibly the government at the highest levels is not necessarily implicit in the flexionic behavior of others. Many may not quite understand what they have available to them or that lower ranks are happy to take cut deals for peanuts on partial info. Big business, on the other hand, is able to squeeze every ounce of juice from all and sundry to create the beast that marches forward to all others' misfortune.

Dec

10

 Here am I in New York City, no time for longer philosophy right now, but quick observations. After talking to friends in recent days, left and right, all ages, NY TX IL …. I'm not sure the real problem is left vs right or statists vs libertarians or socialists vs capitalists, etc.

Because all those worldviews have deeper roots…

Here is what strikes me as possibly the REAL issues…

1. Emotionally driven public policy. (Holy Moses, there is a homeless man, somebody give him some money now! Raise the minimum wage! Ok, problem solved!)

2. A public that is illiterate in arithmetic (not math) and afraid of it, of data, of statistics.

3. A public with no education in economics, even the most basic understanding of how prices clear markets and how that is just as beautiful as dinosaurs and butterflies.

Of course I am saying it's a failure of our k-12 education system.

Its not socialist teachers…I see little evidence of that though of course some exist but I don't know that the students believe them….it's teachers and students piling up over the years who were never shown these things (analysis, rationality, economics) in the first place. It's a problem of curriculum balance. Every grade schooler probably knows how to recycle and figure their carbon footprint. And how to "give back."

I also think there is a real gender gap in these items, especially the emotion point for many women voters. Perhaps not unlike the gender gap in science and technology.

Or something along those lines…you get my drift….

Gary

Gary Hoover

Entrepreneur

Chairman/CEO Bigwig Games, Inc. Play Hard and Prosper

Chris Tucker writes: 

Here is a video of the talk Gary gave at the Junto, almost verbatim.

Richard Owen writes:

Mr Hoover should add John Lewis in the UK to his list of impressive department store business models. Great talk.

anonymous writes: 

I also enjoyed Gary's talk very much. Seems the historical mechanism for success in retailing has been increasing quality while reducing price. I have been wondering about this lately with respect to healthcare. Along the lines of retailing, in the wake of the recession my patients seem more sensitive to cost, and they don't want to be "nickled and dimed".

Over recent years in my periodontal practice, I have reduced fees, increased service, and do many more things without charging. Despite loss in local employment (Amgen layoffs, etc) and increasing competition, we've stayed quite busy. However like some of the retailers, our profits are down. Presumably by keeping fees low we have preserved market share.Some of my nearby colleagues take a different approach. Since their busyness and revenues are down, they raised fees - as if this will compensate for lack of demand. They are still not busy, but they do have patient flow and stay in business.

Recently I did some grocery shopping at a local supermarket I usually stay away from, which is a small chain known for high prices. One bag with a few items (including Chilean Sea Bass) cost $126, and I vowed not to come back. While in the market I saw several patients from my practice who looked very happy to be shopping there. Like many in our community, these were affluent people who don't need to budget for groceries. Perhaps they obtain status by paying extra to go to an expensive fancy grocery? The exact value of health care services is much harder for the consumer to judge than groceries. Perhaps my high priced colleagues are aiming for this demographic, and are willing to sacrifice market share. And if so, status-spending is a different twist to supply/demand.

Gary Rogan writes: 

 It is well known in high-end retailing (or actually retailing of any "prestige" products) that raising prices often increases sales. The function of prices is to communicate information about quality in that world. How can any self-respecting "prestige" buyer think highly either of themselves or the product if it's priced like cheap junk? I don't like people who think better about themselves when they pay more, but that doesn't change the reality of what sells at the high end. 

Rocky Humbert adds: 

Shopping in our local over-priced "gourmet" market last weekend, I noticed some brilliant-looking Chilean Sea Bass for $29/pound. I didn't buy any. I noticed an in-store special for Starkist Tuna for $0.99/can. I bought 15 cans. What are the lessons here?

1. It is arrogant and foolhardy to make judgments about other market participants and their motivations. The market and the economy works because participants have different preferences, values, and information. The vendor wants to know, and big corporations spends billions to shape the preferences. But they really don't and can't without unintended consequences. I didn't buy the Sea Bass because I was making a Paella. I bought the tuna because one of our cats is on a high-protein diet and at 0.99/can, the tuna is substantially less expensive than gourmet high-protein cat food!

2. Shaping customer preferences is not the same as offering a product that consumers want in a shopping environment that consumers enjoy. The couponization of consumers and the recent experiences of JCP and Sears illustrate this point well. My Lexus dealer offers an oil change for $50 whereas the Jiffy Lube charges $30. Lexus can take 3x as long as Jiffy Lube. Where do I go? Surprise! I go to the Lexus dealer because the waiting area is more comfortable, they treat me better, they have "free" coffee and danish; they give me a "free" car wash; I can do work while waiting so it's productive; and it's a generally more "enjoyable" experience. What is my enjoyment worth? Do the math. Are other people there because they are making a statement about "being seen" at the Jiffy Lube? Who knows. Product differentiation occurs at many different levels. But overall, it's rational and derives from utility curves.

3. I find that many people who have missed this stock rally (and I wish I had been more aggressive) rationalize the opportunity cost by thinking that the people who participated are "wrong". The rally has been "engineered" by the Fed. The long term fundamentals don't support the expectations. It's going to end badly. The Nikkei didn't go anywhere for X years so the S&P will do the same. Blah blah blah. I think the real story and lesson is that making value judgments about other people is not a productive exercise. Not in business. Not in the markets. And not in life.

Gary Rogan adds: 

 My favorite example of a case where judging motivation is easy comes from one of the behaviorist books I've read where a lady who owned a boutique in New Mexico had a display case of handcrafted Indian jewelry that wasn't selling at all. Once, preparing to go out of town she left a not to her assistant instructing her to mark down the jewelry with a suggested percentage. Due to her poor handwriting, the merchandise was substantially marked up instead of down, and to the owner's surprise almost completely sold out in just a few days. I will arrogantly (but not foolhardily) assume that the marginal utility of the jewelry came from the high price and not the suddenly changed quality or usefulness.

Rocky Humbert responds: 

Mr. Rogan, we both agree that there are many such examples of what you describe. Brands and pricing and intangibles matter. However, the academics often argue that these consumer preferences demonstrate irrational or gullible or other behaviors that are not "efficient" or not "optimal." My point is that the underlying supposition that "optimal" or "efficient" is a universally accepted, static, independent variable, is questionable at best, and misleading at worst. . If you voluntarily partake in an activity, you are getting "value" from it. If the activity is transactional and involves a seller and buyer, then both participants are getting "value" from the activity — or they would not engage in it. To the extent that the transaction is "zero sum" financially does not mean that some other intangible value is not being created. An observer might just not understand what the value is. It's all about personal utility curves.

An observer watching me decline the $29/lb Chilean Sea Bass and buying 15 cans of $.99 tuna would reach a very different conclusion than the truth. An observer wondering why any particular individual decides to shop at Whole Foods, Trader Joes, or the local A&P will similarly come up with questionable conclusions. (I'll bet that the person who started this whole thread doesn't shop for food regularly! Spending 60-90 minutes every week in a supermarket can be a huge chore and one of the attractions of Whole Foods is its environment and presentation.) Sure you can buy the same diamond on 47th street as at Tiffany's for a fraction of the cost. Is it the status of the blue box? Or is it the certainty and comfort of the buying experience? Or is it laziness? Or something entirely else. Countless examples of this.

Gary Hoover writes: 

 The books about marketing luxury and super luxury goods list many techniques which are the opposite of standard marketing wisdom for mainstream products. These include creating product shortages, ignoring negative reviews and keeping them off your website because you only want to talk to your advocates, raising prices to create status appeal etc.

While a walk down Fifth Avenue or other luxury districts worldwide might make you think otherwise, luxury goods are still a relatively small part of the economy. Neither BMW nor Daimler-Benz are in the world's top ten vehicle makers in units, though their dollar revenues rank them higher (especially due to Daimler's big truck and bus operations).

But the luxe segment has grown dramatically in recent years.

Nevertheless, the real dollar volume rests, like the last hundred years, in serving the huge and growing global middle class. Those companies have to pay attention to "old school" rules like price elasticity and great product availability and distribution.

In walking stores in New York the last few days, I was intrigued by the volume done by Swiss Chocolatier Lindt, with multiple Fifth Ave locations, who now drives their product through mass merchandising outlets like the drugstore chain, apparently without ruining product quality or perceptions thereof.

Amanda K comments: 

 Gary (aka Free Market Liberal),

As a female libertarian who has worked in the tech field for years, I definitely see the gender gap in both areas. I suspect that there is a higher percentage of people in tech that are libertarian-minded than other fields. Is it because they are more logical? Because they spend a disproportionate amount of time surfing the web for good ideas? I don't know. Even my female scientist friends reject small government… and they are supposed to be so logical! Of course, they are paid by the government so they may be a bit biased:)

Warning – Politically Incorrect Paragraph (or PIP) below:

I suspect that many of my girlfriends voted for Obama because he is handsome and youngish, they are more easily guilted into voting based on ethnicity, it's cool to vote Obama, to vote against him is to admit that they were wrong the first time around, and Mitt Romney is a plastic man – there is nothing to latch onto. In other words, they vote for emotional reasons.

There may be another issue in addition to the three issues you outlined:

4) A public that has abandoned basic moral principles. For example, if everyone recognized that it is wrong to steal, then it would be obvious that asking the government to steal in order to give money to the homeless guy is also immoral. Schools would be a symptom, not a cause of this problem.

Thoughts?

Amanda

P.S. – ENFPs and INTJs are the most likely to be libertarian with 5% chance each. The only letter in common is N: Intuition. One of the Myers Briggs websites contains the following statement as part of the description of an N: Sometimes I think so much about new possibilities that I never look at how to make them a reality. Sound like any libertarians you know? ;-)

Dec

9

 Bill Rafter, thanks for your interesting posts.

I think you will be interested in the attached chart showing native-born compared to immigrant gains (or lack of gains) in employment. It is the work of a perceptive fellow like yourself who tracks such comparison from gov. statistics (whose name I have for the time being misplaced) and who reports on the vdare.com website.

As you can see from the chart, all net gains in US employment since Obama took office have gone to Foreign-born, while net employment of native-born Americans has not increased during this period.

In addition to being worrying in itself, this may well tie into your finding that while employment has increased, payroll taxes (and therefore wages) have decreased, presumably because of substitution of lower-paid immigrant workers for higher paid native-born workers.

As an illustration one can think of the US construction industry, which used to employ large numbers of middle income workers. Now as I understand it the industry largely employs immigrant Hispanic workers at far lower salaries. One can think of a number of other industry examples.

Gary Rogan writes:

In traditional economic terms substituting cheap foreign-born labor for native-born American labor is manna from heaven: the cost of goods for everyone goes down, so what's not to like? But when those displaced workers go on disability and when they vote themselves food stamps and "free" healthcare, it's not working out so well, is it? This sounds like a Luddite-type argument, and it is, but Luddite argument are valid when the number of displaced workers reaches some critical mass. People are not copper or oil, if they are desperate they resort to desperate measures. The industrial revolution produced Marx, and it was only because the positive effects of that revolution overtook the negatives quickly enough that there wasn't a Marxist revolution in England at the time.

Stefan Jovanovich writes:

Er, no. Gary should stick to his guns on the subject of migration. The reason there was not a Marxist revolution in Britain/England in the 19th century is that people emigrated from the British Isles in sufficient numbers to populate Canada, Australia, New Zealand and double the white-skinned population of the United States. You can add to those numbers the millions of Britons who went overseas to manage/rule/work for the Empire in Africa and Asia and the Caribbean. The argument for "free trade" made by Cobden and others was that the attempts to support prices for British landowners was literally starving the "native-born" population of Britain. They were right, of course; what even they did not anticipate was that, by allowing goods to come into and out of Britain without quotas and with "honest" tariffs (ones that could not be manipulated to hold the goods hostage to official approval) the free trade produced the financial revolution that made London the center of the world's capital markets. That financial revolution and the ability of Brits to do wonderful things with maths are what sustained Britain and still do, not the industrial revolution. The best scholars are now in agreement that Britain's economic rise over the rest of the world came much earlier, before combustion-driven machinery had even begun to take hold - in the 18th and early 19th century. By 1850 and certainly by 1870 Britain's "industry" had been overwhelmed by American, French and German innovation and mechanization.
 

Nov

25

 One thing I notice in unsophisticated investor-traders such as myself is that the positions one takes are usually supported by an unspoken prediction: "I will know when it is a good time to sell this and I will be able to do so."

Gary Rogan writes: 

The beauty of really long-term investing is that you don't have to have this unspoken prediction.

Victor Niederhoffer writes: 

And to add to Mr. Rogan's "beauty", you take full advantage of the most marvelous aspect of arithmetic, the power of compounding. And furthermore, you reduce to a minimum the vig from flexionic and top feeder activity.

Anatoly Veltman writes: 

Can't dispute all of the beauty. The problem is that only a narrow group is willing to commit: those who set aside slow money. Most suffer from the "hot money" bug: how to make money work its hardest. Willing for the money to die trying.

Gary Rogan writes: 

Very poetically put. It also illustrates the following point: in any kind of investing or trading the problems and solutions come in two flavors, namely those of competence and those of psychology. Even in long-term investing you still have to decide what to buy and when to buy it, so it's not immune from either category.

S. Humbert writes: 

Buy and Hold (for the medium term) is not, in my view, enough to earn a living from. Please let me explain before you fry my IP address.

In the past 30 odd years alone, even the unleveraged long only holder of US stocks has had many barren years (and multi year) periods when he lost or didn't make.

In my usual, inelegant fashion, what I am saying is that if you trade for a living — for yourself (i.e. at the sharp end of the game) then buy and hold alone doesn't cut it. (Unless you start in 1982 or 2009 or some other retrospectively chosen low). This does not dilute the effectiveness of the strategy, I'm just saying an individual's perspective and starting point dictate what weight one should give to the passive, low vigorish strategies.

Frankly, a low single digit return with a very poor Sharpe Ratio over the lady two decades LESS retail friction, well… I certainly couldn't have lived off that taking into account my extremely modest circumstances when I started my speculative business in 1990. Anyway — it's at all time highs now right!

Ralph Vince writes: 

Worse–you're still going to touch that money. You're going to take a morsel, or add a morsel, you can't sit there and forget about it.

Now you're on the curve.

Now, if you are 100% invested, you are completely doomed, and it isn't a matter of if.

Nov

17

 It's shocking to see with all the disapproval of the Oval that the stock market keeps going up. Usually the Oval is like a father figure, and when disapproval of him goes up, it makes everyone insecure in a freudian way. Suicide and expiation for evil thoughts comes to the fore, even the sale of stocks. I think I'll sell some tonight.

Gary Rogan writes: 

I note with interest that Aetna was up 1.74%, Wellpoint 1.67%, United Health 0.61%, Humana 0.89%, and all of them are a lot closer to their 52 week highs than lows. Superficially the Oval has created a dilemma for them today where they will supposedly be blamed for an incredible mess as they are now "allowed" to re-offer the just canceled individual plans that they can't possibly offer in time to have the formerly insured covered again in the new year on any scale as it takes too long to reprogram their computers, send the letters out, get various local approvals, etc.

Vic Niederhoffer wrote at 10:06am EST via Twitter:

All bad things must come to end including shorts. I call this a draw. I
will go after believers in flow funds more important than stocks next week.

Steve Ellison writes: 

One wonders if the stock market is moving inversely to the diminishing likelihood of any further attempts at agrarianism before 2017 given the tremendous loss of political capital by the Oval Office and the lame duck status of the incumbent.
 

Nov

15

 Once again the sensibilities of the centrals and sovereigns and flexions galore who buy the bonds at the auction were not discommoded.

Gary Rogan writes: 

I have maintained for many months that they will not let the rates run away for as long as they can help it because they just can't afford it. Those who thought that the employment report would provide some cover for the would-be taperers and sold everything in sight wrongly believed that the supposedly taperers needed cover. Their only real job is to delay the death spiral of higher interest payments => higher borrowing to make those payments => higher rates => still higher payments for as long as possible. Well, OK and to keep the big banks permanently on the dole. How can they ever do anything deliberately that will signal higher rates? Only mistakenly as Ben did in May, a mistake he tried hard to correct but not enough to even think about tapering.

But the good news according to Ms. Yellen that the stock market isn't in any kind of bubble either, so it's safe to buy. To infinity and beyond! Abby Joseph Cohen a noted expert on value in the market still sees some so it's all good.

Craig Mee writes: 

So many fake outs, levels of deception, noise, and price runs come to mind, but just a few take away from that trade that you look back on and think to yourself, "how easy should that have been, all I had to do was hold".

Gary Rogan adds: 

A few days ago Goldman's Hatzius found two Fed economist studies that support lowering the unemployment threshold for tapering. Of course that's only to help unemployment as all of the Fed's goals are ultrapure. How often do we see Fed studies that permanent money printing on this scale isn't something that has a precedent and these projections are on the level of "climate science"? Once again, to the man who only has a hammer everything looks like a nail.

Oct

22

 Confirmation of a trade signal can be helpful to avoid drawdowns. Many small gains,and several large losses tend to be a pattern when using normal expectations in a non normal market. It's the 5+ sigma moves that cause big losses when working in a 2-3 sigma model.

Nison in Candlestick charting methods describes Japanese rice traders waiting for confirmation of a trade signal as the next day shows the reversal or continuation of the signal. This avoids the falling knife syndrome. Larry Williams wrote about confirmation of patterns either as completion of the pattern or as confirmation. The later entry is not as good a earlier entry, but avoids the multiple sigma losses, which may be worth it overall. It would be a worthy exercise to examine and test this. Recent doji reversal signal with narrow range off 1650 after long decline and multiday drop was confirmed the next day is an example of the candlestick idea of confirmation.

Anatoly Veltman writes: 

On Candlesticks: weekly Candles have vastly more meaning. Daily are now meaningless due to seamless Sun thru Fri action. Intraday are totally ridiculous because they vary with arbitrary choice of 5 or 10 or 15 or 30 or 60min period.

Confirmation is a tough dilemma, which may border on trend-following vs. contrarian dilemma.

Gary Rogan writes: 

"Dilemma" isn't strong enough in this case: it's like saying that the market will go up tomorrow for sure unless it goes down. At least Larry Williams developed incorporating multiple time frames into the calculation, but by itself confirmation seems like it can't possibly be meaningful considering the ever-changing cycles: a trend that can be "confirmed" in a statistically significant way using the same methodology over the years seems as likely as a unicorn.

Oct

22

Currently, as today's action demonstrates, bad news that is likely to keep the Fed from tapering (or even increasing easing) is taken as good news. Can this go on forever? At some point when the Fed's behavior is seen as pro-liquidity in the foreseeable future, will bad news start being interpreted as bad news?

Oct

21

 "James Baker Says Republicans Were Losers in Government Shutdown"

Why does it always play out the same with Zachar's "your own man says you were out" coming into play. And Kostelanetz "useful idiots" out of woodwork, and the impartial government organization weighing in on the part of more agrarianism.

Gary Rogan writes: 

When else is "your own man" useful but in these types of situations? They come out because their designated role is to stab "their own side" in the back when there is a choice of direction for that side. When does the sage offer his most damaging pronouncements? Whenever there is something to decide or support a decision just made so that "everyone" knows that agreeing with the forces of darkness was the sensible thing to do.

Oct

21

 It begins with a new uncertainty, we're going to attack Syria, we're going to default on our debt, a Middle East fight, in conjunction a 1 1/2 % decline or more in stocks or bonds then fighting between the conservatives and the liberals a call by Buffett and Krugman for government intervention and more service revenues. A resolution with a big stock market rise to new 20 day highs an end with blame being put on those who wish lower service revenues and reduced intervention and unanimous agreement that we should never strive for reduced intervention again, and tea party types must go back to caves. How would you improve this or possibly profit from it?

Anatoly Veltman writes: 

But of course crisis starts on the way up. It's been said that no market has ever topped because someone sold massively short at the high. Any decline from the high is merely profit taking, not new shorting. So the beginning of crisis is such overvaluation that's liable to cause aggressive profit taking.

Gary Rogan writes: 

The way to predict the quick resolution of the next crisis is to figure out who is in control of the mechanics. While there was some ambiguity in this one, John Boehner played a truly masterful role in its handling and supposedly (although not by all accounts) received a standing ovation and no blame in the end by most of his tea party opponents, a deliberately induced case of the Stockholm syndrome. Next time he initiates a crisis (and there will be two opportunities early in the new year) bet on a timely resolution, and this time probably a couple of days before the deadline, as in this last one he was almost by his own admission compelled to give his tea party "friends"/antagonists as much rope as was needed to supposedly hang themselves and this will likely not be the case in the future.

Kim Zussman writes: 

Doesn't seem that ambiguous.

When the Organizer and his operatives said to worry the market worried. When the conscientious objectors gave up it went up.

We were re-elected and you will go quietly.

Oct

11

Since Bamster has apparently figured out that de-linking the CR and the debt increase isn't in his interest, isn't it clear that political strategy is now the dog and the market is the tail? If the market is so smart, why can't it see more than a day ahead, and why does it swing wildly based on words, leaks, conjectures?

Rocky Humbert writes:

When this whole thing started, I wrote: "This slow motion train wreck will probably continue (and stock guys will keep denying it) until CNBC puts the 1 month Tbill on the side of their price montage. Once that happens, you'll know it's safe to go back into the water. (I'm only half kidding)."

Remarkably, that happened late on Wednesday and the WSJ dutifully carried a large news story about the breakdown in money markets after the close Wednesday and in the print edition of Thursday. The current Obama administration is pretty light on people who understand the systemic importance of the money markets and what would have happened if the panic continued to accelerate.

I suspect that they (and perhaps you) got an impromptu lecture from the NY Fed Open Market Desk and understand this better now. (Or perhaps you consider the timing of the stop-gap, face-saving 6 week extension headline to be total coincidence???) The plumbing of our entire economy is the money markets. Not the stock market. Not the bond market. The money markets. It's the dog. And everything else is the tail. 2008/2009 demonstrated this powerfully. If you've ever been in an argument with your wife and both noticed a serious plumbing leak in the midst of your argument, you stop arguing and call the plumber. It took a spike in yields of roughly 5,000% to get the politicians back to the table. The dog wagged the tail.

Gary Rogan replies: 

I appreciate this line of thinking, it's very instructive. But help me out with one thing: my model of how Obama operates is that he would LOVE to crash the economy if he could blame it on the Republicans. While I can see how the Republicans would be forced to negotiate, is there any real pressure on Obama, Fed lectures or not? Perhaps than this is a recipe for the total Republican surrender, since they are the only side with the market pressure on them, but still: is Obama in any sense motivated to solve the market problem as opposed to find a way to assign the blame to the opposition?

David Lillienfeld writes: 

So you subscribe to the thesis that the GOP crashed the economy in 2007 to blame it on Barney Frank and get Dodd-Frank repealed?

Gary Rogan replies: 

No, this is a random thought that has never occurred to me. The GOP would never crash the economy on purpose because they are not Marxist revolutionaries and because they are largely beholden to a lot of business owners and operators. It would also be hard to believe that as a party they would want to hand the victory to the Democratic Presidential candidate in the following year, so this is an absurd suggestion.

Obama has clearly demonstrated that he personally only cares about the following things: (a) income transfer to the "unfortunate" (b) gay rights (c) Muslim rights (d) black rights (e) triumphing over any opposition regardless of any collateral damage" You can see that he has a tin ear for what's important in the "flyover country" by his handling of the "death benefit". Getting him to act normally is like trying to explain human behavior to a creature from some Alien movie: they can certainly pretend most of the time, but once in a while the algorithms fail and a few humans bite the dust.

David Lillienfeld retorts: 

Sorry, but you'd have to go back to the DNC's decision in 1972 to have George McGovern give his acceptance speech at 3 AM (at least I think it was 3 AM–I was pretty sleepy at the time) rolling all the way forward to McGovern's declaration of "1000%" support for his Vice Presidential candidate a few days before the latter withdrew to find anything rivaling the political stupidity and naivite evidenced in the GOP's actions in the past couple of months. As for the biggest absurdity in the present situation is the GOP's apparent suicide wish. I had thought after the last election, there was some desire in the GOP to come to terms with its growing political isolation, that it understood that the American electorate was not amused at the sight of an 82 year old man lecturing an empty chair on a stage. Apparently I was wrong. I also find your premise that business owners and the like are beholden to the GOP. That's starting to change, though I don't think that means they will be any more interested in aligning with the Democrats than they are right now. The effect of the shutdown and even moreso the debt ceiling doings on business has hardly been a positive one.

Not everyone in the Democratic Party is a Marxist and not everyone working in the White House is a Marxist (the idea of Chuck Hagel as a Marxist is humorous, though, I grant you, and ditto for Jack Lew). Not everyone who voted for Obama is a Marxist. And there are those who voted for him while not supportive of everything he says or does if only because of the choices they were confronted with. Just because someone disagrees with you doesn't make them a Marxist, either.

I lived through the "America: Love it or leave it" period in the late 1960s and 1970s, and I'd like to think that we're past that as a society.

Stefan Jovanovich clarifies: 

David is too good a scientist not to know that public opinion polls have become suspect precisely because so much of the actual electorate chooses not to answer the phone or answer the questionnaires. In fact, for more and more people answering Gallup's questions is considered to be the equivalent of voting - i.e. I answered the poll questions so I don't need to get an absentee ballot. Some of us made this mistake in predicting the last Presidential election; David seems determined to repeat our error by taking the "public's voice" for being equivalent to the electorate's.

As for the description of the Democrat Party, I am afraid my answer is "yes, they are all Marxists". To say that, I have to rely on my own peculiar definition of Marxism; but I think it is an accurate precis of what Marx, Engels and Lenin all thought. In their world a person always and everywhere believed that labor had a value independent of (and almost always superior to) its market price? Since the late 1950s, when I first started following politics, I have never met a Democrat, left, center or right, who did not agree with that assertion. It is hardly an odd opinion; for most of my life it has been shared by not only all Democrats but also a majority of Republicans. Both parties have shared the fantasy that there are two "sectors" in an aggregation called the economy and that the prices for the "public" sector and those for the "private" can be directly compared to one another. That is why, even now, a majority of the Congress supports labor unions, Davis Bacon, non-judicial regulation and all the other forms of soft and hard government-enforced monopoly.

All this upsets Gary - understandably. It would upset me if I were not a hopeless optimist. The idea of actual liberty - of people being absolutely free to paint their houses whatever colors they liked, swap fluids with whatever consenting adults they chose, eat, drink and smoke things that are "bad" for them, believe in Joseph Smith's golden plates, heavenly virgins, Darwin's universe, whatever - has always been a truly radical idea. That it has never yet been the majority opinion is no reason to believe that it will not someday become the "common sense" of humanity. The dedicated Communists who were my grandfather's friends - the ones who actually went to Spain to fight Franco and the Nationalists - had, in their own way, the same stubborn faith. They thought Stalin was a monster, but that not shake their belief that someday the dictatorship of the proletariat would not longer be necessary and we would all be free. Grandfather agreed. He just thought we could skip all that petty and monstrous bossing around of other people and get straight to the Don't Tread on Me that had been his reason for coming here in the first place.

Sep

23

 (With apologies to Gerry Rafferty/Baker Street)

Winding your way down on Taper Street
Light in your head and dead on your feet
Well, another crazy day
You'll drink the night away
And forget about everything
These Fed announcements make you feel so cold
They've got so many people, but they've got no soul
And it's taken you so long
To find out you were wrong
When you thought you knew everything

You used to think that it was so easy
You used to say that it was so easy
But you're trying, you're trying now
Another year and then you'd be happy
Just one more year and then you'd be happy
But you're crying, you're crying now

Way down the coast they're shutting down the place
They close the door, they put a frown on your face
But they ask you where you've been
You tell them who you've seen
And you talk about anything
You've got this dream about buying some puts
But what to do while the flexion loots
How can you settle down
In some quiet little town
And forget about everything

But you know they'll always keep talking
And you know it's you they will be stalking
'Cause they're breaking, they're breaking bones
And when you wake up, it's a new morning
The sun is shining, it's a new morning
But you're not, you're not going home

Sep

19

 Can anyone explain to me why counting matters anymore?

I asking seriously and without disrespect.

How can one "count" for what happened today? Is there some sort of "the market is up 37 out of the last 42 full moons" question/equation that would lend one to believe that the the 2 pm rocketing of the market was going to occur?

Maybe there's some other form of analysis that we can do to have an edge?

What about fundamental analysis?

What about technical analysis?

What about astrology?

Palm reading?

Maybe I should convert Scientology and see if the Thetans give me any insights?

I firmly believe that the government (and let's be not pretend that the Fed is not the government) and politics are driving 98% of what happens in the markets now.

This is a BS market.

Ralph Vince writes: 

It's a GREAT market.

At the risk of being a blasphemer, my interest in market analysis is an academic one. My implementation, devoid of my personal academic failings. That is……buy low, sell high, and at the same time, sell high something else, to buy it back lower.

You should never have a move like this go by without taking a profit on something.

Yeah, I take a lot of disparagement over my bullish stance on the markets here, as I do thinking the Miami Dolphins will be Super Bowl Champs this year. I have no skins in either game you see.

Gary Rogan writes: 

If you invest long-term in good companies you don't have to be hurt and/or left out of the steady progress of the market regardless of any of this.

If you enjoy this n-dimensional game of chess than you should be like the Palindrome: smart, totally cynical and totally connected.

Ralph Vince responds: 

Gary,

But the premise of buy and stay long HAS worked only because we have been in a bull market since forever. Every high of the past couple hundred years has been exceeded — long term bull market (for whatever reason).

That is a bet on that continuing.

Gary Rogan replies: 

Ralph, but didn't Victor publish some whole-world stock data from Dimson, I believe it was, that showed steady progress? Isn't it the expectation for the previous highs to be eventually exceeded simply from the nature of the beast and not being a a "hundred year long bull market"?

There are really only three risks for a diversified stock portfolio:

-Geographical concentration risk (including where the owner lives so that he can actually access his money if it hits the fan)
-Unprecedented worldwide collapse
-The future being TOTALLY different from the past in this area

Otherwise it's steady progress all the way to infinity.

The three risks are unquantifiable, but seem better than being able to outwit the flexions day-to-day.

You pays your money and you takes your chances.

Ralph Vince adds: 

The thing is, this isn't a big move up.

When the rain comes, it washes everything away in a hurry. Weeks worth of advance vanishes in minutes.

I don't recall, in my lifetime, a setup for liquidity disasters like we have under us here, and when this goes, it will vindicate any shorts you can hang onto.

Gary Rogan writes: 

Ralph, why would all this extra liquidity resolve itself by the stock market collapsing in a spectacular fashion as opposed to say (1) Sudden high inflation perhaps followed by hyperinflation of the economy improves, and the stock market losing value in inflation adjusted, but not absolute terms (2) Or a multi-year stagflation period with the economy not doing well in some middling fashion and with the stock market slowly drifting down or simply not rising (3) Given that we will have this extra liquidity for quite some time now, evidently, based on the recent Fed personnel developments and Ben's short term and new-found caution, a liquidity withdrawal quite a few years from now, making any shorts in the meantime unfeasible, even if there is an eventual collapse?

I really have no idea what will happen if there is a bond vigilante battle royale against the Fed and it's printing press, and clearly bonds cannot be a GREAT investment at this point, but how can you be even reasonably certain that there will be a stock market collapse unless there is an overall economic collapse (which is reasonably likely, but will make profiting from the shorts a moot point)?

Mr. Kris Rock comments: 

Counting is a discipline…like belonging to the mormon church is a discipline…

Ralph Vince writes: 

I think people look for "causes" (du jour) to explain market moves. Right now, the story is QE, and it sounds plausible, but the story always sounds plausible, but it is always a very, very specious causation there.

We're talking about equities. Puffs of smoke that only have value because people day they do, right now, that the value is X. And that is only because they don;t have something shiny elsewhere to put their money. Equities are an easy place to park money.

But they have the same value as puffs of smoke, and when we forget that, the market has a cruel way of reminding us.

Gary Rogan adds: 

The future is fundamentally unpredictable: no amount of past experimentation or data can preclude some fundamental parameter of the system changing and invalidating all the statistical evidence. We don't seem to have a choice in having to rely on the past to the extent that we understand it and extrapolating in the future. But what if a parameter like the unprecedented rise of the national debt in peacetime or the rise of socialism or the changing demographics flips the long term growth rates in profits? Or the reduction in de facto property rights or the rise of flexionism make it impossible to realize gains? I don't think there is an answer other than overall we have evolved to take the past as a consideration for the future, so we might as well stick with it for the lack of a better alternative watching out for the changes in the parameters where we do understand the causal relationships as well as (and particularly so) for contradictions.

Sep

12

 This is an interesting article for the layman about the changing gravitational constant. One part that intrigues me is their hypothesis that maybe the nature of gravity (the form) is changing and that some other force might be changing it. Or maybe gravity is subject to oscillations? Any change could have interesting consequences.

Gyve Bones writes:

A rather weighty and grave subject for this site, eh? I reckon it falls under the category of ever-changing cycles, and perhaps, BBQ.

Gary Rogan writes: 

It's almost funny to see these scientists very concerned about the possibility that G is changing without much concern about what, in our universe (other than some supposed new field), really determines why it has any specific value vs. any other value or why it's at least somewhat constant through the Universe. Why shouldn't it change, if you have no idea how the value comes about in the first place?

Jeff Watson adds: 

But then again, if gravity can change form, can time and space be far behind? And I'm not talking Discovery Channel stuff.

Gary Rogan replies: 

ANYTHING where you don't understand the root cause (and even then if your understanding is wrong or incomplete) can change. All the fundamental physical laws are basically just observations that haven't been contradicted YET, and all the social science/market "laws" are just observations that at some point seemed correct to enough people. 

Jeff Watson writes: 

I suspect that F=MA would stand the rigors of any test in the macro realm. PV=nRT would probably stand up also, as well as V=1/2 AT^2. The fundamental Newtonian physical laws are pretty intact and have been proven in a variety of ways. Had the physical laws been incorrect, man would have not been on the moon, we wouldn't have landed a rover on Mars etc, Ohm's law(among other things) would not have be proven and I would not be able to communicate with you in this venue. And " the social science/market "laws" you make note of are more of an art than a science. I apply science to markets every day, but along with the science, I also use the art taught to me by my mentor to achieve a small degree of success….sometimes.

Aug

30

 [The company said] the target for its general insurance business was
“challenging” following disaster-related losses.

"Zurich Defends Accounts as Ackermann Exits After CFO’s Suicide"

Using some pop psychology, I would anticipate that what exactly is referred to as "challenging" has some bearing on the magnitude of future declines. In this case some financial target being "challenging" simply means that there is no way in hell they will meet it. If however the business environment is described that way it's likely to mean two things: all hell is breaking loose and the management not only lost control but doesn't want to take responsibility for what's going on.

Victor Niederhoffer writes:

A study of use of "challenging" and NYSE might show some evidence of future inordinate declines a la Sornette but taking account of both side of the distribution, not just one tail, i.e. a real study.

Here is a 2007 study of that hypothesis which is somewhat "challenging" on a number of fronts. 

Ken Drees writes: 

I find this Stunning.

The poetry of the the modifier word "healthy" pointing to cash flows as in blood flow that sustains "a strong and resilient balance sheet", the body of the corporation, juxtapositioned against the wan image of a very "dead" monitor, (CFO), of the bloodflow of the corporation's health under a "sheet" at the morgue.

Aug

22

 The fact that the Dax was up 3 ratio points against the US markets shows that the largesse of the flexions on our numbers is not withheld from those who make recipes for the bernaise and bechamel sauces in Brussels .

Alan Millhone writes: 

Dear Chair,

Am afraid the bernaisacky sauce might upset my stomach.

Note Dow was below 15. That is upsetting enough to many without adding any sauces.

Sincerely,

Alan

Kim Zussman writes:

It was dyspepsia from absence of Bernanke sauce.

Peter St. Andre writes: 

I really need to write a little poem that starts with "Ben Bernanke makes me cranky"…

Gary Rogan contributes: 

There once was a man named Bernanke

Engaged in some bad hanky panky 

But he went AWOL

and skipped Jackson Hole 

And now the markets are cranky.

Craig Mee adds: 

Bernanke the captain of Fed
Resembles Titanic's, Smith Ed
Evades all bergs, engines full out
Bond infinity, no damnable doubt
"Untapered, untwisted, now screwed", he said.

Aug

19

 There have been 5 occasions when stocks fell by more than 200 Dow points in a day and bonds the same time fell by more than 1/2 a big point 3 of them occurred in last two months including last Thursday. This has many market implications including the changing the guard of the relation between bonds and stocks, and the importance of liquidity preference.

Rocky Humbert writes: 

Agree 100% with Vic's astute observation and hypothesis. Mr. Market is seemingly at the point in the economic cycle when good news is bad news for financial assets. What's difficult to believe is that in the current cycle, this inflection point is occurring with lackluster GDP growth (i.e. substantial output gap in domestic and global economies) and high unemployment. These facts help explain why the 2 year Treasury is not backing up.

One surmises therefore that Mr. Market is trying to find an equilibrium yield in the long end of the curve with no prospect of further aggressive manipulative Fed interventions. Since the current easing cycle began (and before the Fed started buying long-dated securities), the extreme of the 2/10 spread has been +288 bp. We are currently at +248 — which gives a price anchored sense of magnitudes to where we may be headed. If the curve steepens another 40bp, that will coincidentally also put the 10 year TIP at about +100 real yield — all of which is sensible, consistent and not a panic overshoot. This will also put the 10 Year Treasury at about 3.2%ish.

I'm not making any predictions about the effects of this on stock prices. Except that I would expect stocks to get into some potentially serious problems should the 2/10 spread quickly widen past 300bp as that will represent a new regime (as Vic says, "changing of the guard"). There are too many other variables to be more precise. Including the relationship between nominal yields, yield ratios, etc. I will note that bank CD rates have not been increasing with market interest rates. This can be interpreted numerous ways but it's an important fact for investors.

Gary Rogan writes:

Perhaps this is as simple as the market is taking seriously Ben's statements that he will keep the short end of the rates low, but is determined to use any good news, fake or real to taper/stop the QE. There is just going to be less money for any kind of financial assets so that any rates not controlled directly by the traditional Fed manipulations so that their prices all have to go down, stock, bonds, and everything. The market must believe that the Fed sees real danger in continuing QE and it thus must come to an end almost for sure. This has puzzled me for a while since I can't see how any kind of housing recovery can be sustained with higher mortgage rates nor how the US treasury can afford the higher rates, because I expect the deficits to start increasing again. But Ben's term is coming to an end and he probably wants to leave on a certain not that only he can judge to be the most optimal for his post-Fed future. In a couple of years it could be deluge as far as Ben is concerned but not in a couple of months. Perhaps he just doesn't want the QE in place when he leaves.

Anatoly Veltman writes: 

This is an unusual Ponzi, in the most important respect: that there is no official to call it. Alas, where market is bound to err, the market will focus on public sector Ponzi alone. The more important is the derivatives Ponzi, and that's what is liable to cause 90% market contraction off of whatever pinnacle.

Happened twice already in new millenium: with .com stocks, and then with bank stocks. Yet, most participants' philosophy is that it can't happen. Or has no right to happen? What right is there to take a billion-dollar underlying, re-hypothicate it without an end in sight, and pass it for a trillion-dollar book? Mr. Market is bipolar; trying to fit it onto historical precedent will work, for most of the trading days — but not for the most important trading days.

Jeff Sasmor writes: 

It's also possible that this is a trial balloon and that there will be feedback from the market reaction into what the fed does.

If interest rates rise and choke off the housing market wouldn't they act to reverse that?

"Plans within plans," as the Guild Navigator said.

Rocky Humbert writes: 

Anatoly is of course correct that markets go further and trends persist longer than reasonably sane people expect. The most recent examples of this are the Platinum/Gold spread; the WTI/Brent oil spread; and the 2008/2009 period. But his conclusions about "most important trading DAYS" are not only disproved by the duration of these episodes, they are also suspect in the context of investment and wealth accumulation — as the power of compounding requires time.

There remains no evidence that ANYONE can consistency anticipate or profit from the "most important" trading days. Those "important" days pale in the fullness of time as we see over and over and over again. Furthermore, he can (as I do) lament the Fed's mechinations. But they in no way resemble a Ponzi scheme. A Ponzi scheme requires new money to pay off old money, and can persist in perpetuity so long as there is sufficient new money to pay off old money. So long as the Fed has a printing press and the ability/willingness to expand its balance sheet AND THE US DOLLAR IS STABLE, the status quo can and will persist. Social Security (as a standalone entity) is a better example of a societal Ponzi scheme.

Further to the "status quo," among the things that I find most remarkable about the past few years is the relative stability of the major currency markets. Sure there have been some violent moves. But the Dollar, Yen and Euro are all within a couple of percent of where they were exactly 20 years ago! . Even the Chinese Yuan was trading at about the same price twenty years ago. (They devalued it to about 8 in 1994, and then gradually moved it back towards 6ish.) Lastly, does anyone remember Bill Ackman's breathless announcement from a couple of years ago that he had a massive call position on the Hong Kong dollar … and that they were going to be forced to imminently re-value their currency. With his problems in JCPenny, Herbal Life etc, he should consider unplugging his Bloomberg and read "All Quiet on the Western (sic) Front."

Gary Rogan adds:

I expect that they can't live with the effect of the rising 10 yr and mortgage rates even as they stand today. My initial supposition when Ben first started the tapering talk was that he wanted to puncture the stock bubble, but can't afford to puncture the bond bubble. He seems to have punctured both. The genie is out of the bottle and with all the loose talk emanating from the various Fed associates it will now take a pretty dramatic action to reverse what looks like a looming crash for most asset classes.

Aug

19

 I've recently enjoyed reading Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster, the story of how Amaranth blew up. It's essentially a story of one man who was successful for a while and took on unbelievable amounts of risk trading natural gas futures while all of his supervisors, mostly the fund's owner but some others as well lost all control or even desire for control. The book greatly details the actual trades and talks about many related personages, but it left me puzzled about how the trader who was mostly responsible for this disaster lasted this long. He had made a huge amount of money prior to blowing up, and even though he appeared to be quite intelligent the reasoning behind his trades are either inadequately or perhaps truthfully described as being close to random. He suddenly takes a liking to certain types of spreads and just bets on them evidently without much more than a seemingly unjustified belief that they will widen.

At some point he essentially became the market and and had to keep up the spreads by continuous buying until the fund blew up. The main trader and some others are portrayed as sociopathic degenerates driven by irrational beliefs as well as a strong desire to win at all costs. I would be interested to hear some energy trader's or any commodity trader's opinion about the book.

Aug

19

 Many years ago one followed the Wall St. Journal stock-picking / dart throwing contest. The Journal claimed that the expert stock pickers were well ahead of the darts over many iterations. Holdings in those days were all mutual funds or indices. So for a first foray into individual stock ownership, I bought shares of "TCBY treats" - a frozen yogurt franchise - which was touted by the analyst in WSJ dart contest.

His analysis was, "The balance sheet looks good". I checked his background and he seemed well educated and reputable (remember this was pre-enlightenment vis. shibboleths of Ivy degrees and name shops).

I never checked the balance sheet because it was unlikely my novice reading would provide more insight than the market, and in any case the analyst was trained, experienced, and (in essence) endorsed by WSJ.

Some time later the analyst could point to brief intervals when TCBY was higher. However as you might guess the stock went into a long/slow slide into oblivion.

Following recommendations without understanding their basis and the motives of the recommender is risky business.

Rocky Humbert writes: 

Dr. Zussman is absolutely correct. One should never ever listen to any recommendations or thoughts that I espouse as my motives are suspect; my analytics are flawed; and my thought processes are clouded by insomnia and senile dementia. (I view these albatrosses as my secret edge in the markets.)

Furthermore, I myself follow Dr. Zussman's advice religiously and assiduously avoid reading newspapers or books, avoid conversations with intelligent people and spent 23 hours per days in a saline-filled sensory deprivation tank (from which I emerge to occasionally pen SpecList posts.)

Gary Rogan writes:

I have been told by many people, on multiple occasions, and for a variety of reason to avoid stock tips, mainly because you can never know exactly why the person likes them and also because they are unlikely to fit into your "trading system" (and I would guess investment system). I find this advice hard to evaluate. I suppose if one knows some stats of the person's previous picks this makes it easier. If you can deduce that the person isn't simply talking their book, that's probably better as well. But fundamentally, a stock can't know that someone has recommended it to you. If you have a system, you should at least know whether the person intends for the pick to be a short-term trade or a long-term investment and judge accordingly. Rocky doesn't give a lot of stock tips, so what should one think of one when it suddenly appears? Hard to know. On the other hand, I think I have a pretty good idea who Rocky really is and he is an upstanding member of the community with a good track record, and can't possibly be thinking of moving AAPL significantly by talking about it here, so is it really wrong to follow his recommendations?

Aug

15

 I'm just curious: why is the rice market small when the crop is so popular all over Asia and Asia has so much population? Is is because the Asian country make it a priority to be as self-sufficient as they can be even when it's not economical?

Leo Jia writes: 

As a picky rice eater, I think the large varieties of rices segment the rice market. All these rice are not the same at all though they may look very similar. The majority of rice produced in China is a hybrid rice developed by a contemporary Chinese scientist named YUAN Longping. Its mouthfeel is horrible, but it is much cheaper and contributed largely to feeding the large population in the country. Sogi-san commented that rice in Japan costs 4x or more than it does in the US. I am not sure if he referred to the same rice, but to my taste, some Japanese rice are much better than the American one.

There are two rice futures in China, but to my understanding they are both of some small varieties and therefore traded thinly.

Jeff Watson writes: 

Rice is a thin market because the insiders want to keep it that way, and the export market is small compared to other staple grains and grasses. Furthermore, rice tends to be consumed in the country of origin. We export around 3 million metric tonnes if memory serves me correctly, which is about half the US crop.

Aug

14

 A note and a chart today from Warren Mosler .

Funny how little attention, if any, is focused on how corporate profits are a function of federal deficit spending?

Ideological conflicts?

Nothing new about the idea that deficit spending and profits are related: [from Wikipedia]

"Kalecki's most famous contribution is his profit equation.     P_N=C_P+I+D_g+E_e-S_w

In this model total profits (net taxes this time) are the sum of capitalist consumption, investment, public deficit, net external surplus (exports minus imports) minus workers savings."

The above chart shows US Corporate Profits YOY change, quarterly (source: BEA).

In any case, without an increase in net exports or some kind of material increase in credit expansion the decline in the federal deficit is highly problematic.

Gary Rogan writes: 

But what if reducing deficit spending encourages "capitalist" investment? Kalecki's equation also assumes that all the "workers'" wages are spent. If all the money printing stopped and interest rates rose what would be the effect on savings by "the workers"? These types of equations are static identities with some simplifying assumptions and ignore various feedback loops. Seems pretty similar to the Keynesian assumption that government spending like crazy has exactly the same positive effect as companies and individuals making their own spending and investment decisions. It is well known that when consumers are aware of deficit spending they reduce their own spending in anticipation that they will eventually be taxed (and I assume inflated out of their money) to eventually pay for that deficit spending.

Aug

13

 This article shows results of experiment on the E-Coli bacteria detailing the survival or death of the bacteria in response to the way it handles introduced exogenous stimuli. The upshot is that small changes in exogenous conditions can lead to large substantial differences in outcomes. Surely a rich field for market related phenomena looking at how small changes in one input (say rates) may lead to large movement in other markets (say currencies) when the dependent variable is already under some stress.

Pitt T. Maner III writes: 

This is a really interesting field.

It looks like bacteria have been "hedging their bets" for quite some time. And they have a type of "memory" that influences their response to current environmental conditions. On a larger scale it is interesting to note what happens to the ecology of a system when a "keystone species" is removed. The field of "synthetic ecology/biology" looks to have important findings for a wide range of fields and the bacterial algorithms already developed are being used for engineering problems.

1. "Bet-hedging in stochastically switching environments":

"We investigate the evolution of bet-hedging in a population that experiences a stochastically switching environment by means of adaptive dynamics. The aim is to extend known results to the situation at hand, and to deepen the understanding of the range of validity of these results. We find three different types of evolutionarily stable strategies (ESSs) depending on the frequency at which the environment changes: for a rapid change, a monomorphic phenotype adapted to the mean environment; for an intermediate range, a bimorphic bet-hedging phenotype; for slowly changing environments, a monomorphic phenotype adapted to the current environment. While the last result is only obtained by means of heuristic arguments and simulations, the first two results are based on the analysis of Lyapunov exponents for stochastically switching systems."

2. "Memory in Microbes: Quantifying History-Dependent Behavior in a Bacterium":

"Your average bacterium is unlikely to recite π to 15 places or compose a symphony. Yet evidence is mounting that these 'simple' cells contain complex control circuitry capable of generating multi-stable behaviors and other complex dynamics that have been conceptually linked to memory in other systems. And though few would call this phenomenon memory in the 'human' sense, it has long been known that bacterial cells that have experienced different environmental histories may respond differently to current conditions [1]–[3]. Though some of these history-dependent behavioral differences may be physically necessary consequences of the prior history, and thus some might argue insignificant, other behavioral differences may be controllable and therefore selectable and even fitness enhancing manifestations of memory."

3. The work of Professor Robert T. Paine and the concept of the "keystone species" where an organism has a big effect relative to its abundance:

"It was a ritual that began in 1963, on an 8-metre stretch of shore in Makah Bay, Washington. The bay's rocky intertidal zone normally hosts a thriving community of mussels, barnacles, limpets, anemones and algae. But it changed completely after Paine banished the starfish. The barnacles that the sea star (Pisaster ochraceus) usually ate advanced through the predator-free zone, and were later replaced by mussels. These invaders crowded out the algae and limpets, which fled for less competitive pastures. Within a year, the total number of species had halved: a diverse tidal wonderland became a black monoculture of mussels1."

anonymous adds: 

 OK, what about Slime Molds (particularly, Dictyostelium discoideum). It has the absolutely stunning biological characteristic that it spends much of its life as thousands of individual cells and other times as a single entity.

When times are good for Dictyostelium doscoideum its 'cells' wander off and enjoy themselves. However, in less hospitable environments the 'swarm' of cells coalesce and form a single entity.

Apparently the cells emit acrasion (or AMP) that contains information useful for other cells

When things are starting to look tough the cells pump out increasing amounts of AMP and the cells begin to cluster….Other cells follow these trails and increase to mass towards it completed whole.

Now, I wonder about the stock market. During the regular upward movements most of the components are doing their own thing, following their oscillations generally higher…. When 'it' hits the fan, the correlations between the stocks increase rapidly to 1.0 and they form a single bearish, growling entity.

Now without pushing the analogy too far, I wonder if stocks 'transmit' statistical information (AMP to follow the analogy) to each other (in this context they would not transmit as much as 'exhibit' some form of common statistical behaviour) that forced the behaviour of component stocks into a more correlated state.

Testing possibilities are legion.

Gary Rogan writes: 

My general objections to giving some purpose to the market have to do with incentives, or more precisely lack thereof to do anything in particular.

I read a whole chapter of a book on a slime mold presented as an altruism study. The reason it was presented like that is that when the individual slime mold cells cooperate, only the lucky few that join the growing "mushroom" at the right time get to propagate because they get to form spores only at a particular state of development of the hastily arranged colony. Nevertheless, when presented with a choice of dying for sure or maybe propagating (and the cells only cooperate when they are close to death) they chose to cooperate and propagate. There is also some amount of deception involved when the cells jokey for position, but not a lot, since any particular placement is hard to achieve.

What is the equivalent reason for stocks to cooperate?

Bill Rafter writes: 

Should what you say about stocks transmitting statistical information occur, it would mean a relative decline of idiosyncratic volatility. That is something we have studied, and found that when the going gets tough, the idiosyncratic vol grows faster than the market's vol.There are some other measures of "group think" that are good indicators of both the broad markets and individual assets.

I would posit that stocks do not transmit info, but their owners do. Consider the case of futures in which one market takes such a hit as to require significant margin calls. Human nature being what it is, the public sells its winners to finance its losers, and non-related markets dive along with the primary.

Aug

9

 I recently read this article about Snowden. It began:

The recent revelations by the whistleblower Edward Snowden were fascinating. But they - and all the reactions to them - had one enormous assumption at their heart.

That the spies know what they are doing.

There are professions where you have to daily prove your competence, sometimes multiple times. I was recently talking to an appliance repairman who was on his 9th call of the day and he found and fixed the problem every time. On the other side of the spectrum are professions where if you go through the motions for extended periods of time and your competence (other than not offending the people you shouldn't offend) is hardly tested at all, like say counter-intelligence people, mid-level government bureaucrats in many but by no means all departments, movie reviewers, judges, etc.

Almost everybody has to do SOMETHING right in the sense that they can all screw up enough to lose their jobs or businesses, but clearly there are extremes depending on how objectively one's success is measured, both in terms of it even being possible or in terms of how much information is available by those who evaluate them, and several other factors.

I wonder where the people who contribute to pricing securities on a daily basis fall within this continuum?

Aug

9

 It would be nice if you could just put your money in mutual funds managed by established, well-regarded front-men and outperform the market.

I was recalling a discussion on the spec-list literally 10 years ago in which a Lister advised that if you want to know when/what to buy, then just take a look at what Mason Hawkins, Bill Miller, Marty Whitman (all of whom manage mutual funds available to the retail investor), and a few other names (all of whom managed hedge funds unavailable to the retail investor) were all doing and imitate them.

At that time, Hawkins, Miller, and Whitman all had great reputations. Furthermore, if you were to read an interview with them, they could make very compelling cases for the stocks that they owned.

What happened to their mutual funds over the next ten years?

I think it's important to separate their "alpha" returns from their "beta" returns, and this is something that can be done very easily at Morningstar.com, where they conveniently provide, for the past 3, 5, 10, and 15 years, each mutual fund's alpha and beta.

Here's a table.

columns:

 Marquee investor / mutual fund ticker / 10-year alpha vs S&P / 10-year alpha of fund category vs S&P / fund category

Mason Hawkins / llpfx / -1.77% / -0.36% / large blend

Bill Miller / lmvtx / -6.16% / -0.36% / large blend

Marty Whitman / tavfx / 0.47% / 1.06% / MSCI EAFE

So let's take a look. Mason Hawkins' fund LLPFX's alpha was -1.77%. That means that given his beta with the S&P 500, his fund returned -1.77% less than it "should" have. Now his fund is in the "large blend" category. We should consider whether his negative alpha came about just because he was in "large blend" stocks, and they just had a bad 10-years. In fact it turns out that "large blend" mutual funds had an alpha of -0.36%. So that could explain some of Hawkins' negative alpha, but not all. He under-performed.

Similarly Bill Miller's fund LMVTX had an alpha of -6.16%, not good by any measure. His fund is also in the "large blend" category, so that only explains -0.36% of his large negative alpha.

Marty Whitman's fund TAVFX had a positive alpha of +0.47% vs the S&P. But he's in the MSCI EAFE (basically "international / developed world") category, which itself had a positive alpha of +1.06%. Foreign stocks happened to beat US stocks, and that more than explains Whitman's positive alpha to the S&P.

So all three of the marquee mutual fund managers mentioned 10-years ago by a Lister (who himself is very knowledgeable and experienced) failed to add any risk-adjusted extra goodies, and in fact they took something away from what you should have gotten based on the market risk that you took with them.

I've always enjoyed reading intelligent analyses of individual stocks, but that's probably something I should do just for fun, not with any expectation that it will make money.

Gary Rogan writes:

Bill is a gambler who bets huge on things he can't possibly know with any degree of certainty. He is very smart so usually his bets pay off. He is still a wild gambler who given enough time will blow up, or at least lose a lot of capital.

Buying a lot of inexpensive stocks with stable fundamentals when they are down, either relative to their historical valuations or to typical long term average ratios of P/E or P/S, in multiple areas, is still gambling like everything else, but a much more stable form of it that's not likely to blow up unless the market blows up and you can still beat the market.

Aug

5

 In talking about what I learned in the last 10 years, which I wish had been more, I concentrated on four factors. Everything is deception. Fear creates tremendous non-random underperformance. The purpose of markets is to take from the weak. The cycles are ever-changing (they recently changed again for bond stocks) and the solution is to buy and hold. I quantified several aspects of the fear of underperformance and alluded to a study by Mr. Curve that by selling at the fear point, traders lose 4 percentage points a year. That's big.

I'm reading some books on fear. Namely The Science of Fear by Daniel Gardner. The great praise it received is that it's as good as Gladwell. My goodness, at least it had no references so far to the Expert. However, I came across an idiot reference to one of the contrived Kahneman references that supposedly shows that fear is ubiquitous. The naval research bureau which reached such height with Osborne's stock market work, swings to the other side of the pendulum by supporting the masters of part whole biased answers to contrived question. The Kahneman group asks students: "heads you win 150, tails you lose 100." Would you take it. Amazingly to those who wish to show that rationality don't exist, the students don't take it. With these kinds of ridiculous questions and the choices to the answers are again designed by Pam Alikes to guarantee that the hypothesis will be chosen, the supposed irrationality is built; :"Why Investors Make the Wrong Choice".

What kind of world do we live in when the very rational response of students that they don't have 100 bucks to lose, or their liquidity doesn't permit it relative to frat parties, beer and dates, leads to a whole science of behavioral irrationality which Arnold Zellner tells me is called the promiscuous science around the faculty clubs at Chicago.

Gary Rogan writes: 

Everything makes perfect sense especially the buy and hold conclusion and the fear factor, and the useless behaviorist bias experiments and the whole aura of ridiculousness of the same behaviorist conclusions being rehashed as new science for over 30 years, but I'm still searching for some way to see whether markets have a purpose. To me they seem to just exist. What gives them purpose? Why do they have to have any more purpose than the ocean which you can surf, in which you can swim and fish and ride boats, or drown or lose a house if it's next to it?

Anatoly Veltman adds: 

An intriguing subject to be sure, and I'm certain that someone will be able to quantify fear. Personally, I only get fearful at dizzying new highs — not at scary lows. But yes, the mass psychology seems to err on that count.

I don't know what to do about buy and hold, fully four years and counting of correctionless appreciation. In the current case from 667 to over 1700 so far… I suspect individual stock picking is of increased importance at this point, as I don't believe the indexes' survivorship bias provides any edge during the Bullish phase.

This time it may be different, as I've noticed marked difference in Chair's attitude toward commodities and Gold in particular. I recall stopping by the Junto in early summer 2007 to quite an ear full about stocks having risen 10000 over half century, but Gold barely a handful. And good meal at a favorite SF eatery only a three fold or so. I couldn't understand why this statistic made a Bullish case for stocks and not Bullish for commodities, at that junction. But in the course of this year, Chair has appeared partial to any sweet dip in Gold. I can only suspect, that the liquidity opium has rightfully impressed just about everyone on the planet. And little distinction is being made any more about what exactly to buy and hold! A true contrarian might begin to suspect that, maybe…nothing? Might be soon, too. Are market manipulators really bigger than market - this seems to be the question to answer in 2013. And yet, over the centuries, all of this may just prove statistical noise.

Commenter Kevin adds:

"Everything is deception". Is that in markets…or life…or both! I kind of know the answer but the latter is kind of depressing. What's real!?

Gary Rogan writes:

The trick is to fear neither the highs nor the lows, that's what buy and hold is all about. They are just blips on the exponential rise towards infinity. That's for stocks, not gold or anything that's in it's final form. The ability of people to create more wealth will increase until everything collapses, hopefully many many years from now, but commodities are just things that are produced for as little as someone can figure out how to produce them. Yes, they are a hedge against all the currency debasement and gold is special, but there is no intelligent force making them better and better. I like the lows because then I can buy, but that's not essential. Sooner or later this market will crash hard, but when? And then it will get a hold of itself and will resume it's climb up. And unlike the bond rates it won't be for a few decades or a few years but forever, sort of.

Gary Phillips comments:

Or perhaps the optimists edge is the next piece of low hanging fruit to be picked and traded out of the market.

Sam Marx comments:

With so much apprehension at this point may mean that the S&P has further to go up.

Anatoly Veltman adds: 

Why not Sam. Yet up how much before down how much? Is 17 trillion deficit realistically manageable just like the 3 trillion was — within the economy that haven't been pacing near that? Eventually, something will have to be cut — and the spiral will quickly shave some 90% off the top. And of course, the records will be regained again over decades, and compound again. Alas, a pattern like THAT only loosely resembles commonly defined drift. I put forward that it's extremely rewarding to partake of drift from any cyclical bottom; but also that records can't serve as bottoms, by any reasonable method.

Stefan Jovanovich adds: 

Vic, you said: 

1. everything is deception

2. fear creates tremendous non-random underperformance

3. the purpose of markets is to take from the weak

4. the cycles are ever changing

5. the solution is to buy and hold

That is an excellent concision. I suggest the challenge is to buy and hold, over any chosen time frame.

If I might add my own, they would be:

1. understanding is itself a necessary self-deception c.f. Hume's Inquiry

2. fear in investing comes from envying other people's successes and wanting, out of envy, to ridicule other people's failures

3. the purpose of markets is to test everyone's strength of mind — the rich can be as weak-minded as anyone else

4. cycles exist because we need to see patterns which may, or may not, actually be there - see 1 above

5. only the steadfast survive the second-by-second test of not knowing whether or not there is a spoon

Jul

24

 I heard something on NPR this morning (from the CEO of Mashable) which got me thinking about Apple. Consider: Back in the early 1980s, Apple was flying high–it occupied the high margin section of the emerging PC industry and it was making lots of money. Its CEO Steve Jobs was seen as a major entrepreneur. However, by the mid 1980s, Apple had lost its way, as it maintained its margins even as it lost market share. Jobs had been jettisoned in favor of someone with no computer industry marketing experience. Apple maintained many of Jobs' hires as Apple saw its market share shrivel. The high flyer then was a software company whose offerings ran on a host of hardware platforms–Microsoft. Everyone could use Windows and everyone could use Office. Now, fast forward a generation: Apple is again flying high, determined to hold its profit margin even as it loses market share. But there's a new kid on the block offering a mobile operating system used with different hardware platforms: Android. And Jobs is no longer running Apple. And Apple is again run by someone lacking computer industry (or consumer electronics) marketing experience.

Looking at this picture, I have to wonder if it isn't deja vu all over again. Now, I know that Apple has gazillions of cash that it can use to buy companies, but I'm looking at which of its acquisitions has been that helpful to its bottom line. Not much help that I can see. Kind of like Cisco during and soon after the dot-com boom and bust. Lots of money, not much to show for it. Its products are looking dated (and some products, like AppleTV, haven't appeared at all), several products have been introduced though they no longer elicit the oohs and ahs that characterized the products commanding the profit margins associated with Apple. Its execution on the software side has been little short of awful (the cloud in particular is something Apple doesn't get), and it no longer commands the attention of young engineers in the manner that it once did. And while it's PE is low, there's nothing to suggest that earnings will stay healthy, particularly if profit margins give way.

Is history repeating itself?

Gary Rogan writes: 

Apple is followed by zillions of super-smart people who track every available piece of information, many in real time. It also has a lot of moving parts and a lot of very smart people working for them. I doubt it's feasible to make money by out-thinking them all without some identifiable edge.

anonymous writes:

Didn't they say the same thing about Japan in the mid 80's?

Gary Rogan responds: 

Did Japan have a P/E of 10 and down almost 50% from its recent peak? There doesn't seem to be either irrational exuberance or irrational despair about AAPL but there is frenetic interest. It's latest numbers resulted in some pretty healthy volume after hours and a reasonable jump. Who knew how much it would jump and in which directions? Someone probably did, but it wasn't on the basis that Apple doesn't get the cloud. The point is, if there was ever an efficient market this is it. Not always, not for all time, but for here and now.

Jeff Watson writes: 

Isn't every stock that's not on the Pink Sheets followed by a bunch of super smart people who get tons of info in real time? Do you think the market makers have a pretty good estimate of the value of the stock? Don't insiders in their particular companies know if their stock is too cheap or too expensive? Just because AAPL is a cultist type of phenomena, please don't ascribe mystical powers to the stock. It's going to do what it's going to do, without any regard for the super smart people who follow and trade it. In fact, personal experience tells me that the super smart people are going to feel the most pain.

Gary Rogan retorts: 

I don't ascribe any mystical powers to it at all. It's a stock constantly in the spotlight. In my experience, there are "sleepy" stocks and there are highly followed stocks, in the sense of constant attention being paid to them everywhere. The market seems less efficient in the stocks that are not in the news all the time. If you have a long time horizon, and the highly followed stocks is showing signs of a mania, it may be a good short candidate, and the opposite if there is widespread despair, but it's hard to know. Of course it will do what it will do, I never claimed otherwise, but ruminating that their CEO, who at some point was in charge of worldwide sales, doesn't get marketing or the company doesn't get the cloud, or that Jobs is dead, or that there is this new kid on the block called Android would get you about as much as edge as me claiming that the world population is growing and needs more wheat and therefore going long wheat.

David Lillienfeld weighs in: 

Let's deal with these one at a time, and keep the emotion out of it.

First, Tim Cook was EVP for Sales and Operations, but insofar as he's never held a marketing position in his career (certainly not as long as he's been at Apple), this position seems as much organizational as anything else. His marketing value-add seems to be pretty small, if not nil. Fact. Cook's role has been manufacturing, and he executed pretty well. But that's quite a ways away from marketing, I think you'll agree. There isn't any report suggested that Cook has ever had any involvement in marketing other than this title, and one must note that at the time Cook was placed into the position, Jobs was handling marketing himself. Fact.

Right now, Android is doing to iOS exactly what Windows did to Mac OS in the 1980s. Fact. Apple kept a closed system and IBM/Microsoft an open one. Guess what. The open system won. When the Mac came out, one of the things seen in its favor at the time was that, much as happened with the Apple 2, there was software around to run on it. Same thing today–except it's now in the form of the App Store. Again, fact. We're now seeing the same thing happen in mobile. Google may not be able to monetize Android, but that's probably a matter that will be dealt with once someone figures out how to monetize mobile. (That's opinion, but one I think is supported by facts.) Do you deny that Android has taken market share from Apple, that it's more widely used than iOS, or that iOS doesn't seem to have much place in the low margin East Asia market? Moreover, Apple focused on maintaining margins rather than going after market share–both during the 1980s and also during the recent period. Fact. Earlier, that turned out not to be the way to success. Fact.

As for Apple being followed, that's irrelevant. Apple was heavily followed in the first half of the 1980s. I remember it well. By the latter half of the 1980s, it was no longer followed because it was in the process of becoming irrelevant in the face of Windows. By 1997, the company was on the verge of bankruptcy with 90 days of payroll in the bank. Fact. That's hardly the setting for a followed enterprise. Successful companies are followed. When success disappears, so does the following.

Lastly, if you think Apple gets the cloud, then I suggest you review how Apple's efforts in that space have fared compared with its competitors. I know of few who would opine in favor of Apple's efforts, even the cultists. Let's not forget that fantastic roll out of Apple Maps. Fact. Enough said.

I also noted that Apple has lots of money to work with, but then again, back in the early 1980s, it did too. (It's worth remembering Microsoft was similarly fortuitous–and well followed–and I don't know that it has a similar following today as it did in years past.)

That a generation has grown up since Apple's last appearance in similar circumstances of adulation also suggests that the younger minions may have forgotten that Apple's earlier escapade didn't result in hegemony–far from it. Fact.

As for Jobs, the reality is that since Jobs died, Apple hasn't functioned anything close to what it did when he was around–and he was active until about a month prior to his death. Fact. He may have picked the management team to succeed him, but much as happened back in the 1980s, without Jobs, that team didn't perform well. The contrast with, say, Alfred P. Sloan or Andrew Carnegie, or John D. Rockefeller, or David Hewitt or Adolph Ochs, or Robert Noyce or … I could go on, but the one thing that separates this group of CEOs is that when they stepped down as CEO, it took at least two generations of managers after before the company hit much of a bump. That's the mark of a great CEO–in addition to what happened to the company on the CEO's watch. Jobs didn't do so well with it in the 1980s, and it appears he didn't do so now.

If you don't like the facts, that's fine. Don't like them. But those are the facts. I'll leave the other elements of your comments for some other time.

But let's stick to the facts.

anonymous writes:

Let's cut to the chase. Tell me the long term growth rate of AAPL's earnings and I'll tell you (+/- 10-20%) what the stock is worth today. The bloomberg consensus growth rate is 19%, so the stock is worth about 1090/share.

If you cut it to 10%, the stock is worth 512/share.If you use a 5% long term growth rate, the stock is wroth 340/share.

The primary reason that 19% is wrong is that AAPL is simply too big to grow at that rate — or it would suck all of the oxygen out of room. At 442, it's priced for about a 8.25% growth rate. Not crazy, but 8% is still a lot of growth for such a big company. But their buyback can provide a lot of help in achieving EPS growth. BUT — the chart looks good! 

Jul

18

 There must be a way of measuring the hills and valleys and their durations. Possibly with survival statistics. And then computing similarities of the present to the most egregious bad or remarkably good ones in the past. Once this similarity is measured, presumably with a squared distance, the similarity would be correlated with subsequent action. I would imagine geologists and modern statisticians have many rules of thumb for computing such distances of current to past.

Rocky Humbert writes: 

I think we both know that the vast corpus of academic research demonstrates no systematic predictability from simply looking at price charts.

The issue is, when one is otherwise bullishly or bearishly inclined, can the chart's characteristics help an investor improve his/her results?

For Bruce Kovner et al, the answer is yes. "Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature."

Pitt T. Maner III writes:

It does look at times as though certain "faulted" structures get reactivated and blocks rise again in the basin and range of the market (with reference to HPQ, GMCR, NFLX, SODA, CMG, et al.) Are they more susceptible to future reversals based on past history?

"Ultimately, the broader scientific challenge in the Basin and Range Province is to compare geologically determined rates and styles of deformation to contemporary strain fields determined by GPS to see if regions of accelerated extension are relicts of geologically recent activity or precursors of future activity. Hopefully, the new compilation of faults in the Basin and Range will provide an ever-growing archive of paleoseismic information that will encourage such comparisons."

from "Summary Of the Late Quaternary Tectonics of the Basin and Range Province in Nevada, Eastern California, and Utah
"

Gary Rogan writes: 

Assuming random news flow, something that has really negative sentiment will react with a larger upward move to a positive piece of news than something that has really positive sentiment. Clearly something that has been going down for a long time is likely to have negative sentiment, therefore it is more susceptible to a reversal than something that has been going up for a long time (which is actually incapable of a reversal on positive news unless it's "sell the news", and the effect of similar positive news is also likely to be smaller). On the other hand if there are no positive news or a state of illiquidity is achieved than negative sentiment doesn't help. So the trick is to look for things that have SOME chance of positive news and are not near bankruptcy.

Jul

17

 I recently read the article "At Sears, Eddie Lampert's Warring Divisions Model Adds to the Troubles". My friend sent it to me with the subject line "is Ayn Rand destroying Sears?!"

Obviously this sort of article is biased towards taking a crack at a huge success like ESL that's meeting with a tough spot. But is raises some interesting points. Doctrinaire belief systems always fall apart when taken to extremes. I guess it is Soros' 'competition vs. cooperation' debate.

The time frame of hedge funds is trickling through the whole of society. Given life contains an inevitable sequence of errors and that the current measurement system allows for zero error, it is perhaps inevitable that within a corporation you will be cut and cauterized at some point. Buffett, Ackman, ESL, etc. would presumably all have fired themselves at various points of setback. And when you get cut from somewhere like Sears, you lose all the "clients" that you've spent a career building and have no entrepreneurial base from which to direct yourself mid-career.

Is this "time frame" a strong argument for encouraging your children to pursue the diversified/entrepreneurial approach going forward? The zero-error expectation and threat of career termination is a key factor in pressuring staff at certain financial firms to do unsavory things.

Gary Rogan writes: 

The first thought that I had after reading the article was that typically there is no "algorithm" that one can come up with that works long enough, consistently enough, and is platform-independent enough to be declared an algorithmic success story when dealing with complicated problems involving a lot of people. Any kind of attempt to manage lots of people by a relatively rigid and relatively simple algorithm will fail, and it will be even worse if the algorithm is rigid and complicated. You have to have some system, but the system always requires human intervention by some very smart humans. If the human is highly eccentric (and these are over-represented among those who start things) the results are usually highly unpredictable and uneven although always entertaining, yet people like Howard Hughes and the rest of eccentric billionaires prove that they are not always unsuccessful.

It is absolutely true that in the modern age two-way loyalty between the corporation and the individual has gone out of style, so anyone who is not independently wealthy should be prepared to have skills to sell at any moment. What ESL evidently did at Sears seems almost cruel though, like experimenting on live humans after offering them a big enough incentive, but it's certainly not unethical as they were all big boys and girls and should have known who they were dealing with.

Jul

4

 At times like these, with the employment report two days away, the importance of Erica ("Obama Labor Agency Nominee Sent her Kids to Communist Rooted Summer Camp") can't be gainsaid. Presumably would wish a number that's not too good.

Rocky Humbert writes: 

Quoting from website: "Founded in 1923 by Jewish activists as a retreat for their children from the tenements of NYC, Camp Kinderland is true to the vision of its founders. In a difficult world, we are an oasis for children; a place where they can be themselves, feel at ease, and work and play in an atmosphere of cooperation and trust. As at many camps, our campers play sports, swim and hike, gain new experiences in arts, drama, music, dance, nature and camping. But at Kinderland they also encounter ideals of social justice and peace. They don't hesitate to sing a Yiddish labor song, paint a mural of Harriet Tubman or write a skit about putting an end to war—that's just what you do at Camp Kinderland, where it is okay to think, to care, to question and to act. There is nothing quite like it; and it works because the values of community and culture, of justice and righteousness, are inextricably integrated with the friendship, the joy, the beauty, the sheer fun and adventure, of life at sleepaway camp. Please feel free to explore our website ."

Dare I suggest that someone you know might actually benefit from a couple of weeks in this environment? I remember a summer at YMCA camp and it not only strengthened my Jewish identity, it strengthened my immune system. (The bathrooms didn't have hot water and it was my first and last interaction with a pork chop.) My wife, who's political views are somewhat right of Attila-the-Hun spent a few weeks at a Workman's Circle camp during her youth. The menu was better, but the sports were worse.

Gary Rogan writes:

"social justice" = "redistribute the loot to the 'rightful owners'", AKA "Communism", its Jesuit and later Jewish roots notwithstanding. It's worth avoiding anyone who excitedly talks about believing in it.

Stefan Jovanovich writes: 

The idea of social justice first took root in the US in the 1840s when the first flood of German immigrants - Lutherans, Catholics and Jews — took advantage of cheap tickets on the paddle wheel steamers from Hamburg. To this day their descendants remain the largest single "ethnic" group (sic) in the country. 

Rocky Humbert responds: 

Perhaps Mr. Rogan might consider starting Camp Hassen-land as an alternative to Camp Kinderland? He might find a couple of willing investors from spec list. Rocky offers this advertising copy for his website:

Founded in 2013 by cynical atheists as a retreat for their children from the tree-lined streets of Greenwich and Palm Beach, Camp Hassenland is true to the vision of its founders. In a difficult world beset by a particular idea in its grasp, we are an oasis for the self-accomplished - those who earn, deserve and consume the best; a place where money can be spent without thinking about the less fortunate or considering the possibility that one's place in life might be (just occasionally) outside of one's control. As at many camps, our campers play sports, swim and hike, gain new experiences in arts, drama, music, dance nature and camping. But at Hassenland, they also encounter vodka and inane propositions bets. They don't hesistate to sing a negro spiritual — recalling the golden age of this country — paint a mural of Sir Francis Galton, or write a skit about stepping over homeless people in the gutter — that's just what you do at Camp Hassenland — where it is okay to think, to not care, to act, and to screw your fellow campers if they are that dumb. There is nothing quite like it; and it works because the values of individualism and greed, of entitlement and smugness, are inextricably integrated with the the sheer fun and adventure of life knowing that you are superior to everyone else. Please feel free to explore our website.

Jun

24

Isn't it likely that anything like the current level of prices will cause a slowdown in the economy and soon we will be hearing that the tapering is not imminent?

Anatoly Veltman writes: 

I assume energy prices are meant. Maybe food, too? Any other, "input" prices?

And my second question: ok, suppose "we will be hearing that the tapering is not imminent". Will it necessarily sustain record equity prices? What about cyclical fluctuations? What about economic realities? Will stocks always necessarily go up (from ANY level) due to Fed "hopes" alone? What about fiscal issues around the world? What about geo-political strains? What about currency wars? What about old fashion profit-taking, correction…

Again, the chart looks eerily like 1987 - when a drop of historic proportions proved to be a mere correction

I think the most dangerous for the market situation will arise precisely as described by the Chair: that participants will be given more Fed "hopium"; and we'll get a lot more of them in for the wrong reason and at the wrong levels.

Ralph Vince writes: 

Vic,

Don't you think that depends on the pace of events though here, doesn't it?

Conceivably, things can fall off very, very rapidly given the political backdrop right now and the history of anemic real GDP growth leading as a reliable prelude to recession (and the fact that YoY real GDP has seen successively lower troughs since 1980, the stage is certainly set for a rapid descent). And if the jawboning (which is likely priced in already) doesn't provide the support it is thought to?

A commenter adds: 

A Fed official has already bandied this idea in the media. On Friday Bullard said that the pace and duration of QE will respond to market conditions.

Gary Rogan writes: 

The costs of the rising rates are already hitting the mortgage refinancing market severely and may soon derail the housing recovery. The cost to the Treasury of higher interest payments and the lack of the profit rebates from the Fed would be enormous, while simultaneously increasing outlays for unemployment and food stamps if the Fed causes a recession. The recovery is tepid and not self-sustaining. Also getting to 6.5% unemployment is a long way off.

It seems likely that the Fed saw a stock bubble building and decided to puncture it. When the first downtrend after the initial attempt started to reverse itself, Ben jawboned some more. He probably has a target level in mind, but he can't afford to to let the rates rise too much so it's a balancing act. What may be best from his perspective is a stock market crash followed by a quick rhetoric reversal from him and perhaps even more QE to lower the rates. He needs to have stocks and bonds to move in the opposite direction by any means necessary.

Scott Brooks writes: 

IMHO, there is no amount of stimulus that ward off the coming demographic shift that is occurring in America as well as most of the rest of the developed world.

In America, the final wave (the 3rd wave) of the baby boomers have exceeded their peak spending years and are refocusing their money. Generation X is not yet ready (nor do they have the numbers) to replace the spending of the baby boomers.

Spending is one of the biggest (if not the biggest) driver of our economy. Spending peaks at about age 47/48.

If one were to look at an immigration adjusted birth index, one would clearly see that the baby boom peaked in 1961 then leveled out (with an ever so slight increase increase) thru early 1964 and then off precipitously after that. Add 48 to 1964 and you get 2012.

Spending will decrease for the boomers. The big index companies that sell to the boomers will see their profits further erode. The secular bear that started in 2000 will continue on for several more years.

It will be a traders market with several bear market rallies and opportunities to make money on the short side. I predict higher than normal volatility.

Old "buy and hold" dinosaurs like myself will have to adjust our portfolios and be more nimble. It will be a great opportunity for the day traders and option/future traders of this list to make profits (that is if you profit off volatility). Smaller more diversified positions, low leverage (you don't want to get burned by big moves in volatility), and hedging will be the hallmarks of the day. The long only crowd may experience more pain they are accustomed too, unless the volatility increases the premiums enough on OTM puts that it makes them worthwhile to sell without getting burned on the downside.

Although the potential exists, I don't see big moves down (like 1987)….I see more of a slow bleed like we saw in 00/01/02.

The combination of statist entitlements based on unrealistic assumptions are going to put excessive pressure on governments to deliver on their promises. The same pressure is going to be put on private pensions, many of which are currently underfunded.

This won't last forever, though. Things will get better. Watch demographic tables for those countries which see their demographic start to move positively and buy there when demographics make their positive move. Don't look at typical "index stock" type companies though. When demographic changes take place and the younger generation starts to move into power, they will innovate. Look at smaller companies for profits.

Of course, I've been wrong many times before so it may be best disregard everything I've said.

Ed Stewart asks: 

Scott, where do productivity increases fit into this type pf analysis? After all, isn't this what boosts living standards over the long run? Rather than think in money terms, what about the creation of real goods and services that improve lives.

If it is just "spending" that is needed, they could just poof cash into everyone's bank account in the same way that today they "poof" cash into the QE programs.

Scott Brooks replies:

Ed, it's more than just spending that drives any economy. Innovations that improve productivity do play a role.

As to real goods and services and improving lives…..I am very excited about that. Difficult times are often the fertilizer needed to cause innovation. As one generation (the baby boomers) moves off into the sunset of their lives, the next generation (GenX) moves into power and gets to apply their new ideas and innovations.

Each generation builds on the work of the last….and even comes up with brand new ideas along the way.

We saw it happen from 1968 - 82, 1929 - 48 (with a hiccup due to the war), and I could go back even further. Generation shifts occur and we are in one now.

Carder Dimitroff writes:

Your argument makes sense. Unfortunately, this is not how the system has been working. Worse, those advocating for the good 'ol days do not realize they are asking for more government guarantees, a la Solyndra.

Utilities love these guarantees. Given the choice of free markets or government controls, utilities pick government controls every time.

Look at the southeastern states. They had several opportunities to create a free market, called "Grid South." They rejected that idea, preferring instead to remain centrally planned by comrades in state utility commissions.

Almost two decades ago, liberal states began implementing free-market systems for New England to Virginia and all points in between. Soon after, California jumped in. Late to the game was the Midwest. Even later was Texas. Of course, utilities operating in these states were not pleased when their generating assets exit the state's rate base.

It gets better. For decades, gas and electric utilities operated a "cost-plus" enterprise. From time to time, utilities would visit their regulators, present their [prudently acquired] costs, seek an adjusted rate to recover those costs and then asked for a modest margin.

It's like milking your neighbor's cow.

Jun

24

It is interesting to note that there have been 92 days over the last 15 years, that's six a year, that bonds and stocks have both been down 1/2 on a daily basis. But three of them have occurred in the last month. The red colors on our DailySpec graph illustrate this in part. Looking at the concurrent of down 1% and 2% days, we've had 3 years without such events but 3 of them in last month. We are entering a different world where the old regularities much be reconsidered.

Anatoly Veltman writes: 

Of course you remember that going into October 1987, it was the pervasive downdrift in bonds which eventually got the better of stocks. The other element was the currency wars, which Jim Baker didn't handle appropriately.

I speculate that should the bond market of today continue its route, then stocks will follow in much more blistering fashion than Mr. Rogan predicts.

Gary Rogan writes: 

I don't think I predicted that stocks will not go down substantially. In fact, my point was that Ben really wants them to. My other point was that he wants bonds to go up. However if neither he nor any of his colleagues at the Fed say anything of substance, I see absolutely no reason for both of them not to go down together, perhaps in a spectacular fashion. I'm not capable of making any kind of time-based predictions, but they are both overvalued on any kind of substantive basis and what has been keeping them both up is liquidity from the Fed. Now if Ben and company keep making disparate noises, some about tapering and some about doing the opposite, while keeping QE to infinity that would be such a mess that I wouldn't even attempt to predict how that will turn out. Ben clearly wants the redirect all the liquidity into bonds, but whether the bond vigilantes will let him do that is anybody's guess.

Jun

24

Isn't one of the main reasons that the economy has not been as vibrant as hoped because of the QE? The Fed has an opportunity cost for the assets it has bought. That opportunity cost around the world must be 400 billion. It was taken from the common man, either through direct payments not given or futures increases in service rates and interest costs, and given to the banks. The Fed itself must have a loss of 200 billion on those assets purchased. How has this provided an artificial and frictional stimulus which in the reasonable future will leave us worse off? Regardless, they can't let stocks go down too much, or else everyone will complain and it will be bad for the flexion in November, 2014.

Gary Rogan writes: 

QE is mostly an response. The cause is the federal spending that would be unsustainable were it not for QE. You can't stop QE while the government is running enormous deficits and while everybody and their brother is actively encouraged to go on food stamps and disability. Until the federal government totally changes its tone and approach, QE is inevitable and in fact the only thing that prevents quick collapse. It's not stimulus, as you can't push a rope but a destruction of new government debt via wealth transfer. Inflation plus the interest not paid to those who have cash is what's subsidizing the government largesse.

Jun

19

I found this paper interesting:

"A Bayesian Understanding of Information Uncertainty and the Cost of Capital"

Uncertainty is not always resolved by new or better information. Also contrary to intuition, the cost of capital implied by a conventional capital asset pricing model can increase as investors become more certain about future events.

Gary Rogan writes:

I only got as far as this premise in the abstract:

"The role of financial reporting should be understood not in terms of its effect on the cost of capital per se, but as aiding investors to assess the probability distributions of future cash flows more accurately, thereby leading on average to higher expected utility portfolios."

Can widely distributing financial information to investors increase the AVERAGE expected utility? If everyone is better informed, won't the positive effects average out to zero or close?

Rocky Humbert writes: 

I have not read this paper yet, however, the answer to Mr. Rogan's question is: No, this is not a zero sum game. Better information can generate net positive value when measured at a societal level. The core economic principle which explains the net positive is that better analysis/better information will result in better capital allocation. Better capital allocation should result in higher societal productivity and hence a higher potential growth rate. This is one of the economic underpinnings behind the SEC principle of full disclosure of all relevant and material facts.

Simple example: If I "invent" a perpetual motion machine and raise $10 Billion in capital to build a factory to produce my perpetual motion machines, then this capital will be re-directed from some other potentially more productive use. In this silly example, investors rely on my prospectus to invest and have bad information. If they read the prospectus carefully however, they will see a disclaimer that the physics behind my invention are nonsense and they are better off investing in a factory that creates widgets or drugs or whatever which actually work.

Jun

16

 I have recently had a lot of pain related to a problematic tooth. It is a tooth that has been giving me trouble on and off for years and I have no idea why. Dentists have suggested it suffered some type of trauma when I was younger, but if that was It I don't remember the event.

Went to the emergency room last January (weekend, regular doctor closed) because I was in massive pain over the holiday weekend.

It turns out that it had become infected and was putting pressure on the nerve in the Jaw. Since that time I have had a root canal on the tooth, but that did not solve the problem. I have had two other procedures, the last one this morning because the prior one did not heal properly and got infected again. Really aggravating experience, no need to go in to details. Today I am holed up recovering, jaw aching on a beautiful day.

The thing is, back in January, I had a gut reaction that the best thing to do would be to just forget all the treatments and have the problematic tooth yanked out. Based on the trouble it had caused me to that point, it just seemed to be the solution that made sense — likely to be final and just "end" the problem.

Yet, I was told that was too extreme and "the tooth could be saved" etc. No professional I spoke with thought it was a good idea, in fact they seemed astonished that I suggested it. And today, after treatments and quite a bit of discomfort, things not going right, etc, I am inclined to think my initial hunch was correct. Forget treatment. Just get rid of the problem.

I wonder how often this happens.

A clear cut solution to a problem exists, but a bunch of complex alternatives are presented and the resolve to do what is likely required to the end the problem with certainty is dampened. Not to push the analogy to far, but does this not also happen in trades, businesses, and relationships that are going wrong. Rather than end a problem trade, it is easy to tinker with it, look for hedges, "scalp" around the position, etc. but instead of a resolution only more pain is created. Or a relationship that has stopped working — "keep fixing it" but only more delays for the inevitable split which is more painful than a clean break.

It is hard to tell what is hindsight quarterbacking, and what is a life lesson. In this case I am still not sure which it is. I wonder if there are any general rules or ideas that can be applied to these situations to give better outcomes.

anonymous writes:

Absolutely, the best case is to always treat (your tooth or a losing trade), like it was bad meat and spit it out. Deal with it immediately, no messing around, just take the hit and get over it. Bad trades, like bad relationships, have a way of metastasizing into something worse, and the old cliche comes to mind, "Your first loss is the least."

Personally I remember once having a relationship with a nice gal that went south (but as a guy I was totally oblivious to the whole thing and didn't see the obvious signs). I was out with the lady in question in public at a restaurant and she gave me "the blow-off speech." I was so confused that I didn't even see it coming (One could make a case that infatuation is insanity). In retrospect, I should have gotten up, picked up the check, paid her carfare, bid her adieu, and walked out, never to see or communicate with her again…..like one exits a bad trade. Instead I lingered for months in an emotional limbo, like a sick puppy, suffering great humiliation and many bad feelings. In retrospect, like a bad trade, that relationship wasn't worth it and there was no bargaining, hedging, covering it with options that was going to save it. It had to be pitched immediately, and I broke my cardinal rule by not pitching it (emotions again).

Bad trades, like bad relationships can teach one many lessons in life and trading if one listens to what the situation (market) is telling you. If only, when dealing with that person, I had used my trading persona instead of my emotional side, I would have not lingered in emotional limbo for months.

This supports a great case for dispassion, and a big part of the Masonic obligation is to "learn to subdue your passions." But like the ying and yang, good things happened out of that debacle and I ended up seeing a very cultured, erudite, successful, powerful, and beautiful woman that I married a few months ago. I'm happy for the first time in five years, and that's what's important. Bad teeth, bad trades, bad relationships…..get rid of them, they are just nuisances that get in the way of life.

A commenter adds: 

But that thinking of could have, would have, should have is very deadly in the markets. Although hindsight is always 20/20, my eyesight of 20/100 does not allow such indulgences and my defensive game does not allow for such risk. I'm trying to make money, not keep my finger in the dike like the little Dutch boy. The Dutch boy was wasting his time. 

Gary Rogan writes: 

Bad women and bad teeth rarely get better by themselves, although some teeth that seem to need a root canal sometimes do. Equities do it a lot more frequently, so to this day I don't know how to reliably tell when a bad equity trade needs to be spit out. "Your first loss is the least" obviously applies to some situations, but for instance I still own a stock that lost me 20% two days after I bought it, 50% three months after I bought it, but now two years later it's up 70%, having been up 120%. Rocky talked a lot about his thoughtful decision to exit HPQ back when it was relentlessly moving south, but it's back. What used to be RIMM is still in the dump, but someone who bought it in September doubled their money. If you could always make a wise decision by just getting out of a (currently) losing trade, everyone would be a lot richer than they are.

Rocky Humbert responds: 

Mr. Rogan,

Indeed HPQ has been inexorably working its way back and may keep climbing. Who knows? What we do know is what  the S&P index has done subsequent to my exiting HPQ. And we also know what  other alternative investments (gold, real estate, etc) have done over the same period of time. Taking the hit and putting the (remaining) capital into the alternatives would have been better than suffering. Hence in these matters, one must consider not only the ongoing pain, but also the opportunity cost. To the extent that one is monogamous, the analogy holds for personal relationships.

Is there an opportunity cost for teeth? Not sure.

Gary Rogan replies: 

Sure, there is always the opportunity cost. The question is, how well do we know it in advance? My point was that if say you bet all your money leveraged 10 to 1 on wheat, and your position is down 10% you may want to exit, but if you own 100 stocks and one is down 10% or 50% or even 90% what to do at that point outside of any tax considerations and without any additional information isn't exactly clear. Given my preference for 52 week lows in the absence of any other information it may make sense to buy more or do nothing. If the sudden move lower really attracted your attention, and upon further study you conclude that this is only the beginning, of course you may want to sell. But then a sudden move up or a long period of flatlining or something you happen to read or hear may attract your attention as well.

A commenter writes: 

The key phrase that piqued my interest was when you said, "you bet all your money leveraged 10 to 1 on wheat." Why would you "bet" all your money? Wouldn't you want to just "bet" a small part of it, and keep the rest of your powder dry? Anyways, betting signifies gambling, and gambling is wrong.

Gibbons Burke writes: 

Anonymous, I am like you—I don't see any value in pissing my money away in a known negative expectation game, so I sympathize with your view. I have never found enjoyment in gambling, personally. But I can't extrapolate from my subjective view and experience onto the world because everyone's utility and entertainment functions are different.

Gambling in the United States has several positive social functions… State lotteries support education of children… Gambling on Native American reservations is a voluntary form of reparations to that people… and, it gets money out of mattresses and back into economic circulation, transferring capital from those who are not prudent in their stewardship of that capital (otherwise they wouldn't be gambling, would they) and putting it into hands where it will be more efficiently employed.

Part of the freedoms cherished in this Constitutional Democratic Republic is the freedom to act the fool, on occasion, as long as you don't infringe upon the rights of others, or forsake the duties to yourself or those in your charge. 

Kim Zussman adds: 

You would not have regretted your decision to accept professional opinion / treatment had everything gone well.

The mistake is assuming you could have made a better decision - to extract the tooth - simply because in hindsight the treatments have not worked.

For any decision there is a range of outcomes. Perhaps your treatment had 80% chance of success (defined as rapid pain reduction, elimination of infection, and saving the tooth). But so far you are in the 20%, and for you the failure feels like 100%. "If only I'd extracted"

Do you expect portfolio managers or sound strategies to never lose, or abandon them only when they do? (Buy high / sell low)

Dentist and physician success rates are mostly unknowable but patients use cues to evaluate them. Cues such as trusted referral, reputation, diplomas, demeanor, looks, office decor, exhibited technology, etc.

Your treating dentists are simultaneously incentivized to obtain good results (reputation, future referrals) as well as make money (perform treatment). Those with consistently poor results have trouble competing with those with good results, and you are less likely to wind up there. 

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?

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