Charles Dow used to counsel that no individual should ever be promoted if they hadn't made a large error at some point. Phil Fisher used to insist only in investing in those stocks that had management teams willing to make big mistakes. If they didn't make mistakes, they wouldn't also take the risks required for success. Is this the essence of success? How does a corporate management team, upon the fruition of such errors, survive being "stopped out" of their positions in today's hair twitch paradigm? Is being expropriated from your career rather than your capital not the bigger risk today? And thus can it only be stocks with founder, family or veto shareholdings that make for truly great growth stocks today? Should not Tim Cook undertake an LBO with the Qataris?

anonymous writes:

Does modern risk management preclude financial Darwinism?

Steve Ellison writes: 

Having worked in the technology industry, it has long seemed to me that many companies are never again the same when founders are replaced by "hired gun" CEOs. My best guess on why this might be is that hired managers don't fully understand non-financial aspects of the founders' visions that prove to be critical to success. As I posted in 2010, this study found that founder-led companies outperform others:

"Eleven percent of the largest public U.S. firms are headed by the CEO who founded the firm. Founder-CEO firms differ systematically from successor-CEO firms with respect to firm valuation, investment behavior, and stock market performance. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. An equal-weighted investment strategy that had invested in founder-CEO firms from 1993{2002 would have earned a benchmark- adjusted return of 8.3% annually. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually. The implications of the investment behavior and stock market performance of founder-CEO led firms are discussed."



It is interesting to reflect that out of 37 open market meetings since the beginning of 2009, 11 have closed the day before at a 20 day high versus just 3 at a 20 day low. That might seem unusual without the knowledge that since 2009 there have been 292 separate 20 day highs and only 95 20 day lows. Thus 25% of all days have been at 20 day highs since 2009 but 30% of the open market day precedings have had that honor. A most insignificant but interesting difference and framework. 

Jeff Rollert writes: 

I had a long discussion about this with someone internally yesterday.

Writing and "doing" concurrently in a team is a very difficult organizational exercise, as ideas and implementation folks have different time frames frequently. I've seen similar dynamics with pilots and racing skippers with their navigators.

Steve Ellison adds:

I found that even talking about my trades introduced subtle motivations that I did not believe to be performance-enhancing.



 Have you seen this opinion piece by Jason Richwine: "Why Can't We Talk About IQ".

The reason "we" aka the enlightened cannot talk about IQ is that "we" don't want to know what the test mean any more than the group spokespeople who dislike what they presume the results of the testing show. Neither side of the supposed "debate" wants to accept the wisdom of the 14th Amendment.

"Race" - as crudely defined in this article - i.e. people of northeast Asian descent, European lineage, sub-Saharan African descent, Hispanic Americans - is so innately stupid a categorization that it has only one purpose - to somehow use skin color as a marker of innate capabilities. People of Northeast Asian descent, i.e Japanese, Koreans, and Chinese from Northeast Asians represent a small group of entrepreneurial minded self selected emigrants. If one were to test the descendants of similar European groups - Huguenots, Moravians, Jews, English Catholics, the IQ results would be disappointingly similar.

My father, who created the modern IQ test that is the cause of all this fuss, wanted people to be tested every 3 months so that the test could serve its proper function - which is to measure a person's changes in cognitive abilities. When he offered to sell quarterly testing services to the New York City and other "urban" schools for the same price that he was selling annual testing (in order to avoid any suggestion that he was trying to channel stuff his customers), they turned him down flat. The school bureaucracy knew what a threat such an offer was; it would make it that much harder for teachers to avoid individual accountability.

Cognitive science - the new sociology - will do everything it can to avoid using IQ tests as a measure of progress. It will be far more profitable for academics to create yet another "group" question - i.e. are "black" people really more stupid than whites, er, Europeans. If the answer is "yes", the subsidies are guaranteed to flow; if the answer is "no", then clearly there is no reason not to have further quotas in favor of having the skin color of every occupation match the color wheel of the population at large.

IQ testing is only useful as a measure of the changes in individual ability; and like all monitoring of organisms the testing needs to be done repeatedly over time for there to be any meaningful results. Dad was able to get a few odd schools to submit to regular testing; what made his experiment interesting is that he had both the parents and teachers participate. The result was what common sense would predict; the children who made the greatest progress were those whose teachers and parents also made the greatest progress over time.

His conclusion: "Genius cannot be taught; everything else responds to practice and effort."



 This chart is interesting. It comes from a passionate market historian, Robert Prechter and his Elliott Wave group.

However, I disagree with it. A local maximum in interest rates is established only after they peak out somewhere and start declining again. So this illustrious list of busts and crises is not happening during the spike, but at its end.

A classical cart and horse problem. Framing Bias will make it appear that each time a spike in interest rates happened a crisis happened. The reality is likelier that each time a crisis could no longer be shoved under the carpet, when the economy could not sustain playing on the house money, when the illusory money effect succumbed to gravitational pull of reality, when the epidemic effect of the meme played out the asymptotic end of the S-curve, no one was willing to pay more for using Other People's Money (OPM). Interest rates are a willingness of people to undertake risk. Yet when this willingness becomes a larger risk than the aboriginal risk, a crisis comes.

Also, in the customs I learned on this list, there is always a chance that endless other financial crises have come along the curve too. Not sure, just checking with the specs which other key crises have happened at the troughs of interest rate cycles? Have there been any or as many?

Steve Ellison writes:

Yes, there is always bad news around, and any number of events could have been annotated at the low points on the chart, too.

Here is an example
I posted on the site in 2005.

One of my prized possessions is a chart of stock market returns in Venita Van Caspel's book "The Power of Money Dynamics." Each year is annotated with a reason to have been bearish that year:

1934: Depression
1935: Civil war in Spain
1936: Economy still struggling
1937: Recession
1938: War clouds gather
1939: War in Europe
1940: France falls
1941: Pearl Harbor
1942: Wartime price controls
1943: Industry mobilizes
1944: Consumer goods shortages
1945: Post-war recession predicted
1946: Dow tops 200 - market "too high"
1947: Cold war begins
1948: Berlin blockade
1949: Russia explodes A-bomb
1950: Korean war
1951: Excess profits tax
1952: U.S. seizes steel mills
1953: Russia explodes H-bomb
1954: Dow tops 300 - market "too high"
1955: Eisenhower illness
1956: Suez crisis
1957: Russia launches Sputnik
1958: Recession
1959: Castro seizes power in Cuba
1960: Russians down U-2 plane
1961: Berlin Wall erected
1962: Cuban missile crisis
1963: Kennedy assassinated
1964: Gulf of Tonkin
1965: Civil rights marches
1966: Vietnam war escalates
1967: Newark race riots
1968: USS Pueblo seized
1969: Money tightens; market falls
1970: Cambodia invaded; war spreads
1971: Wage-price freeze
1972: Largest U.S. trade deficit in history
1973: Energy crisis
1974: Steepest market drop in four decades
1975: Clouded economic prospects
1976: Economic recover slows
1977: Market slumps
1978: Interest rates rise
1979: Oil prices skyrocket
1980: Interest rates at all-time highs
1981: Steep recession begins

(Van Caspel, 1983, pp. 124-125)

Unfortunately, I have the 1983 edition, so the chart ends there.

A modest attempt to bring the record up to date:

1982: Double-digit unemployment
1983: Record budget deficit
1984: Technology new issues bubble bursts
1985: Dollar too strong
1986: Dow at 1800 - "too high"
1987: Stock market crash
1988: Worst drought in 50 years
1989: Savings & loan scandal
1990: Iraq invades Kuwait
1991: Recession
1992: Record budget deficit
1993: Clinton health care plan
1994: Rising interest rates
1995: Dollar at historic lows
1996: Greenspan "irrational exuberance" speech
1997: Asian markets collapse
1998: Long Term Capital collapses
1999: Y2K problem
2000: Dot-com stocks plunge
2001: Terrorist attacks
2002: Corporate scandals
2003: Gulf War II
2004: High oil prices
2005: Trade deficit



 Seems like the market has been rather trendy lately. Of course now that I've realized it its probably near the end of the trend. But that's the same thing I though at the beginning of the trend.

Mean reversion systems have difficulty in a trendy market, and simple TA things work well for trends if you're lucky.

Rocky Humbert writes:

Mr. Sogi writes: "Mean reversion systems have difficulty in a trendy market, and simple TA things work well for trends if you're lucky."

I suggest that Mr. Sogi should have written: "Simple TA things have difficulty in a choppy market, and mean reversion systems work well if you're lucky."

Every single profitable trade requires a trend!

If you buy at 9:30am at a price of 100 and sell at 9:31 at a price of 100.25, there was a one minute trend. Call it whatever you want. But if you have two points connected by a line, that line is a trend.

The carpenter ants that live in my yard don't know that my neighbor has much better foraging.

Steve Ellison writes: 

As I understand the premise of trend following, it is allegedly good to identify the trend in place before placing one's trade and enter the market on the side of that trend. To say every profitable trade requires a trend seems a tautology to me and not useful since the statement refers to the trend that occurs after entry and hence cannot be known at the time of entry.

Bruno Ombreux adds: 


This is a semantic debate. It all depends how you define a trend. "Point A to point B" is a "line", not necessarily a "trend". There are actually formal definitions for "deterministic trends" and "stochastic trends". There are also statistical tests to check the presence of those trends.

Mean-reversion: you can make money in a market going from "point A to point A" instead of "point A to point B". 

anonymous writes:

Having spent a number of years in the trend-follower business, I can confirm that trend-following, as practised by some rather large CTAs, means betting on markets where models suggest the continuation of a move. So if the price went up from A to B, a trend follower would make bets where the move from B to C is in the same direction, whereas a mean-reverting player will try trade instruments that he believes will move back towards A.

Over the years, I have given much thought to the workings of the whole trend-following business, and its role in the market ecosystem. The Chairman's various critiques of the style are all valid, and worth heeding. Yet, properly understood, I believe trend-following remains a valid approach to trading. i.e., it is a trading style that exposes you to risk factors for which the market is willing to pay you.

Rocky Humbert adds:

A wise man once said, "There ain't no point in beating a dead horse. But there ain't no harm in it either."

We've all had this trend following discussion ad nauseum in the past, and the chair's pathological aversion to trend following is well known. So to avoid re-opening old wounds, I will re-offer the single most plausible and economically rational reason why trend-following can work and has worked. (That is, I'm not saying anything about whether it still works or will work in the future.)

In order to move a price, the market requires new information. And this new information takes time to disseminate among market participants. And during this period of dissemination and acceptance of a new perception, prices will appear to trend. If you are the first person to acquire and understand this new information, you are said to have a variant perception. If you are the second or third person to realize that there is new information, you are called a trend follower. And if you instinctively fade this perception as it disseminates through the market, you are either called a contrarian or Anatoly. Strictly speaking, a true contrarian, like a stopped clock, is right twice a day. And while this new information is disseminating through the market, there are obviously many opportunitities to profit.

Ultimately, however, a trend-follower is economically equivalent to a person who buys synthetic options or volatility. And a mean-revision trader is economically equivalent to a person who sells synthetic options or volatility. Transaction costs notwithstanding, unless one has superior information, there is no apriori reason to believe that selling synthetic options should, over a career, be more profitable than buying synthetic options. However, the equity profile of an options seller is that of many small profits and a few big losses. Whereas the equity profile of an options buyer is that of many small losses with a few big gains.



In the old days when I used to trade ag futures, about once a year I would see total unanimity of signals. Grains, meats, sugar, cocoa, etc. would all give the same signal at the same time. For example, they would all give a buy signal, such that I would think to myself, "holy mackerel, these markets are going to explode". But the total unanimity was a fake as the markets would stutter and then all drop. I was never bright enough to conjure up a reason why it happened, but it did.

Recently all of my financial market indicators gave sell signals. Stocks, Bonds, REITs, Gold. And the sell signals were everywhere. Momentum, behavioral economics, actual volatility, actual volatility of implied volatility, and some bizarre stuff you would never think of. You name it and it was bearish. Even the fundamental stuff I watch like surrogates for employment and retail sales are bearish.

We are very mechanized traders, and when I get a bearish signal for equities, I simply look to my overall rankings and see what to switch to. But everything was bearish, so there was really nowhere to relocate. However in looking at the rankings, equities were ranked higher than the competitors (e.g. bonds). So I had no choice but to stay in equities, being very selective and keeping every stock on a very short leash.
I have no idea why unanimity of indicators would negate the indication.

Any ideas? I don't see any flexion hands in this, but maybe others do.

One of the holy grails out there is to know how to forecast future co-movements between different assets. (As if forecasting just one isn't hard enough.) As it all starts to hit the fan, the correlations between all assets approach 1.0 at something much greater than an exponential rate…

My qualitative take on it is that the growth rate of the cross correlations as they inexorably accelerate towards parity approaches a certain velocity 'x' at which point, mathematically, we are as close to the asymptote as the 'system' can stand.

This is the 'going to the cliff and back again' phenomena that The Palindrome speaks of as a result of 'reflexive' interactions of market participants' expectations with the price and the price's effect upon the market participants' expectations. Arguably this is the ideal time for stabilising 'flexionic' behaviour (as opposed to shenanigans in TY around auctions et al.)

How they might do it, and more importantly time it, is a very deep question. For 'them' to have it figured out I think they would have to have figured out the actual underlying price generating process (what really moves prices).

Now, I guess only Renaissance Technologies' Medallion Fund has gotten anywhere near identifying the answers to that series of non linear questions. The most that one can say at this stage of the game is that the occurrence of substantial downwards co movements of assets tends to cluster (which is a 'warning sign' in itself) and for short periods after this clustering risk assets often make substantial minima. 

Steve Ellison writes: 

My first guess to Mr. Rafter's question is that, like a Higgs boson, unanimity in any market is very volatile, unstable, and unsustainable. As Richard Band wrote in a book about contrarian investing (doesn't everybody profess to be contrarian?), "If everybody is bullish, who is left to buy?"

To test this proposition, my first idea was to find instances in which the Investors' Intelligence survey of advisors had a 4-to-1 preponderance of bulls over bears or vice versa. There have been no such instances in the 2 years I have subscribed. I settled for instances in which either the bullish or bearish percentage was below 20%. There is typically a sizable group of fence-sitters predicting "correction", so the sum of the bullish and bearish advisors is much lower than 100%.

There were 10 recent weekly reports in which the percentage of bearish advisors was less than 20%. I get the reports on Wednesdays, so I tabulated the change in the S&P 500 futures from the Wednesday close to the Wednesday close of the following week.

Report             One week         Net
Date     Close     later    Close   change
3/13/2013 1550.00  3/20/2013 1549.00   -1.00
3/20/2013 1549.00  3/27/2013 1556.75    7.75
3/27/2013 1556.75   4/3/2013 1548.50   -8.25
 4/3/2013 1548.50  4/10/2013 1582.75   34.25
4/24/2013 1574.00   5/1/2013 1577.25    3.25
 5/1/2013 1577.25   5/8/2013 1628.75   51.50
 5/8/2013 1628.75  5/15/2013 1654.25   25.50
5/15/2013 1654.25  5/22/2013 1655.50    1.25
5/22/2013 1655.50  5/29/2013 1647.00   -8.50
5/29/2013 1647.00   6/5/2013 1608.00  -39.00

Average                                 6.68
Standard deviation                 25.31

Considering that the average net change during my subscription has been a gain of 3 points per week, I get a t score of 0.46, which is not only insignificant, but has the opposite sign of what my conjecture implied, i.e., that low bearishness is bearish.



 Blackjack tables seem to be the major profit centers in Vegas, and I don't see them going away anytime soon. The house has the edge when you're playing a "perfect game." Make one or two mistakes or deviations from the perfect game and the house vig goes to ~18%.

At the Riviera, if they suspect you are counting, that shoe gets reshuffled every other hand. On those non-regulated offshore gambling boats, they either put in a mechanic or a gaffed shoe to bury you. Blackjack, roulette, slots, lotto, keno, etc are way too tough for me.

Steve Ellison writes:

I had three fraternity brothers on the team referenced in the below article. The most obvious parallel with trading is that casinos won't tolerate any player who consistently wins. Casinos have rules against card counting, but the principle applies in other games, too. My wife knows a guy who has won big at video poker and is banned from several casinos.

"Aces Return to Vegas for Gaming Panel"

"Blackjack is the 'minor leagues,' said John Chang '85, one of three alums from the notorious MIT blackjack team who returned to Caesar's Palace in Las Vegas May 28 for a panel discussion at the 15th International Conference on Gambling and Risk Taking.

The Las Vegas Sun reported on the panel, at which Chang joined Houh '89, SM '91, PhD '98 and Andrew Bloch '91 for a frank discussion of the years-long streak that MIT students enjoyed, putting their math skills to practice.

Chang had to join the panel remotely, answering questions in a prerecorded session, since his ban from Caesar's (among other casinos) is still in effect. …"



 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.



 Many top level executives and successful traders and entrepreneurs have sports backgrounds and continue to be active in sports. Sports provide good training and experience for a young (and old) person by:

1. Providing a competitive but safe atmosphere;
2. Allowing the ability to absorb losses and move on;
3. Teaching sportsmanship;
4. Providing health benefits;
5. Honing the competitive instinct, or killer instinct, in a non
lethal environment;
6. Giving incentive to give 100 per cent plus;
7. Providing the opportunity to learn how to learn under the guidance
of a coach or teacher;
8. Creating the foundation for a training regimen and discipline.
9. Teaching team dynamics and working together as a team in team sports;
10. Making life long friends and connections.
11. Providing a conducive social setting outside of business during
which business and personal matters can be discussed in an informal setting.

I'm sure there are many other benefits.

David Lilienfeld writes:

There's also 12. Developing an implementing a strategy which may not
work and making the needed changes in it to attain success. It's a
variant of "You're going to be wrong.

Steve Ellison writes:

Sports are generally objective. The final score stands regardless of excuses or rationalizations.

I have noticed that many athletes become successful salesmen, which might explain why many are CEOs. I was called on by a former Kansas City Chief selling software. Before 2001, EMC had a reputation for seeking out athletes for its sales force, particularly those who had grown up non-affluent, because they were determined, persistent, and never satisfied.




 While most of you don't play racketball, I believe the hobo's history of racketball on site was very educational for those with kids who wish to play it or anyone who plays any racket sport. The torque and the backswings on the backhand and the bends in the pictures are most enlightening. One notes that there have been 4 champions who ruled the racketball world for about 5 years each, winning almost every tournament. I noted the same thing in squash, and tennis isn't too far away in that area also.

One wonders if a similar phenomenon relates to markets. e.g. is there one stock that can outclass all the others in performance for a certain number of years, like Hogan, Swan, and Kane. Eventually those champions receded due to age, competition, or injury. Is there a predictable turning point?

Alston Mabry writes: 

Obviously, AAPL is the current version of this. And looking at AAPL, one sees an example of a company that stumbles as it fails to effectively deploy the very capital it accumulates due to its success. 

A commenter writes: 

This is the measure of how good a CEO Jobs was. He may have been a great innovator and manager, but he may not have been that strong of a CEO. A good CEO assures succession, and it isn't clear that Jobs was successful in this regard. The same was true of RCA and David Sarnoff, By comparison, Alfred P. Sloan accomplished this task for GM, Adolph Ochs for the NY Times, Hershey with Hershey Foods, and the Mars family with the Mars candy business. That hasn't been the case with Apple, at least not yet. Any guesses on how long the Board waits until Cook is replaced?

David Lillienfeld writes: 

There will always be outliers.

There are also companies at the other tail with managements performing more for "enjoyment" (like me athletically–I suck at racketball but I very much enjoy playing it and when I've had access to a court, done so for 3+ hours a week). Are there stocks in which management is in it for fun rather than shareholder value "enhancement"? Sure. It isn't hard to identify underperforming companies.

As for a predictable turning point, there should to be tells in each industry, but that doesn't address your question about one sentinel stock. I don't think there is a sentinel today the way GM was in the 1950s and 1960s. (Some might argue that Johns-Manville was a better sentinel. Either way, there was a single stock.) You've got a globalized market and no one company occupies a dominant position in a sentinel industry (such as autos in the 1950s and 1960s). Of course, implicit in this uninformed comment is that a connection exists between stock performance and corporate performance.

Or have I misunderstood your question?

Alston Mabry writes: 

Just to do a little bit of counting, here are the 48 non-financial US-based cos with cash of $5B or more, with LT investments added in. The amounts are in billions of dollars, and the list is sorted by the Total column.

total cash: 729.4
total LT inv: 337.7
cash + LTinv: 1067.1


AAPL   39.8  97.3  137.1
MSFT   68.1  9.8  77.9
GOOG   48.1  1.5  49.6
CSCO   45.0  3.7  48.7

XOM   13.1  35.1  48.2
CVX   21.6  26.5  48.1

GM   31.9  14.4  46.3
WLP   20.6  22.1  42.7
PFE   23.0  13.4  36.4
ORCL   33.7  0.0  33.7
QCOM   13.3  15.1  28.4
KO   18.1  10.2  28.2
IBM   11.1  15.8  26.9
F   24.1  2.7  26.8
AMGN   24.1  0.0  24.1
MRK   18.1  5.6  23.7
INTC   18.2  4.4  22.6
HPQ   11.3  10.6  21.9
JNJ   19.8  0.0  19.8
BA   13.6  5.2  18.8
CMCSA   10.3  6.0  16.3
DELL   11.3  4.3  15.5
UNH   11.4  2.6  14.1
NWSA   7.8  5.2  13.0
EBAY   9.4  3.0  12.5
LLY   6.9  5.2  12.1
ABT   11.5  0.4  11.9
AMZN   11.4  0.0  11.4

GLW   6.1  5.2  11.3
EMC   6.2  5.1  11.3

HUM   9.3  1.0  10.3
FB   9.6  0.0  9.6
UPS   9.0  0.3  9.3
WMT   8.6  0.0  8.6
SLB   6.3  1.7  8.0
DVN   7.5  0.0  7.5
S   6.3  1.1  7.5
PEP   5.7  1.6  7.3

PG   7.0  0.0  7.0
UAL   6.7  0.0  6.7

HON   5.3  1.3  6.5
DISH   6.4  0.1  6.5
RIG   6.0  0.0  6.0
ACN   5.7  0.0  5.7

COST   5.6  0.0  5.6
NTAP   5.6  0.0  5.6

DE   5.0  0.2  5.2

Richard Owen adds: 

This is a brilliant list with many lessons.

- 80/20 rule: $2tr of surplus cash is bandied about as the figure for US corporations. Here are 50 covering over half of that sum.

- The 1% have an internal dissonance. Here is their accumulated share of National Product, all stored up and failed to be reinvested. The 1% neither wish to reinvest their cash, to reduce their share of Product, nor to have GDP decline, nor to run deficits. This is in aggregate impossible.

- By giving you will receive. By being cowardly, you will realise your fear. Tim Cook is hoarding his cash out of fear. Nobody has EVER put that kind of cash to work successfully. Not even Warren Buffett could do it on his best day. If Apple attempts to do so, they will end up hanging themselves. David Einhorn is so on the point with his analysis. And for once an activist is helping make management's jobs more secure, not less. They just need to listen. Take some options, recap the stock, make yourself heroes. Don't think you can use that cash to buy another magic wand. You will end up buying a pup. The most recent example of what might happen to Tim Cook if he doesn't see the light is the CEO of Man Group. They totally feared that AHL would stop working. They grasped at their cash looking for any credible diversification. They bought GLG at totally the wrong multiple. And then it all fell apart. All totally well intended, all well thought through. But if they had just recapped the stock - "coulda been heroes". Get out of your own way.

Steve Ellison writes: 

A couple of theories:

The crossover point from innovator to mature company occurs when revenue from continuing product lines becomes large enough that it dwarfs revenue that could realistically be expected from starting up a new product line in a new niche, was the theory in the innovation class I took in business school. Let's say that a company might develop a completely new line of business. If it were successful, it would be doing very well to get to $1 billion per year of sales of the new line within 5 years. If the company already had $20 billion per year in revenue, management would probably devote more attention to nurturing and further developing the cash cows that bring in the $20 billion than to a risky venture that might, if all goes well, add 5% to existing revenue. One might test this proposition by setting an arbitrary sales per year threshold and checking stock price movements of companies after they move past this level.

Adoption of new technologies follows an S curve pattern, driven by a small number of early adopters followed by more cautious but herdlike technology managers at large businesses, was the theory advanced by Geoffrey Moore in Crossing the Chasm. One might test this theory by looking for companies whose sales growth decelerated to less than 20% of the maximum growth rate of the past 5 years.



 Driving through the Owens Valley on a beautiful sunny clear day, the entire 150 mile stretch with 14000 peaks towering above showed the geological effects of immense glaciers that filled the entire valley during the past ice age. Ice could have been 3000 feet deep gouging up mountains. Even Mauna Kea in Hawaii has clear geological evidence of glaciers! The last ice age was as recent as 10-20,000 years ago and ice covered a large part of North America. Global warming is the end of the current ice age and has provided good weather and prosperity and the growth of civilization and the human race for 20,000 years. The reverse of global warming, namely cooling, is not an attractive alternative. Imagine if cooling began. It would mean summers with snow that did not melt lasting through destroying crops. 4 years of snow on the ground through summer would wipe out most of the world population. 4 years of 40 foot snow accumulation would erase most signs of civilization under a layer of ice. When Krakatoa went off in 1883 the ash plume circled the world and there was no summer in the US that year. Imagine the impact on gnp and the markets if cooling commenced. Its awful to imagine. So its a case of unintended consequences or be careful what you wish for should they figure out how to reverse global warming.

A commenter writes:

Cold weather crops like rye and barley would come back in vogue if we had an ice age which is not unthinkable. The zones for planting crops would change drastically. One would expect that researchers might do some genetic tinkering with corn, wheat, and soybeans, allowing them to flourish in a colder climate. Quite a number of scientists are predicting a Maunder Minimum at the end of this current solar cycle, which coincided with the "Little Ice Age.".

Steve Ellison writes: 

Quite a long time ago, I reviewed Evolutionary Catastrophes: The Science of Mass Extinction by Vincent Courtillot. Every one of the 7 mass extinction events identified by M. Courtillot was caused by global cooling. Therefore, I agree that global warming (which I see no reason to doubt) is the lesser evil.

David Lilienfeld writes: 

In the 1950s, 1960s, and 1970s, 1980s, and 1990s, the asbestos industry maintained that "there was reasonable disagreement" among scientists about asbestos as a cause of lung cancer; no asbestos-related regulations were needed. In the 1950s, 1960s, 1970s, and 1980s, the same was true of the tobacco industry for tobacco and lung cancer (and other sites, too). In the 1980s, 1990s, and last decade, many in the social conservative school of thought maintained that there was little evidence, or at least controversial evidence, about the role of human papilloma virus in the development of cervical cancer (I won't get into the matter of hand and neck cancer and HPV). In the 1960s, 1970s, and into the 1980s, the US salt industry insisted that the data linking consumed salt and hypertension were controversial and that no regulation of the salt content was needed. The argument against the consensus view holds only so long as additional data do not validate the view of that majority. With Copernicus, that was the case. It was the same with the role of bacteria in the development of peptic ulcers.

Absolute certainty and uniform conclusions by all members of the science community shouldn't be needed for policy formulation. If they were, then the Marlboro Man and Joe Camel would still be roaming the ranges and desserts of our television screens.

Ralph Vince comments: 

What a logical stretch David.

In the tobacco litigation, we found secret emails amongst the defendant employee's indicating a nefarious conspiracy to keep their methods and activities secret.

The East Anglia emails are similar in that regard.

I can tell you, from firsthand observation of the computer code that was in the email trove (because I have been writing code since the 70s, and I can tell you from examining someone's code what nationality they are, what mood they were in when they wrote it, and often what they had for breakfast). The code that was dumped was utterly damning to their cause. Not only does it show that the data does NOT sufficiently show that we are experiencing (anthropomorphic or not) temperature rises, but taints the issue because it raises the question of motive. We're left knowing that CO2 in the atmosphere has increased, a seeming understanding that this should have caused temperature rise, and the facts that do not comport to this, and as-yet no legitimate scientific reason (there are some theories, but that's all) to account for this.

Scott Brooks writes: 

I suggest that we look at the motives of the people involved in perpetuating what I believe is a giant con job.

Let's say the earth is warming. Is this a man made phenomena or is it just a normal cycle that the earth goes thru from time to time? Who stands to profit from these suggestions to stop global warming? Al Gore and his ilk?

Why do we trust these idiots in DC to make decisions that are common sense based and "special interest group" based?

If we start down this path that global warmists like yourself want us to go down, what happens when the earth keeps warming up (i.e. let's say it's really just a cycle the earth is going thru and not man made)…….what will happen then? Do you think the politicians will say, "Well, it's not mans fault. So let's roll back all the regulations", or do you think that they'll bloviate about how they need even more power to solve this horrible problem?

Why are you so willing to give more and more power to the government when they have a LONG history of abusing that power to their own selfish ends?

If you chose to go down that path, you will find people like me standing in your path actively trying to stop you.

Garrett Baldwin writes: 

I wasn't going to jump in on this, but I wanted to shadow something Scott said.

With regard to motives, pay attention to the way that the hearings and the solutions to solving this problem are handled. Some of us want the market to solve the problem. For example, let's say that the biggest threat in the world were something that is hard to measure, like the earth is running out of fresh air.

I'd argue that if that were a serious problem, a man would come a long and invent a machine to solve it. We'd rely on human ingenuity. We'd beat back that threat…

But the people who stand to profit through centralized alchemy only want to do it one way — their way. And any solution that is market based, creates competition, and doesn't enrich allies or decision makers or centralize more power with the government is either demonized, destroyed or regulated from the conversation.

The reality is that central planners can't solve this problem. They claim that they invented the internet, but if the government were still operating the internet, it would just be two dudes from DoD playing pong back and forth between New York and Camp Pendleton. This entire hype has evidence of scam all over it. Naomi Klein has demanded that the U.S. distribute $2 trillion to third-world nations who are "victims" of the U.S. and our energy policy. Ironically, the nations that are demanding the money are also the ones that are near the bottom of the Heritage Economic Freedom Index. Countries that aren't developing because they keep they limit their own people's ingenuity and production are going to get $2 trillion and then do what with it? Usher in a green economy? Come on…

So, when I hear the idea that we have to "do something" and do it fast without exploring the data, without asking questions, and without being allowed to have a debate because doing so would cast the distrustful of government as people who don't care about the children or the future or humanity. Meanwhile, the alarmist will have a moving wardrobe of children follow him as he spouts off how important his intentions are and how we are monsters.

Beyond that, we also ignore one thing in this discussion.

What are the positive benefits of global warming? After all, Greenland had a booming farm trade 1,000 years ago. I'd like to get some beach front property in Greenland. I'd also think that trade through the Arctic Circle would be nice and reduce shipping to Asia in half. Why is global warming such a terrible thing? Is it because we refuse to embrace the challenge, and because there's profit to be made by saving us from ourselves?

So, I will say from my perspective this. I don't consider climate change a big deal, and it's not something that I worry about. Humanity will adapt after government spends trillions of dollars chasing this dragon..



I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

 Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.



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

Vince Fulco writes:

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

anonymous writes: 

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

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

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

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

Rocky Humbert adds:

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

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

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

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

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

Jeff Watson writes: 

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

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

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

Steve Ellison writes:

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

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

Russ Sears writes: 

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

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

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

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

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

Gary Rogan adds:

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

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

Jeff Rollert writes:

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

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

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

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

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

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

You guys often remind me of that lesson too!



A quick check of the last 61 annual changes in the S&P 500 index shows no significant difference in net changes between years immediately following changes of 20% or more and other years. The average net change one year after a gain of 20% or more was 11%, slightly higher than the average net change of 8%, but with t=0.79, so consistent with randomness.

Sorted by previous year change:

Date        Close   Change  Previous year change
12/30/1955   45.48     26%     45%
12/31/1959   59.89      8%     38%
12/31/1996  740.74     20%     34%
12/31/1976  107.46     19%     32%
12/31/1998 1229.23     27%     31%
12/31/1990  330.22     -7%     27%
12/31/1999 1469.25     20%     27%
12/31/1956   46.67      3%     26%
12/31/2004 1211.92      9%     26%
12/31/1986  242.17     15%     26%
12/31/1992  435.71      4%     26%
12/31/1981  122.55    -10%     26%
12/31/2010 1257.64     13%     23%
12/31/1962   63.10    -12%     23%
12/31/1997  970.43     31%     20%
12/31/1968  103.86      8%     20%

12/29/2000 1320.28    -10%   19.5%
12/30/1977   95.10    -12%     19%
12/31/1964   84.75     13%     19%
12/31/1984  167.24      1%     17%
12/31/1952   26.57     12%     16%
12/31/1973   97.55    -17%     16%
12/30/1983  164.93     17%     15%
12/31/1987  247.09      2%     15%
12/31/2007 1468.36      4%     14%
12/31/1965   92.43      9%     13%
12/30/2011 1257.60      0%     13%
12/29/1989   353.4     27%     12%
12/31/1980  135.76     26%     12%
12/31/1953   24.81     -7%     12%
12/29/1972  118.05     16%     11%
12/30/1966   80.33    -13%      9%
12/30/2005 1248.29      3%      9%
12/30/1960   58.11     -3%      8%
12/31/1969   92.06    -11%      8%
12/30/1994  459.27     -2%      7%
12/31/1993  466.45      7%      4%
12/31/2008  903.25    -38%      4%
12/29/2006 1418.30     14%      3%
12/31/1957   39.99    -14%      3%
12/30/1988  277.72     12%      2%
12/31/1985  211.28     26%      1%
12/31/1979  107.94     12%      1%
12/31/1971  102.09     11%      0%
12/31/2012 1426.19     13%      0%
12/29/1995  615.93     34%     -2%
12/29/1961   71.55     23%     -3%
12/31/1991  417.09     26%     -7%
12/31/1954   35.98     45%     -7%
12/31/1982  140.64     15%    -10%
12/31/2001 1148.08    -13%    -10%
12/31/1970   92.15      0%    -11%
12/29/1978   96.11      1%    -12%
12/31/1963   75.02     19%    -12%
12/31/2002  879.82    -23%    -13%
12/29/1967   96.47     20%    -13%
12/31/1958   55.21     38%    -14%
12/31/1974   68.56    -30%    -17%
12/31/2003 1111.92     26%    -23%
12/31/1975   90.19     32%    -30%
12/31/2009 1115.10     23%    -38%
Of the 58 years from 1951 to 2008, 49 were followed by at least one down year within the next four. The only exceptions were 1981-1985, 1994-1995, and 2002-2003 (and each of these periods included at least one year with a 20% or greater gain).



I tested the DeMark Sequential system, as best I could understand it from the information I could find, on S&P 500 futures daily bars about a year ago and found that there were some strikingly good calls on buy signals, including on October 4, 2011 just before a monster rally, but only 14 buy signals in 29 years. Results of the sell signals appeared consistent with randomness.



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

Steve Ellison writes: 

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

Stefan Jovanovich writes: 

Details, details:

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

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

Jim Sogi writes:

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

Gary Rogan writes:

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

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

Vince Fulco writes:

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

Tim Melvin writes: 

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

Anonymous adds:


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

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

How about when the White House issues exemptions to Obamacare?

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

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

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

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

Jim Sogi writes: 

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

David Lilienfeld writes: 

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

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

A better paradigm for guidance might be the Persian Empire.

Gary Rogan writes: 

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

David Lilienfeld adds: 

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



Thie largest building in the world is expected to open right before Chengdu, a city in the southwestern Sichuan province of China, hosts the Fortune Global Forum in June of 2013.

This video is a virtual reality tour of the compound.

Steve Ellison writes:

It will be the largest building, not the tallest building, so it may be exempt from the Chair's theory that constructing the world's tallest building is a sign of hubris (for example, the Empire State Building was begun near the end of the 1920s boom and finished just as the Great Depression was intensifying).



Let's examine the limit order in more detail. There are essentially three scenarios that can occur when you place a limit order. One - you are brilliant. You caught the bottom, nicked the top and got in at an excellent price and can now manage a trade with great risk/reward profile. Two, you were right on the overall direction of the instrument but because you tried to be cute with price you missed your entry and now watch wistfully as prices move away from you while you remain empty handed. Three - you got your fill and now you wish you hadn't as price continues in the opposite direction of your bet.

So in summary in two out of three cases you have a negative outcome. Now if you happen to be a superb market timer that may not matter, but if you are just an average Joe (and we all are) then your chances of execution are basically 33% on each scenario which means your chance of winning is only 33%. That's why limit orders are a sucker's bet. They play to our desire for a bargain, but in the end they cost much more than we think.

Steve Ellison writes: 

"… your chance of winning is only 33%. That's why limit orders are a sucker's bet."

Here is a quick test of that proposition.

Imagine that traders A, B, and C each make at most one round trip trade in the S&P 500 futures every week. Trader C is a permabull, so every Sunday afternoon when Globex opens, he immediately buys the contract. He sells at the close on Friday.

Trader B wants to only "trade in the direction of the price flow", so he only buys the contract if it goes up 5 points from the Sunday open. Then he sells at the close on Friday.

Trader A fancies himself a tough negotiator and places a limit order 5 points below the Sunday open. He is last in line, so his order is only filled if the price drops to 5.25 points below the Sunday open. If filled, he also sells at the close on Friday.

Here is how each trader would have fared in the last 64 weeks.

Trader A, the user of limit orders, would have had 59 of 64 orders filled. He would have been "too cute" 5 times and missed out on big gains. 7 of his fills would have suffered from adverse selection as the market continued down, and trader B stayed out of the market. Trader A's net profit on his 59 trades was 223 points. 37 of the 59 trades were profitable.

Hence the 2 out of 3 things that can go wrong with limit orders occurred less than 20% of the time empirically. Trader A won far more than 33% of the time. Even after detrending the data to correct for the upward drift during the period, trader A's limit orders were profitable 34 of 59 times (58%).

Trader B would have avoided all the adverse selection weeks in which the market did nothing but go down. However, his net profit on his 57 trades would have been only 53 points.

Trader C, the always-in trader, would have traded all 64 weeks and had a net profit of 172 points.

In this test, the user of limit orders did better than the follower of price flow.

Sample data:

Week          Net profit
Ending   Trader A  Trader B Trader C
 7/8/2011    12.4     2.4      7.4
7/15/2011   -18.6      –    -23.6
7/22/2011    32.1    22.1     27.1
7/29/2011   -36.7   -46.7    -41.7
 8/5/2011  -100.4  -110.4   -105.4
8/12/2011    12.1     2.1      7.1
8/19/2011   -50.4   -60.4    -55.4
8/26/2011    59.4    49.4     54.4
 9/2/2011    -1.7   -11.7     -6.7
 9/9/2011    -2.6   -12.6     -7.6
9/16/2011    79.7    69.7     74.7
9/23/2011   -65.2   -75.2    -70.2
9/30/2011     9.2    -0.8      4.2
10/7/2011    35.9    25.9     30.9
10/14/2011     —    56.2     61.2
10/21/2011   22.0    12.0     17.0



 Having internalized some basic aspects of wave counts, such as alternation of corrective waves within a motive wave, coming back to the counts produced by Advanced GET is a strange experience, as the software-generated counts seem quite wrong.

Have others, as I now have, given up using software to mark the key wave points? Of course one would still use a software grid to mark Fibonacci retracements.

Anatoly Veltman writes: 

Actually, Advanced Get by Tom Joseph was very good when first introduced in late 80's-early 90's. Trick was that one should have also attended Tom's weekend workshop (mostly held near an airport in Ohio), to be tipped on the whole essence: type 1 and type 2 trades, wave 4 index and oscilator. Without figuring out when Wave 4's odds diminish to unacceptable — there is no reliable Elliott Wave trading. And Fib retracements are great — but ONLY if EW type 1 or type 2 trade has first been isolated. I taught Tom's methods for about 15 years. Not sure if any of my students succeeded in black-boxing the entire methodology.

Tim Melvin writes:

Did someone really say fibonacci on the spec list? This could get interesting if it is anything like the old days…

Anatoly Veltman writes: 

Well, that's the whole point. Loving to say Fib doesn't test well– when the wrong application was tested to begin with.

Phil McDonnell writes: 

To be sure one must test something according to the right way of doing things. However that is exactly the problem with wave counts and the like. The rules are so arcane and convoluted even so called experts disagree on them.

If you get 5 different Elliot exerts in a room you will get 5 different wave counts at the same time. It is a bit like the game of Fizzbin. The rules keep changing and are unnecessarily complex. 

Leo Jia writes: 

I think one probably should take this argument as a not-bad news for Elliot theory or any theory that gives non-consenting results. It means that it likely has some statistical truth in it that is worth one's effort in seeking. Don't we agree that a market theory delivering definitive results does not exist or, if exists, ought to be thrown out?

Steve Ellison writes: 

Trying to stay in line with our raison d'etre, I have been coding a method for retrospectively identifying highs and lows of multiple levels of significance.

My approach is to go bottom up, starting with an idea I got from one of the Senator's books. A local high is a bar whose close is higher than the closes of both the previous bar and the following bar. A local low is a bar whose close is lower than the closes of both the previous bar and the following bar (a sequence of 2 or more bars with equal closes count as one bar for this purpose).

After identifying the local highs and lows, I move up a level. A 2nd level high is one that is higher than both the preceding local high and the following local high. A 2nd level high cannot be recognized until one bar after the lower local high that follows the 2nd level high. I record the time at which the 2nd level high could have been recognized.

I follow similar rules to identify 3rd level, 4th level, etc., highs and lows and the times at which they could have been recognized in retrospect.

I haven't finished yet, but this method should give me a platform for testing hypotheses about "primary trends", etc.

Anatoly Veltman writes:

Tom Joseph's contribution to E.W. trading, in my view, was much greater than Prechter's or RN.Elliott's. Tom basically said with his excellent refined Type 1 trade: don't ever place any bid, unless:

1) you've already observed a valid impulse (with extended third wave)
2) a correction is currently in progress, approaching 38% of preceding rally
3) you're filtering this correction with oscilator return to 0, and fourth-wave index still sufficient for fifth wave
4) fifth wave projection extends to at least 2:1 profit/loss ratio, incl. all possible slippage.

I say: if all these conditions are not met (and this may not occur every day) - never place a bid at 38% retracement. If all these conditions are not met, you'll have to bid only at near-100% retracement. What does this principle have to do with popular E.W. or popular Fibonacci methods. Nothing!!

Laurence Glazier writes: 

Sure, things are complicated and one would not wish to poke a stick into a hornets nest, but … some things are complicated.

It took hundreds of years to elicit the laws of harmony from the canon of classical music (many to this day deny their existence). Put five composers in a room and have them harmonise a tune (the non-believers might refuse to!), and they will do it five different ways, but they will all have added to the map of knowledge.

Even knowing those laws, one could not reasonably predict how a piece of music would continue if Pause were pressed (unless it were minimalist) - but one might anticipate it would return to the tonic key, and that the free fantasia would not be over-long, and so on.

Those laws are difficult, unprovable, and without material substance but are the result of empirical observation.

Gibbons Burke writes: 

CTA E.W. Dreiss used, in the 1990s, a very similar way to count waves in the market using what he called the Fractal Wave Algorithm (FWA), and he traded futures breakouts from FWA-n magnitude highs and lows. Did quite well, but like all trend followers, it is a bumpy ride.

He also came up with the Choppiness Index, which sums the true ranges in the last n periods, and takes that as a ratio of the n-day range.

Jason Ruspini writes: 

This is the natural approach that I took as well. Ignoring the "correct" 1-5 definitions, I just looked for a run of higher such double-X highs and higher double-X lows identifiable with the necessary lag, with attention to what happens when you eventually get a lower major high/low, breaking the "wave" run count, which can keep going after 5. What I found wasn't very interesting, in-line with my previous comment. I'm still unclear if anyone is actually trading a tested (complicated) system or just applying versions of rules with discretion. If it is a tested system, why is it better than a simple long-term momentum system?

George Parkanyi writes:

I like to keep it simple. Many years ago, I read something written by Larry that said, when the commercials are generally substantially more net long or short than specs - that tends to stop trends and turn markets the other way. He admitted it was a rough rule of thumb - that it may take a while to turn the tanker - but I pay attention and time after time I've got to say it works. So right now two markets that fit that profile are coffee and to a little lesser extent sugar. (Oh yeah, VIX as well) I've been long both for a couple of weeks with modest starting positions, and just had a nibble at VIX. I don't know when the trends will turn and I may have to take a stop or two, but I like the chances for a good position-trade in these two markets - and VIX as a bet on a short-term post-Fed hang-over. I checked back to when coffee started this particular big decline - and it was within two weeks of when commercials were selling the crap out of it and their net-short positions had peaked. Gold and a number of other commodities did the same thing at the beginning of this rally that began in May - except that the commercials were the only buyers at the time. It may be a dumb-as-dirt perspective on my part, and will likely set off Anatoly - but its one thing that has stuck with me from reading a number of Larry's books.



 We did our refi at 3.5%. I keep hearing about a renaissance in the US housing market, with Toll claiming it has pricing power. Yet mortgage rates continue to drop. This makes no sense to me. If the market for homes is coming back, shouldn't mortgage demand be increasing –leading to higher rates, not lower ones?

Phil McDonnell writes: 

If mortgage demand is increasing and that is the only variable that has changed then mortgage rates should be rising. But that is not the only variable that has changed over the last couple of years.Helicopter Ben has been flooding the market with easy money via QEn. that is the dominant factor.

Steve Ellison writes: 

In Foreclosure City where I live, sales activity is very brisk at prices 60% off 2006 levels. Homes that are priced appropriately are selling very quickly, and inventory is very low since a new state law went into effect that required lenders to prove they actually held the mortgage before foreclosing.



Considering that the 8/1 open market meeting issued a very disappointing statement about the prospects for easing, and the market went down about 2 % from the announcement to other next day, you would think that there could have been a more balanced release that stated how many members were waiting in the wings to be accommodative at the sign of the first easing. Let us hope that the sensibilities of any flexions were not discommoded by this decoy as much as the public.

Steve Ellison writes:

It seems most of the investing public was driven out by the 2000-2002 dot com crash, and the survivors were decimated in 2008. In this respect, the upside down man's pronouncements seem like piling on. I know he wants people to buy bonds instead of stocks, but he has already triumphed completely in this regard. How could anybody reviewing the past 12 years not conclude that "gentlemen prefer bonds"?



What of the threat stringing out past the point of threat into a sleep? Market fatigue waiting for the euro mess to resolve, Iran to be bombed, Syria to fall, nat gas to get a pulse, gold to restart, Japan to rise again, GE to come, etc.

Steve Ellison writes: 

Natural gas, 6/15/2012: 2.467 (July contract)

2.196 (adjusted for rolls to August and September)

Natural gas now: 2.752 (September contract)

That's a 23% increase.



An unusual consilience of 6 consecutive 20 days maxs in S&P futures has occurred in the last days.

It is interesting to put some stats on table for frequencies of how often such events have occurred in last 17 years.

Number of consecutive 20 day extremes                                          

           min                          max                                          

1         204                     313                                          

2          95                     165                                          

3          37                      88                                          

4          17                       50                                         

5           9                      17                                          

6           5                         9                                        

7          0                         4                                          

8          0                         2                                           

9                                    1                                          

10                                   1                                         

11                                   0                                         

In case my formatting didn't come across on your screens, the number of consecutive 20 day minima starting from 1 and going to 8 was 203, 95, 37, 17, 9, 5, 0 , 0

The number of consecutive 20 day maxima starting from 1 and going to 11 was 313,165, 88, 50, 17, 9, 4, 2, 1, 1, 0.

It is interesting to note the falloffs in consecutive maxs from 4 to 5 and the fall offs in consecutive minima from 2 to 3.

Steve Ellison writes: 

If markets were efficient, one would expect a 50% probability that a run of n consecutive highs/lows would become a run of n+1. In this dataset, of 1017 runs of n, 500 (49.2%) became runs of n+1. That doesn't seem far off 50%, but p=.31 by the binomial distribution.

There was an upward bias to the S&P 500 in the past 17 years, so not surprisingly the results are more extreme when split into highs and lows. Only 163 of 367 runs of n consecutive lows became runs of n+1, an apparent p of .02, if one neglects to detrend the data. 337 of 650 runs of n consecutive highs became runs of n+1.



 The upside down man's objection: "If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year" is easily rebutted by Philip Carret's observation that common stock is like a leveraged investment. Bondholders are first in line to be paid, but their claims are fixed, so all upside of earnings beyond a fixed percentage belongs to stockholders (as does all downside if the company fails to perform). If the typical capital structure is 50% debt and 50% equity, the typical common stock is a 2:1 leveraged investment, so an expected return approaching 2x GDP growth would not be unreasonable.

Stefan Jovanovich writes: 

There is a complimentary explanation. GDP figures are a sub-set derived from the monetary Marxist notion that nominal expenditure by the government is just the same as voluntary private spending. (This is the same notion that the CIA and all the Galbraithians depended on to decide in the 1970s and 1980s that the Soviet Union had matched or even surpassed the US in economic output.) Er, no. Sherman Tanks may be useful and necessary but their "cost" is not the same measure as the spending to buy a combine harvester. The same applies to civil service pay versus private payrolls; the one measures a Keynesian cost, the other measures an expenditure in search of profit. It should hardly be surprising that, in order to support the dead weight of wars and "public" investments that no private market demands, the equity residual has to grow at twice the rate of the overall "economy" measured in nominal Marxist terms.

Ralph Vince writes: 


Yes, this was the case I made on this or a related list about 4-8 weeks ago and had my economic naivete was assailed. In fact, I would posit that not only should government expenditures NOT be included in the positive column of GDP, but rather might best be place in the negative column. A good portion of government spending is in the form of capital outflows, interest payments to foreign entities, outright gifts to foreign entities (when we give the UN a billion dollars, is that really a billion dollars added to out GDP? 10 billion to Israel, does not increase our GDP by 10 billion), nation building (building schools in Afghanistan does not increase GDP). Outflows such as exports, count on the negative side of the GDP ledger — so too should government spending, or at best, it should be a wash.

If GDP growth is anemic now, remove the YoY increase in government spending from GDP and it's a pretty bleak picture in recent years (and no, I'm not being political about the Oreo presidency of the past 11 1/2 years. Same guy, same party, same people, different faces and names).



There is much pessimism on the site about the stock market. One thing I always like to ask is suppose it were true that the economy is really going to be weaker than people expect. Like we'll have 1 or 2% growth rather than 2 or 3. Why should this affect stock prices? What is the evidence that stocks do worse during periods of below average growth? Why should it matter? How does the rate of return on capital of businesses compare to the 30 year rate as stocks are valued based on discounted value of expected future earnings adjusted for risk, with the growth rate of earnings being determined by the rate of return on capital less the pay out on dividends rate. Is it better to buy stocks when people are pessimistic or optimistic?

All these things must be tested. I'm not saying that I'm bullish or bearish on stocks or that one should be. I'm just questioning the glue and the weakness type of stuff. Assuming it was true, which I doubt, why should that be bullish or bearish? Testing is required.

Steve Ellison writes: 

A regression of the 1-year S&P 500 return from 1981 to 2010 against the US unemployment rate reported the previous December shows a 16% positive correlation, with the regression line for the next year's S&P 500 net change being -1.9% + (1.9 * unemployment rate).

t=0.86, p=0.40

Leo Jia writes: 

I often ask myself similar questions but can not answer them. Perhaps one has to answer this question first: what percentage of the people in the market are rational? Or rather, what percentage of the money in the market is rational? Though I don't have an answer, I tend to believe that there is more irrational money than rational money in general. The clear problem is that the degree varies all the time.

J.T Holley writes: 

With the std dev of 18% and annual rate of 8-9%, I'll order a double helpin' of "drift" with a side of "thank you".

If that meal doesn't fill you up then you must question where you get your meals and disregard the gratuity the next time you sup.

Tim Melvin writes: 

Drift only exists if you have a 100 year time frame in my opinion. See 1970s and 2000 to present. Much of investing success last fifty years for most investors is result of membership in lucky sperm club.

Craig Mee writes: 

Doesn't one new variable in a mix during the testing period influence the outcome– QE, no QE, etc etc…(sure, there's been other ways of doing it). But how to judge what has the over riding influence on the outcome? This could vary under certain conditions. How much of the US equity recent rise is in default of Europe, just like EURGBP taking the heat…and how much of the current price is underpinning based on QE to come?

What has recent price action illustrated, if anything at all…

How should weaker growth effect share prices? I would argue that this would just be a further nail in the coffin, when all the ducks are lining up, but how can we say it's got more weight currently than some other significant half ? It's tough. Are the number of running variables any different than twenty years ago? Maybe not. Are market conditions, HFT, leverage, number of participants in the market any different? Certainly. Has this influenced price action? Maybe Richard Dennis may have some views here.

When does the variation in conditions influence the ability to test? I suppose this might be the question.



 Duveen by S.N. Behrman, the prolific playwright (The Second Man, Fanny) contains a smorgasbord of interesting, amusing, and illuminating grist for the mill of readers interested in marketing, history, and finance. Joseph Duveen (1869-1939) was the most successful dealer in fine arts, or indeed any pricey collectibles in history. He achieved almost a monopoly on selling almost all Italian art painted before the 1700's. His techniques to achieve the monopoly are at once hilarious and instructive. He insisted on paying the highest prices for all paintings that came up at auction or through collectors, and made sure that none of his collectors ever suffered a loss on the market value of any paintings he sold to them. He was the main force behind the collections housed in the National Gallery, the Tate Gallery, and the Frick. His customers, included Mellon, Kress, Rockefeller, Hearst, Frick, Morgan, Altman, Huntington, Bache, Goldman (of Goldman Sachs), Widener, Rockefeller and almost every other magnate of his time.

A key feature of his selling method included preparing a catalogue of the collector's holdings that immortalized the collection and the collector. The one magnate he wasn't successful with, Henry Ford, is the subject of a hilarious story. Duveen presented a catalogue to Ford with all the greatest pictures available in the 30s. Ford said it was such a beautiful book, that there was no reason for him to buy the pictures.

On other occasions, he refused to sell to a collector, until his collection has reached a certain point of grandeur. He always insisted that he could sell his best paintings to Mellon or Kress so why would he wish to sell to a mere millionaire who was not one of his favored customers already. In this technique he predated Madoff. In describing his methods, Mrs. Hearst said, "Duveen didn't want to sell any of his paintings. But his customers always badgered the poor fellow until he gave in."

 He liked to buy entire collections, and stored the collections in palatial dealing rooms that he maintained in London and New York. His mantra was that "Europe had the paintings but America had the money" so his main customers were the American industrialists, and 5 and 10 centimillionaires of his era.

His financing method was to use his paintings as collateral for loans, and to buy up all good collections and store them until the values increased. He was able to beggar his brothers and sisters by buying up their interests and refusing to pay them off during his lifetime. He didn't understand the concept of interest on money, and gave his collectors infinite time to pay their debts to him. Yet during this time, he had to borrow from banks like the Mellon and pay enormous interest. In addition, he had heavy expenses from maintaining his business and paying off all his runners, and finders across the world. Thus, he was always cash poor during his life.

He bought out all the interests in his family but didn't pay them off during his lifetime. The main problem in his financing was that he had to pay cash for everything he bought but he gave unlimited credit to all his customers. A favorite technique was to lend a painting to a collector to hang in his home or gallery for several years, while he became acquainted with the painting. He liked to say that the painting was the one asset that a collector could buy that would cost him no upkeep, and give him constant enjoyment from viewing it. They were unable to sue because he was the only one that could sell the paintings in his inventory.

 Behrman believed that the main customers were lonely, silent men who were ashamed of how they obtained their wealth, and unhappy with the ne'er do wells in their family. Through the paintings they gained respect and immortality. And the paintings never talked back to them, became playboys or died in race track accidents like their children.

Duveen had many partnerships with those who could aid him in his marketing. One was with Bernard Berenson, who vetted all his pictures, and received a commission on all that Duveen sold. Berenson eventually turned on Duveen, when the two had a bitter fight about the authenticity of a Titian that Duveen wanted to sell. Other partnerships were with the butlers and comptrollers of all his customers so that he could get advance knowledge of what they had to sell, and when they were in a mode of buying.

One of his marketing techniques was to buy up all the English and Impressionist paintings of the era that his collectors had in their possession, so that they would not be tempted to add to their collections. He liked to upgrade his customers into buying only the best paintings and eschewing all commercial items. He found out early that his collectors liked pictures of pretty woman, with bright colors and action in his paintings that came from English Nobility. And when a great masterpiece came up without these characteristics he would buy them but not try to sell them, and store them in his warehouse. He liked to say, "it is much easier to sell a second rate picture that has belonged to any English nobleman than a first rate one that has belonged to a treat man of the Italian nobility."

Duveen got his start selling Delft antiques that his poor family collected in Holland. He learned all the techniques of selling from his family's antique furniture business. But he soon came to the conclusion that it was much better to sell million dollar paintings than $ 5,000 rugs and medals. The book is sprinkled with great anecdotes and selling procedures of the time. For example, when he found a Da Vinci that a Russian countess was selling, he had first to pay for an option to buy the piece at a set price of 1 million. But then it had to be offered to the Tsar at that price before he could buy it.

Behrman, the author, is one of those 20th century men who despised business people. He took pleasure in thinking that Duveens' customers were "scrupulously dishonest". And he seemed to think it fair that Duveen was equally dishonest with the customers. He fails to note that people like Kress, and Woolworth, and Rockefeller, the billionaires of his day got their wealth from selling goods to the masses that uplifted their standards of living and gave them the comforts that the richest of two generations back couldn't buy. Behrman writes, "as his customers aged, they felt guilt about such things as machinegunning the strikers at their mines, they were characterized as exploiters of the poor and the source of their misery. they felt futility and hostility closing in around them, they longed passionately for the happy company, in the even darker regions ahead." Duveen's paintings and persona provided that company and relief from their guilt.

 Duveen was always cash poor, as he had enormous overhead and inventory from carrying all the items that were out of favor. He also maintained a lavish life style and was constantly giving works of art, and paying for the buildings of the institutions that ultimately housed the paintings like the Tate and The National Gallery. His New York Gallery was built at enormous expense on the corner of 56th street and Fifth Avenue, currently the Bendel building, but then called the Ministry of Maine. His family complained about the expense but Duveen assured them he had "all the pictures sold". The family said "show us the bills of sale". Eventually when he died, he made a big sale to Mellon, and was able to pay off all his debts and died with an estate of about 7.5 million pounds, the first time he was solvent and debt free in his life.

After he died a rival dealer said "We miss him but we are glad he is gone". What can we learn from Duveen? He had a complete marketing operation, with tentacles in every aspect of the supply and demand chain, paying every conceivable source of supply with bribes and emoluments. In this he reminds one of the publicity hungry flexions that run conglomerates of today, especially those in the Midwest, with their politician antennae always attuned to the sources of cheap goods that they can get ahead of everyone else.

He liked to pay the highest prices for things, maintaining the market for his goods and creating enthusiasm among his customers. He was completely attentive to the needs of his customers and would do anything to please them, thereby showing the wisdom of the motto used by most great businesses that "the customer is always right", and taking back items with no questions asked at the original selling price regardless of the legitimacy of the complaint. He maintained the viability of his market by buying up all goods that came to it, thereby insuring that his customers always made a profit. But after he died, the prices of all his goods suffered a terrific fall. He was a master at manipulating markets. He bought goods, not because he expected to make a immediate or reasonable profit on them, but in order to maintain the illusion that none of his customers ever sold a painting at a loss, and that his favored 400 year old Italian masters would never decline in value. The importance of running stops, and hitting the exercise price of knock out options comes to mind.

I'd like your comments on what we can learn from Duveen. 

Steve Ellison writes: 

His operation sounds like a corner.



 Cotton, sugar, corn, and soybeans all have significant backwardation between the July contracts nearing first notice and the new harvest contracts. The entire forward pricing curve is backwardated for soybeans, but the curves for cotton and sugar reverse to contango.

Jul’12 1379.75
Nov’12 1316.50
Nov’13 1189.50

Jul’12 80.04
Dec’12 71.15
Dec’13 76.70

Jul’12 20.77
Oct’12 20.01
Oct’13 20.95

Harry Kat found that commodities in backwardation are more likely to positive returns, and commodities in contango to have negative returns.



 Last night's Stanley Cup final game illustrated the Chair's point about diversion of energy. Having lost the first three games of the best-of-7 final to the Los Angeles Kings, the New Jersey Devils won two games and could have tied the series with a victory last night. Early in the game, the Kings' Jarret Stoll put a late hit on the Devils' Steven Gionta from behind and went unpenalized. Seconds later, the Kings' Rob Scuderi retrieved the puck. After Scuderi passed the puck to a teammate, the Devils' Steve Bernier hit Scuderi late from behind, drawing blood. The officials threw the book at Bernier, assessing a 5-minute penalty and ejecting Bernier from the game. During the 5-minute penalty, the Kings scored three goals. The television announcers noted that the Devils' coach and players were furious at the officials for the gross inconsistency in responding to the two late hits. And, it seemed, the Devils had a valid point. Nevertheless, they went on to lose the game, 6-1.



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

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

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

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

Steve Ellison adds: 

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

Jim Sogi writes:

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

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

Gary Rogan adds: 

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

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

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



A friend told me recently that gold mining stocks had been declining much more sharply than the price of gold. He therefore thought the stocks were undervalued.

Attached is a graph of the ratio of GDX (the gold mining ETF) to GLD (the physical gold ETF) with a 50-day moving average and Bollinger bands.

Here are the changes in the ratio in the next 50 days after the ratio of GDX to GLD fell below the lower Bollinger band. There have been only 15 non-overlapping occurrences since both ETFs began trading.

Next 50 days
             GDX      GLD  GDX/GLD   Ratio     GDX     GLD
Date      Adj Close Adj Clos   Ratio  change  change  change
1/18/2007    35.92    62.26  0.5769    1.4%    7.0%    5.6%
8/15/2007    35.42    66.13  0.5356   13.2%   30.2%   15.0%
11/19/2007   44.16    77.24  0.5717   -4.9%   10.0%   15.7%
 2/6/2008    46.34    88.95  0.5210    3.2%    5.1%    1.9%
4/24/2008    43.78    87.22  0.5019   -0.2%    4.4%    4.6%
7/24/2008    43.48    91.33  0.4761  -27.0%  -34.0%   -9.6%
10/3/2008    28.70    82.59  0.3475    4.4%    4.5%    0.0%
 3/2/2009    30.72    90.93  0.3378   25.6%   25.3%   -0.3%
1/21/2010    43.33   107.37  0.4036    3.8%    7.2%    3.3%
10/19/2010   54.01   130.11  0.4151    6.7%   12.4%    5.3%
 1/6/2011    56.58   133.83  0.4228   -1.7%    2.2%    4.0%
 5/2/2011    59.95   150.41  0.3986   -3.8%   -1.4%    2.5%
 8/5/2011    55.26   161.75  0.3416    1.6%    2.1%    0.5%
12/19/2011   51.02   154.87  0.3294    0.0%    7.4%    7.4%
3/14/2012    50.12   159.57  0.3141   -6.2%  -11.0%   -5.1%

Avg                                     1.1%    4.8%    3.4%
Std. dev                               11.1%   14.6%    6.5%
N                                         15      15      15
t                                       0.38    1.05    0.24



 I'm reading Trading as a Business by Charlie Wright. Pretty good book profiling the evolution from discretionary trader to systematic trader. One of those books where I found myself laughing at having been down the paths. More trend following oriented but I think it is a pretty good synopsis of the systematic world and he covers some bases that added value in terms of elements to consider in one's trading (or at least mine). Decent set of checklists.

Do systematically inclined speculators recommend similar books (besides Victor Niederhoffer's and Larry Williams books).

Also, Tradestation seems to do most anything a trader would want in terms of trend following testing. I have never used it though.


George Parkanyi writes:

The only flaw I find with systems is that they immediately stop working as soon as you try to use them. I think people need to do more research on fading systems.

Christopher Tucker writes: 

Where's the "like" button on the Speclist?

Steve Ellison adds: 

Yes, even systems I developed myself stop working when I try to use them because of data mining bias. Even if there legitimately is an edge, some component of the good backtesting performance is better-than-average luck. 

Leo Jia writes: 

The word "enlightened discretionary" is very appealing. The reason for it, I guess, is because of the word "enlightened" more than the word "discretionary". Everyone hopes to be enlightened in someway. Being enlightened seems to be a spiritual consummation. But I guess that is not the first and real reason why people are after being enlightened. The real reason is that it is mystic and mostly unattainable. This coincides with a human nature of always craving for what they don't have, which is among the reasons why most people are persistently unhappy.

I feel preferring discretion to system is quite illogical. Aren't whatever rules one uses as a discretion by nature a system? It perhaps is not explicitly sketched out, but it by all means is a system of rules that resides in one's head. Couldn't that be phrased and then programmed? I agree some are not very easy. But are they really impossible?

Gary Phillips writes: 

I've been doing this long enough to instinctively know what works and what doesn't. I only need to look at my P&L for empirical confirmation. If in doubt I just try to see the market for what it is and not what it appears to be. One needs to understand market structure, liquidity, and price action and develop a framework for analyzing the market, somewhere between bottom-up & top-down lies the sweet spot. This allows you to see the market in the proper context and provides you with a compass, which will keep you from feeling lost and will show you the way.

Craig Mee writes: 

Aren't ?

Hi Leo, you probably could say "whatever rules one uses as a discretion by nature is a system", but a system may not have the ability to load up once the move kicks (obviously it can be programmed) but at times the opportunity may appear intuitive, and  a trader can do that on relatively short notice, whilst keeping initial risk limited.

Interesting, Gary, the issue with systems seems to be at times data mining against price action and structure which gives strength of understanding. The HFT may work on massive turnover, low commissions and effectively front running, and unless you have those edges then it appears difficult to succeed from a data mining basis (and relatively scary trading something that you don't effectively understand from a logical point of view). However classifying a markets structure, and working off 3-4 premises no more, (as I believe more would allow any edge to be diluted across a range of options), and the ability to leverage once on a move, appears to be something you can work with. This is purely from a hands on execution basis, no doubt the pure programmers can weigh in.

I remember speaking to a guy who professionally programs for others… (admittedly a lot of retail), and we were talking about what are the laws in place for him to not front run me after developing a system I gave him…and he was like "mate, to be honest (probably insinuating "dont flatter yourself") 97% don't make a dime." That was certainly probably expected I suppose, but to hear it in technicolour was confronting and I was surprised he said as much.

Gary Phillips writes: 

I really don't believe that discretionary trading today, is any harder than it used to be. The emotional aspects, and risk management, have essentially remained the same. Methodology is different, because algorithmic driven HFTrading has forced intra-day traders to change from momentum chasers to mean reversion traders. And as you stated, there are countless global/macro concerns as a result of the financial crisis and continued global easing. So, it does demand a broader universe of knowledge, and revamped techniques and benchmarks, but it still boils down to identifying what is truly driving price and how it is being driven. 

I guess this is what gives you the elusive *edge*. But, as we used to say the *edge* can sometimes be the *ledge.* That being said, trading doesn't have to be about being right or wrong the market, or predicting where the market is headed in the next moment, hour, day or week. Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results.


Kim Zussman writes: 

"Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results."

One would suggest that trading is a waste of time if your historical or expected mean are random.



Wondering what the statisticians on Dailyspec think of this Atlantic article "When Correllation is not Causation but Something Much More Screwy" :

One of [UCLA professor Judas] Pearl's most interesting deductions is the idea of conditioning on a collider. If a case being observed is a function of two variables then this will induce an artifactual negative correlation between the variables. This is true even if in the broader population there is no correlation (or even a mild positive correlation) between the variables.

The article cites Professor Cowen's rules for dining out:

Assume that the two main things that let restaurants succeed are food quality and various other things that we can collectively call atmosphere. The logic of conditioning on a collider implies that among surviving restaurants there should be a negative correlation between atmosphere and food. This implies that if you are monomaniacally focused on good food you should follow the heuristic of avoiding fashionistas and seeking out unpopular ethnic groups as the only way such places could possibly stay in business is if they offer good food.



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

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

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

Victor Niederhoffer adds:

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

Tim Melvin writes:

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

Laurel Kenner adds: 

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

Steve Ellison adds:

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

Kurt Specht comments:

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

Ken Drees adds: 

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

From wikipedia

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

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

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

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

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

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

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

Gary Rogan writes: 

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

The Upas Tree

by Alexander Sergeyevich Pushkin

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

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

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

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

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

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

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

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

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



 The % of manufactures that saw increasing orders went from 53 % to 54.8 % this month, and it caused a break in the round and a 1% up move. Let's say there are 1000 or n manufactures who report in the survey. The standard error of a proportion is 1/2 divided by the square root of n, i.e. 1/60. Thus the actual proportion is less than 1 standard error away from expectation, a 35% shot by randomness to say nothing for the quantum increases in randomness caused by faulty seasonal adjustments. When you add in that manufacturing these days represents 10 or 20% of the economy, it's pretty iffy all around. That's what makes the markets run.

Steve Ellison writes:

If we are generous and estimate "more than 300" as 399 respondents, the margin of error for a 54.8% result is 4.9%, if Manta's listing of 45,000 US manufacturing companies is a rough approximation of the population.

Victor Niederhoffer replies: 

As Sholem Alechem would say, "we are both right".

Anton Johnson adds:

An off topic anecdote. For those don't who use Gmail, they mine email text to provide targeted ads. From time to time I get a chuckle at what AdWords elicits for me. Today, from Vic's "sholem alechem" comment, the algo determined that soon I will be travelling to Israel and require lodging in Tel Aviv.



I defined a Flexion Index as the z score of the price of XLF relative to its 39-week average and standard deviation (for example, a z score of -2 would mean the price was on the lower Bollinger Band). My theory is that flexions are happy when the index is above zero because their stocks are going up and they are getting bonuses. When the index is below -1, the flexions are in distress and likely to clamor for bailouts and accomodative monetary policy.

Regressing the net change in SPY in the next 39 weeks against the z score of XLF, I found a positive correlation with N=16 and t=1.40 (scatter plot below). Too few observations for significance; furthermore, 30 weeks into a 39-week period that started with a z score of -2.37 last September, SPY so far has nearly a 20% gain.

   39-week               Change in SPY
  Date             XLF  average   z score  next 39 weeks
 9/17/1999   22.91  24.84   -1.58     9.6%
 6/16/2000   24.00  23.45    0.33   -21.5%
 3/16/2001   25.95  27.58   -1.11    -1.6%
12/14/2001   25.50  26.64   -0.70   -20.7%
 9/13/2002   22.37  25.35   -1.66    11.0%
 6/13/2003   25.34  22.38    2.16    13.1%
 3/12/2004   29.57  27.03    1.51     6.0%
12/10/2004   30.04  28.66    1.83     4.4%
 9/9/2005   29.87  29.45    0.54     0.6%
 6/9/2006   32.69  31.92    0.58    12.3%
 3/9/2007   35.87  34.92    0.52     7.2%
 12/7/2007   31.20  34.79   -1.50   -17.6%
 9/5/2008   21.74  24.72   -1.00   -24.0%
 6/5/2009   12.32  12.12    0.05    20.8%
 3/5/2010   15.22  14.04    1.07     7.6%
 12/3/2010   15.18  14.90    0.37    -4.1%
 9/2/2011   12.54  15.55   -2.37



 I take the view that most market predictions don't produce statistically sound results.

I believe market condition is a result of human behavior. Although many fundamental human behaviors are predictable with the advancement of behavioral sciences, the market involves more than the fundamental human behaviors. The key to it lies in the varying derivative perceptions of market participants.

Let's say the view "since condition A, then the market will rise" is the fundamental perception. A first derivative view, for instance, can be "since all believe the market rises due to condition A, it will fall". A second derivative can then be "since all believe the market falls due to (…), it will rise". And so on.

If the market participants all adhered to one of the principles above, then it would be very easy to predict the market. The thing is that is never the case. The big hands shift views along the derivatives all the time. That is what makes most predictions today unsound.

If we have a way (the big winners should have this talent) to predict which derivative view the big hands take, then the prediction would be more accurate. But then, if many could do that, the game changes again.

Before that happens, let me raise the question here on how one can develop that talent.

Steve Ellison writes: 

This is the principle of ever-changing cycles, as described by Bacon in Secrets of Professional Turf Betting and elaborated on in the Chair's books.

One of Bacon's approaches was to look for good horses that had lost in their most recent races. The memories of the recent losses caused the public to have negative opinions about those horses.

George Parkanyi writes: 

Market movements (which way, how far, and when) cannot be predicted by DEFINITION. The financial markets are a non-linear system. More than three non-correlated variables, and you cannot predict a specific price at a specific future point in time — a mathematical certainty.

However, like many natural cycles, markets exhibit a powerful tendency to revert to the mean. Now that mean moves around and will have its own wobble, but around it there is definitely a clear sinusoidal pattern — actually short and longer term patterns within patterns. Look at any index or commodity chart over an extended period of time. Individual securities will have the same tendency, but the longer term impact of low-probability outliers is more pronounced — your Microsofts or your Lehman Brothers'. The more narrow the influences — the greater the risk (one-trick pony, or bad management risk for example.) If you apply portfolio theory (diversification basically), the risk (and reward) of outliers is significantly diminished, and I believe you can develop successful strategies simply based on price and on the concept of reversion to the mean using indices, sectors, and commodities (anything always economically necessary to greater or lesser degree, that has an extremely low probability of going to zero. Even there it's not quite blow-up risk-free (asbestos didn't really work out.)

You can then more safely use leverage and modulate the range of returns with same. Reversion to the mean requires a large sample size, so you need many sources acting on the main influences on price (large underlying product markets, liquid financial markets), and time. The larger the sample size and the longer the time frame, the more reliable a reversion strategy should be.

The psychology of what Steve alluded above to is reflected in the aggregate behavior (influences on price) mentioned above. If you're going to go for the "bad horses" though, buy several in case one keels over and dies. Now if they all contract a contagious disease from each other…

George Coyle writes:

The 86th episode of Seinfeld was called "The Opposite" and involved George Costanza's experience in cycles.

The plot goes as follows (from wikipedia):

George returns from the beach and decides that every decision that he has ever made has been wrong, and that his life is the exact opposite of what it should be. George tells this to Jerry in Monk's Cafe, who convinces him that "if every instinct you have is wrong, then the opposite would have to be right". George then resolves to start doing the complete opposite of what he would do normally."Of course everything goes right for him from then on (until the end of the episode). While funny it brings up the interesting idea of the Costanza trade. Out sample seldom replicate in sample (probably due to ever changing cycles). How can one figure when to follow the trend of profitability and when to apply the Costanza trade to a perceived winner. 



 I downloaded SPY weekly data from 1/2000. I calculated the open to close change in percentage terms for each week. Next I used the excel function (=WEEKNUM) to find the week number. 1/3/2012 was week 1, 1/30/12 was week 5 which makes this week 7.

I looked back to 1/2000 to see what happens in various weeks (forgive my simplistic counting Rocky, fwiw fundamentally I am wary of being long here). My N was 12 for any period not yet covered in 2012. Only 4/12 week 8s were up (66% down) with an average expectation of -0.80%.

Further only 2/12 week 9s were up (83% down) with an average expectation of -1%.

Market certainly doesn't seem interested in going down and the N is pretty small but probably worth considering.

Steve Ellison writes:

To avoid the problem of multiple comparisons, I would suggest running a simulation in which you randomly reshuffle the weekly changes and sort them into 52 groups. Repeat the random reshuffle 500 or 1000 times . Then tabulate the extremes (highest and lowest number of up weeks in ANY group) for each repetition. You can then sort the extreme results from each repetition and check what the top 2.5% or top 5% of the highest of 52 groups was in the simulation. If you find actual results that exceed these cutoffs, you may be onto something.

There are probably computer programs that will run such a simulation very elegantly; I just use the Excel RAND() function and copy and paste until I have 1000 repetitions




The Chair has noted an unusual percentage of up days recently in the US stock market. In academic studies of simulated trading, this sort of price action occurs when a couple of participants are told the true value of a stock in advance. The uninformed participants trade randomly, and the informed participants' trading moves the price in the direction of true value. I don't think that is what is happening now–insiders have sold 2.5 times as many shares as they have bought in the past two months. The wave of money is coming from elsewhere.

In an attempt to quantify what is happening, I divided the last 1800 days of S&P 500 trading into 90 20-day periods. For each period I calculated the average daily percentage change and the standard deviation of the daily changes. I divided the average daily change by the standard deviation to get an estimate of how far the market was moving relative to volatility.

In the 20 trading days ending February 10, 2012, the average daily net change of the S&P 500 emini contract was 0.19% with a standard deviation of 0.48%. The ratio of average change to standard deviation was 39%, the 7th highest ratio in the 90 20-day periods (and the 8th highest absolute value ratio). After 12 of the previous 14 instances in which the ratio was greater than 25%, the S&P 500 emini was up during the next 20 days, but one was followed by a steep decline, and the t score was less than 1.

20 days    Avg. daily   Std            Next 20 days
Ending     change (20)  dev     Ratio     change
 3/19/2010    0.2%      0.5%    50.2%      2.9%
12/31/2010    0.1%      0.3%    49.9%      2.3%
 6/13/2005    0.2%      0.5%    42.4%      1.5%
 4/6/2009    1.1%      2.7%    40.0%      8.8%
 12/1/2005    0.2%      0.5%    39.9%     -1.4%
 11/3/2010    0.2%      0.5%    39.0%      2.1%
 2/10/2012    0.2%      0.5%    38.9%
 10/6/2010    0.3%      0.8%    34.8%      3.6%
10/17/2006    0.2%      0.4%    34.6%      1.9%
 4/12/2007    0.2%      0.5%    34.6%      3.0%
 1/12/2012    0.3%      1.0%    29.5%      3.8%
 5/10/2007    0.1%      0.5%    28.8%      0.6%
 8/21/2006    0.1%      0.5%    28.7%      1.3%
 7/30/2009    0.3%      1.3%    25.7%      4.8%
 7/22/2011    0.2%      1.0%    25.3%    -16.2%

Rocky Humbert writes:

It's impossible to know the cause and effect; but if you move from vol=25 to vol=15, stocks SHOULD go up, ceteris paribus. And if we are about to shift from vol=15 to vol=25, p/e's should shrink.

Steve Ellison replies:

Dividing my 90 20-day periods into a 2×2 matrix, price change up or down and volatility low or high (defined as the standard deviation being above or below the median of the last 30+ 20-day periods), I found the following distribution:

Price up   30    30

down       6     24

              low   high


Price went up in 83% of low volatility periods and only 56% of high volatility periods.

Rocky Humbert replies:


Thank you as always for your numbers on the table! If I understand this correctly, it confirms my superficial hypothesis … and it's also part and parcel of how the GARCH etc people manage money. Mr. Rogan writes: "How can it be rational for people to react to some short-term decrease in volatility by bidding up prices, when they have no idea if that change will hold the next day?"

To Mr. Rogan: The risk of a position is not what it did yesterday. It's what it will do tomorrow. You are making the quaint assumption that it is less "risky" to buy after a price dump. That might be true after some period of time, but it's not true in the days or weeks after a sharp price drop. For investors who use VaR, they are willing to buy/own more of an asset that exhibits less price volatility REGARDLESS OF THE INTRINSIC VALUE of the asset. This is one of those things that got us into the financial crisis. But it is rational if you believe that the market generally gets the nominal pricing correct. I am not going to defend VaR, but neither am I going to call it systematically irrational. I dare say that if you were putting 50% of your net worth into a buy&hole stock, you'd feel more comfortable picking a stock that "only" moves +/- 15% per year versus a stock that moves +/- 90% per year.

From Wiki:

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.[1]For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period if there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a "VaR break."[2] Thus, VaR is a piece of jargon favored in the financial world for a percentile of the predictive probability distribution for the size of a future financial loss.VaR has five main uses in finance: risk management, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.[3]Important related ideas are economic capital, backtesting, stress testing, expected shortfall, and tail conditional expectation.[4]



 Let's play a little game — it's called “Baron Rothschild” — who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch)… Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the entire market return the dealer shows next. The gain cards read, say, 15%, 20%, 25% and 30%. If you're defensive, you lag the market by 10% when the market return is a gain, but you get, say, 5% if the market return is a loss. There is one -20% loss card. Once it appears, the game ends and everyone counts their dough, compounded. It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%
15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%
20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%
5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. It just doesn't pay to risk the big loss. The point of this isn't that investors should always take a defensive stance — some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting even long periods of defensiveness. Because of the mathematics of compounding, large losses have a disproportionate effect on cumulative returns. Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses, which is why the recent bull market has not even put the market ahead of Treasury bills since 2000 or even 1998. So again, the point is that the avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon." With regard to present stock market conditions, it would take a correction of only about 10% in the S&P 500 to put the market behind Treasury bills for the most recent 3-year period. That's not an empty statistic given rich valuations, unusual bullishness, overbought conditions, rising yield trends, and a market long overdue for such a correction. Given the average return/risk profile those conditions have historically produced, it makes sense to call out "Baron Rothschild" even if we allow for the possibility of a further advance, in this particular instance, before the market inevitably corrects.

1) Let's assume that one's goal is to beat some passive index (it doesn't have to be stocks; it could be the Yen or Natgas) over an X month period. And let's further assume that one is willing to engage in "selling early." And lastly, let's assume that "selling early" is sometimes the "right" thing to do due to the essay above. As a statistical matter, what is the likely minimum value for X … that permits the speculator to beat his passive index?

2) Let's assume that one's goal is to beat a passive index (again, it doesn't have to be stocks) over an X month period. And let's further assume that one is willing to exit the market "early," but also "buy early." Obviously, if one exits, re-entering is a necessary thing to do. As a statistical matter, what is the likely minimum value for X … such that the speculator can beat his passive index?

3) As a purely statistical matter, which should be better/worse : Buying early and selling early? Or, buying late and selling late ? And, again, what is the minimum X month performance period where either strategy has a chance to beat the passive benchmark.

William Weaver writes:

1. Disposition Effect

2. Great essay and the observation of defensive over aggressive is very good but I can't agree with purely taking profits unless there is a reason to exit. Assuming sufficient liquidity, in my humble opinion, it might not be bad to tighten stops (volatility historically has fallen as equities rise - though high levels in the late 1990's - so stops based on standard deviation should tighten anyway) allowing one to lock in profits but continue to profit from any trend that develops or continues. This seems to be a prominent trait of the most successful traders I've met; allowing profits to run by controlling for risk instead of picking a top.

3. The saying "There is nothing wrong with taking small profits" is a great way to lose everything if you don't also control for losses. In this essay there is only an early exit for profits.

4. His analysis of the equity premium to Treasuries is very insightful but I will leave that to the list for independent testing.

5. Every trader is different and must play to their own personality. For me, when trading intraday (which I am new to and still not the biggest fan of but am coming along) I will take off part of a position when anything changes, and this helps manage risk (leads to a larger percentage of profitable days). But will wait for long term momentum to reverse before exiting the last half as this is where the majority of my monthly profits come from. This way I can be a wuss and still profit.

6. Read The Disposition Effect if you have not and are interested in any type of trading/speculation. (To add to things to do to become a successful speculator: know, understand and be able to identify behavioral biases both in your own trading, and in the market).

Leo Jia writes:

I don't fully understand Rocky's 3 questions at the end. Guess they are meant for some real speculations, rather than for the Baron Rothschild Game, right?

If so, then I take Will's approach as described in his Point 2, except that I don't exit on instant stops, but on closing prices of certain intervals (30 minutes for instance for position trades) if the means of the intervals trigger my stops. My feelings about instant stops are that 1) they tend to have more execution errors (due to price chasing), and 2) either they get triggered more often or I have to set them wider (meaning more losses). I don't have concrete results about this and would love to hear other opinions.

I can't see how the game closely resembles trading. From what I understand about it, there seem to be many more winning cards than losing ones. So a strategy of simply selling on random cards gives one an easy edge to beat the dealer (though not necessarily achieving the best result). Am I missing something there?

Steve Ellison adds:

Turning to writings from 100 years ago, a friend found this book in his attic in Montana and gave it to me: Fourteen Methods of Operating in the Stock Market.

The first article in this book was A Specialist in Panics, which has been discussed on the List before. This method is to buy when there is a panic.

There was another article by H.M.P. Eckhardt, "Plan for Taking Advantage of the Primary Movements". He advised buying during steep market declines, as the Specialist in Panics did, but also suggested selling if a rapid rise brought profits equal to the interest the investor could have earned over three or four years. Mr. Eckhardt surmised that, with his money already having earned its keep for at least three years, the investor would probably get a chance to put it back to work in less than three years when another panic occurred.

For these sorts of techniques, Rocky's X is the length of a business cycle, which is unknowable in advance, but would normally be at least 48 months.

Alston Mabry writes:

Let's say you start at January, 2004 (arbitrarily chosen start date, but not cherry-picked, i.e., not compared to other possible start dates), and you go to January 2012. You have $100 a month to invest. You can buy the SPY and/or hold cash. You have a total of 97 months and thus, $9700 to invest. If you buy the SPY every month (using adjusted monthly close), you wind up with:


But being a clever speculator and wanting to buy the dips, you come up with a plan: You will let your monthly cash accrue until SPY has a large drop as measured by the monthly adjclose-adjclose; each time the SPY has such a drop, you will put half your current cash into SPY at the monthly close. To decide how large the drop will be, you compute the standard deviation of the previous 12 monthly % changes, and then your buying trigger is a drop of a certain number of SDs. Your speculator friends like the plan, but disagree on the size of the drop, so each of you chooses a different number of SDs as a trigger: 0.5, 1, 1.5, 2, 2.5, 3, and the real doom-n-gloomer at 4.

The results, showing the size of the drop in SDs required to trigger a buy-in, the final value of the portfolio, and the average cash position during the entire period:

SD / final value / avg cash
0.5  $11,522.13    $543.03
1.0  $11,328.42    $737.77
1.5  $10,885.80  $1,351.02
2.0  $10,884.15  $2,083.36
2.5  $10,655.96  $2,711.34
3.0  $11,005.72  $3,704.12
4.0   $9,700.00  $4,900.00

You, of course, chose 0.5 SDs as your trigger and so come out with the biggest gain. But your friend who chose 3 SDs says that he *could* have used his larger cash position to invest in Treasuries and thus have beaten you. You say, "Coulda, woulda, shoulda."

Mr Gloom-n-Doom cheated and bought the TLT every month and wound up with $14,465.56.



 I am often asked what ten steps one should take to become a successful speculator.

I would start by reading the books of the 19th century speculators, 50 Years in Wall Street, The Reminiscences of a Stock Operator by Markman, and others.

Next I would read the papers of Alfred Cowles in the 1920s and try to compute similar statistics on runs and expectations for 5 or 10 markets.

Third I would get or write a program to pick out random dates from an array of prices, and see what regularities you find in it compared to picking out actual event or market based events.

Fourth, I would read Malkiel's book A Random Walk Down Wall Street and update his findings with the last 2 years of data.

Fifth, I would look at the work of Sam Eisenstadt of Value Line and see if you could replicate it in real life with updated results.

Sixth, I would start to keep daily prices, open, high, low, and close for 20 of so markets and individual stocks and go back a few years.

Seventh, I would go to a good business library and look at the old Investor Statistical Laboratory records of prices to see whether it gave you any insights.

Eighth, I would look for times when panic was in the air, and see if there were opportunities to bring out the canes on a systematic basis.

Ninth, I would apprentice myself to a good speculator and ask if I could be a helpful assistant without pay for a period.

Tenth, I would become adept at a field I knew and then try to apply some of the insights from that field into the market.

Eleventh, I would get a good book on Statistics like Snedecor or Anderson and be able to compute the usual measures of mean, variance, and regression in it.

Twelfth, I would read all the good financial papers on SSRN or Financial Analysts Journal to see what anomalies are still open.

Thirteenth, of course would be to read Bacon, Ben Green, and Atlas Shrugged.

I guess there are many other steps that should be taken that I have left out especially for the speculation in individual stocks. What additional steps would you recommend? Which of mine seem too narrow or specialized or wrong?

Rocky Humbert writes:

 All the activities mentioned are educational, however, notably missing is a precise definition of a "successful speculator." I think providing a clear, rigorous definition of both of these terms would be illuminating and a necessary first step — and the definition itself will reveal much truth.

Anatoly Veltman adds: 

I think with individual stocks: one would have to really understand the sector, the company's niche and be able to monitor inside activity for possible impropriety. Individual stocks can wipe out: Bear Stearns deflated from $60 to $2 in no time at all. In my opinion: there is no bullet-proof technical approach, applicable to an individual enterprise situation.

A widely-held index, currency cross or commodity is an entirely different arena. And where the instrument can freely move around the clock: there will be a lot of arbitrage opportunities arising out of the fact that a high percentage of participation is inefficient, limited in both the hours that they commit and the capital they commit between time-zone changes. Small inefficiencies can snowball into huge trends and turns; and given the leverage allowed in those markets - live or die financial opportunities are ever present. So technicals overpower fundamentals. So far so good.

Comes the tricky part: to adopt statistics to the fact of unprecedented centralized meddling and thievery around the very political tops. Some of the individual market decrees may be painfully random: after all, pols are just humans with their families, lovers, ills and foibles. No statistical precedent may duly incorporate such. Plus, I suspect most centralized economies of current decade may be guilty of dual-bookeeping. Those things may also blow up in more random fashion than many decades worth of statistics might dictate. Don't tell me that leveraged shorting and flexionic interventions existed even before the Great Depression. Today's globalization, money creation at a stroke of a keyboard key, abominable trends in income/education disparity and demographics, coupled with general new low in societal conscience and ethics - all combine to create a more volatile cocktail than historical market stats bear out. 2001 brought the first foreign act of war to the American soil in centuries. I know that chair and others were critical of any a money manager strategizing around such an event. But was it a fluke, or a clue: that a wrong trend in place for some time will invariably produce an unexpected event? Why can't an unprecedented event hit the world's financial domain? In the aftermath of DSK Sofitel set-up, some may begin imagining the coming bank headquarter bombing, banker shooting or other domestic terrorism. I for one envision a further off-beat scenario: that contrary to expectations, the current debt spiral will be stopped dead. Can you imagine next market moves without the printing press? Will you find statistical precedent of zooming from 2 trillion deficit to 14 trillion and suddenly stopping one day?

Craig Mee comments:

 Very generous post, thanks Victor…

I would add, in this day and age, learn tough typing and keyboard skills for execution and your way around a keyboard, so you don't wipe off a months profit in the heat of battle. I would also add, learn ways of speed reading and information absorption, though these two may be more "what to do before you start out". 

Gary Rogan writes: 

Anatoly, I don't think really understanding the sector and and the niche is all that useful unless one knows what's going on as well as the CEO of the company, which means that in general understanding quite a bit about the company isn't useful to anyone without access to enormous amount of information. It's the subtle, little, invisible things that often make all the difference. There are a lot of people who know a lot about pretty much any company, so to out-compete them based on knowledge is usually pretty hopeless. It is nevertheless sometimes possible to out-compete those with even better knowledge by sticking with longer horizons or by being a better processor of information, but it's rare.

That said, it has been shown repeatedly that some combination of buying stocks that are out of favor by some objective measure, possibly combined with some positive value-creation characteristics, such as return on invested capital, do result in market-beating return. Certainly, just about any equity can go to essentially zero, but that's what diversification is for.

Jeff Watson adds: 

 In the commodities markets it's essential to cultivate commercials who trade the same markets as you(especially in the grains.) One can glean much information from a commercial, information like who's buying. who's selling, who's bidding up the front month, who's spreading what, who's buying one commodity market and selling another, etc. When dealing with a commercial, be sure to not waste his time and have some valuable information to offer as a quid pro. Also, one necessary skill to develop is to determine how much of a particular commodity is for sale at any given time…. That skill takes a lot of experience to adequately gauge the market. Also, in addition to finding a good mentor, listen to your elders, the guys who have been successful speculators for decades, the guys who have seen and experienced it all. Avoid the clerks, brokers, backroom guys, analysts, touts, hoodoos etc. Learn to be cold blooded and be willing to take a hit, even if you think the market might turn around in the future. Learn to avoid hope, as hope will ultimately kill your bankroll. When engaged in speculation, find one on one games like sports, cards, chess, etc that pit you against another person. Play these games aggressively, and learn to find an edge. That edge might translate to the markets. Still, while being aggressive in the games, play a thinking man's game, play smart, and learn to play a strong defensive game……a respect for the defense will carry over to the way you approach the markets and defend your bankroll. Stay in good physical shape, get lots of exercise, eat well, avoid excesses.

Leo Jia comments:

Given that manipulation is still prevalent in some Asian markets, I would add that, for individual stocks in particular, one needs to  understand manipulators' tactics well and learn to survive and thrive under their toes.

Bruno Ombreux writes:

Just to support what Jeff said, you really have to define which market you are talking about. Because they are all different. On one hand you have stuff like S&P futures with robots trading by the nanosecond, in which algorithms and IT would be the main skill nowadays, I guess. On the other hand, you have more sedate markets with only a few big players. This article from zerohedge was really excellent. It describes the credit market, but some commodity markets are exactly the same. There the skill is more akin to high stake poker, figuring out each of your limited number of counterparts position, intentions and psychology.

Rocky Humbert adds:

I note that the Chair ignored my request to precisely define the term "successful speculator," perhaps because avoiding such rigorousness allows him to define success and speculation in a manner as to avoid acknowledging his own biases. I'd further suggest that his list of educational materials, although interesting and undoubtedly useful for all students of markets, seems biased towards an attempt to make people to be "like him."

If gold is up a gazillion percent over the past decade, and you're up 20%, are you a successful speculator?If the stock market is down 20% over a six month period, and you're down 2%, are you a successful speculator?If you have beaten the S&P by 20 basis points/year, ever year, for the past decade, without any meaningful drawdowns, are you a successful speculator?If you trade once every year or two, and every trade that you do makes some money, are you a successful speculator?

If you never trade, can you be a successful speculator?

If you dollar cost average, and are disciplined, are you a successful speculator?

If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?

If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?

If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?

If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?

If you think you are a successful speculator, can you really be a successful speculator?

If you think you are not a successful speculator, can you be a successful speculator?

Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years? 

An anonymous contributor adds:

 In conjunction with the chair's mention of valuable books and histories, I would append Fred Schwed's Where are the Customers' Yachts?.

While ostensibly written with a tongue-in-cheek hapless outsider view of 1920s and 1930s Wall Street, it has provided as many lessons and illustrations as anything by Henry Clews. In this case, I am reminded of the chapter in which Schwed wonders if such a thing as superior investment advice actually exists.

Pete Earle writes:

It is my opinion that the first thing that the would-be speculator should do, even before undertaking the courses of actions described by our Chair, is to open a small brokerage account and begin plunking around in small size, getting a feel for the market, the vagaries of execution quality, time delays, and the like. That may serve to either increase the appetite for such knowledge, or nip in the bud what could otherwise be a long and frustrating journey.

Kim Zussman adds: 

The obligatory Wikipedia* definition of speculation is investment with higher risk:

Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.

There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing

By this definition one must define risk and decide what comprises high and low risk — which may be simple in extreme cases but (as we have seen repeatedly) is not very straightforward in financial markets

*Chair is quoted in the link 

Alston Mabry writes in:

I'm successful when I achieve the goals I set for myself. And rather than a target in dollars or basis points or relative to any index or ex-post wish list, those goals may simply be to act with discipline in implementing a plan and then accepting the results, modifying the plan, etc.

Anatoly Veltman adds: 

And don't forget Ed Seykota: "Everyone gets out of the market what they want". I find that everyone gets out of life what they want.

Plenty a market participant is not in it to make money. Fantastic news for those who are!

Bruno Ombreux writes:

This will actually bring me back to the question of what is a successful speculator.

In my opinion success in life is defined in having enough to eat, a roof, friendships and a happy family (as an aside, after near-death experiences, people tend to report family first). You can forget stuff like being famous, leaving a legacy or being remembered in history books. If you are interested in these things, you have chosen the wrong business. Nobody remembers traders or businessmen after their death except close family and friends. People who make history are military and political leaders, great artists, writers…

So you are limited to food, roof, friends and family. Therefore my definition of a successful speculator is a speculator that has enough of these, so that he doesn't feel he needs to speculate. I repeat, "a successful speculator does not need to speculate."

Paolo Pezzutti adds:

I simply think that a successful speculator is one who makes money trading. Among soccer players Messi, Ibrahimovic are considered very successful. They consistently score. They experience short periods without scoring. Similarly, traders should have an equity line which consistently prints new highs with low volatility and a short time between new highs. Like soccer players and other athletes it is their mental characteristics the main edge rather than knowledge of statistics. One can learn how to speculate but without talent cannot play the champions league of traders and will print an equity line with high drawdowns struggling losing too much when wrong and winning too little when right. Before dedicating time to find a statistical edge in markets one should assess his own talent and train psychologically. In this regard I like Dr Steenbarger work. In sports as in trading you very soon know yourself: your strengths and weakness. There is no mercy. You are exposed and naked. This is the greatness and cruelty of markets and competition. This is the area where one should really focus in my opinion.

Steve Ellison writes:

To elaborate a bit on Commander Pezzutti's definition, I would consider a successful speculator one who has outperformed a relevant benchmark for annual returns over a period of five years or more. Ideally, the outperformance should be statistically significant, but market returns can be so noisy that it might take much of a career to attain statistical significance.

Jeff Rollert writes:

I propose a successful speculator dies wealthy, with many friends. Wealth is not measured just in liquid terms.

Should a statistical method be preferred, I suggest he is the last speculator, with capital, from all the speculators of his college class.

In both cases, I suggest the Chair and Senator are deemed successful, each in their own way.

Leo Jia adds:

If I may wager my 2 cents here.

I would define a successful speculator as someone who has achieved a record that is substantially above the average record of all speculators in percentage terms during an extended period of time. The success here means more of a caliber that one has acquired which is manifested by the long-term record. Similarly regarded are the martial artists. One is considered successful when he has demonstrated the ability to beat substantially more than half of the people who practice martial arts, regardless of their styles, during an extended period of time. It doesn't mean that he should have encountered no failures during that time - everyone has failures. So, even if that successful one was beaten to death at one fight, he is still regarded as a successful martial artist because his past achievements are well revered.

With this view, I will try to answer Rocky's questions to illustrate.

Julian Rowberry writes:

An important step is to get some money. Preferably someone else's. [LOL ]



 I had some difficulty finding a concise definition of the DeMark Sequential indicator. From an article written by Mr. Burke in the 1990s and other sources, I constructed a test, but there are variations in calculation and execution, and there are rumors that Mr. DeMark adds proprietary logic.

1) The method A setup for a buy (sell) occurs when there are 9 consecutive bars with closing prices lower (higher) than 4 bars earlier, and the high (low) of either the 8th or 9th bar is higher (lower) than the low (high) price of a bar at least 3 bars earlier in the sequence.

When setup is complete, begin the countdown. Count any bar in which the close is lower (higher) than the close 2 bars earlier. This time, the counted bars do not need to be consecutive.

If the price goes above (drops below) the highest high (lowest low) of the bars in the setup sequence, the setup and countdown are canceled.

If a new setup occurs in the same direction, the countdown resets to zero.

If a new setup occurs in the opposite direction, begin a new countdown and cancel the previous setup and countdown.

If the count of bars that close lower (higher) than 2 bars before reaches 13, and the 13th counted bar closes lower (higher) than the 8th counted bar, it is a buy (sell) signal. It was not clear to me what should happen if the count reached 13, but the 13th bar did not close lower (higher) than the 8th. I decided to cancel the setup and countdown in that case.

2) The test Using the above rules, I tested daily bars of the S&P 500 futures from 1982 to 1989. I checked the net change over various periods following the buy and sell signals. Results of buy signals:

Change next
Date                          12 days 18 days 28 days 42 days 63 days
                    1/3/1984    2.0%    0.3%   -5.2%   -3.8%   -4.8%
                   3/22/1984   -0.9%    0.8%    2.1%   -2.8%   -3.1%
                   7/20/1984    9.5%    9.2%   11.5%   11.1%   12.5%
                  10/20/1987   18.1%   14.5%    7.3%   14.6%   12.2%
                   12/4/1987   11.4%    9.1%   11.2%   11.9%   18.6%

Average                          8.0%    6.8%    5.4%    6.2%    7.1%
Median                           9.5%    9.1%    7.3%   11.1%   12.2%
Average of all periods in sample 0.5%    0.8%    1.3%    1.9%    2.9%

Results of sell signals:

                             Change next
Date                          12 days 18 days 28 days 42 days 63 days
                  10/12/1982   -0.1%    6.8%    1.6%    3.7%    9.9%
                   4/20/1983    4.6%    2.5%    1.2%    6.1%    5.9%
                   6/17/1983   -1.0%   -2.5%   -3.4%   -3.4%   -2.4%
                   7/11/1985   -2.3%   -3.2%   -2.5%   -4.1%   -6.6%
                   3/11/1987    1.9%    4.2%    1.1%   -0.2%    1.9%
                   1/29/1988    1.1%    2.3%    2.3%    0.0%    1.0%
                   3/14/1989   -0.4%    0.4%    4.1%    5.7%    8.4%
                   5/12/1989    1.7%    3.8%    2.2%    4.0%    8.1%

Average                          0.7%    1.8%    0.8%    1.5%    3.3%
Median                           0.5%    2.4%    1.4%    1.8%    3.9%
Average of all periods in sample 0.5%    0.8%    1.3%    1.9%    2.9%

There were only 5 buy signals in 8 years, but they worked out very well, including a buy signal on the day after the 1987 crash. The record of the sell signals was decidedly mixed. The best that can be said is that the 28-day net change was lower than average after a sell signal, although still positive. I decided 28 days was the optimal holding period and considered only 28-day net changes after later signals.

Buy signals since 1990:

 Change next
Date               28 days
     11/15/1991    6.0%
      11/7/1994   -1.2%
      3/19/2001    6.6%
      7/19/2002    8.6%
      5/10/2005    4.2%
      7/14/2006    4.5%
      3/17/2008    9.2%
      1/12/2009  -14.2%
      10/4/2011   13.3%

Average             4.1%
Median              6.0%
Average of
all 28-day periods  0.6%

Sell signals since 1990:

               Change next
Date              28 days
      8/23/1994   -0.9%
      6/19/1995    2.7%
      11/8/1995    3.0%
      9/16/1996    1.9%
      11/4/1996    2.6%
      2/18/1997   -8.3%
      7/31/1997   -4.5%
      3/18/1998   -0.6%
       1/7/1999   -3.1%
      4/23/1999   -4.4%
      11/7/2001    2.2%
       6/3/2003    3.3%
     11/28/2003    6.0%
      1/22/2004    0.6%
     12/29/2004   -1.2%
      9/14/2006    4.2%
       6/1/2007    0.1%
      4/29/2009    8.1%
      9/16/2009    0.3%
      12/8/2010    4.5%
       2/2/2011   -1.5%

Average             0.7%
Median              0.6%
Average of
all 28-day periods  0.6%

The results of buy signals have continued to be on average very good, although also very rare. The results after sell signals appear consistent with randomness.

Anatoly Veltman writes in: 

May I ask, why would 7- or alternatively 8- or alternatively 9- or alternatively 10- or alternatively 11- ….be my guest to go on forever… "work"?

Jordan Low comments: 

I understand where you are going, but your critique will apply to all of technical analysis, and not just DM. I am not a follower of DM, but I believe that technical analysis is based on psychology. At 80F, humans can only live 9 days without water — so there is some cognitive explanation why we are counting 9 days of frustration to capitulate those who traded counter-trend, before the real counter-trend arrives.

Anatoly Veltman writes:

Now, don't ever talk "all T/A". The reason previous volume areas tend to hold the price is because people tend to transact (again) at their former prices. I've always had a beef with time counters who have no accounting for price. The Chair rightfully refers to many as charlatans; but do I understand his page-sized color-coding scheme correctly: the Bond move +0'02 = Bond move +2'00? SP change of 0.50 gets same color as SP change of 15.00??

I bet you that a system that buys a 38%, a 50%, or a 62% retracement of preceding impulsive up-wave will produce better result than a system that buys exactly the "8th declining" 5-min bar, or 15-min bar, or 30-min bar, or 60-min bar or daily bar or weekly bar. Isn't the 8th 5-min bar getting you to where the 4th 10-min bar would get you? What's the magic of counting those bars?



 By far the most useful advice by Livermore in Reminiscences of a Stock Operator was to avoid tips like the plague. Similarly, Bacon warned:

DON’T look at anybody else’s selections of prices or handicaps before making your own selections and prices. That is a rule with no exceptions.

If you look at some other prices or selections first, the line you will come up with will be a sort of scrambling of his line and your line. Almost invariably, it will combine the weakest features of both. You’ll have the mistakes and trite opinions of his line and yours. But the possible ‘bright work’ and getting-away-from-the-public part of his figures and yours, will be discarded.



 1. Every store in London was having a sale of 50% or more except for the Bates one I went to to buy a hat, and all the big stores like Harrods had queues of at least 2 hours. In Paris, no stores had sales and business seemed quite slow except for the health food stores that substitutes quinoa for rice and hummus. Why is there so much better retailing in London than Paris? Does it have to do with the service rate or National Character? The marginal utility for consumers to buy goods in London and Europe rather than property seems to be a function of the much larger ratio of space to population in US versus Europe. When you have 100 square feet to a person, goods seem very attractive and the Holidays with all their bargains, bring out in London "50% of the population". By the end of a week, people are willing to spend a lot more to buy things than at the beginning when they're still testing the waters and looking for bargains. Can this be quantified in markets?

2. The drop and close below 1200 on Dec 19, 2011 is right out of the playbook of the Trojan War. Time and time again a day before the death of one hero or another, in this case Hector as he firebrands the Greek ships and kills and wounds one Greek defender after another, including Ajax, Menelaus, and Odysseus, the Gods look down, especially Zeus, and say, "look he's going to die tomorrow, let him have a blaze of victory today before he goes to Hades as he's put up a good fight and is the favorite of a few mistresses and daughters." One receives a pretrial settlement letter from Dan about a HP executive's harassment of a party planner, including his showing her his million dollar balance at the ATM. And it gets him in trouble because there is an obvious attempt to cover up through his assistant who might not be buyable off now that he is no longer top guy. It's right out of the Trojan war where all the problems arise from romance and the fate of the war hinges on who can seduce Zeus the last, and which Goddess is consumed by revenge the most because Paris chose Aphrodite and how they can use their wiles to turn the tides of war.

3. A trip to the British Museum starts with a building cramming exhibit of Russian Architecture right after the Revolution to show the Russian's spirit and intelligence, and the love and egalitarianism of Russia by the British right now. But at the British Museum a room is devoted to Roman everyday life then compared to England today, and the conclusion is that it's pretty much the same with the soldiers being able to retire to a nice plot of land after 20 years of service then and now. But on looking closer one sees that most of the wealthy in Greek times were the freed slaves who were able to fill the everyday jobs of merchants, doctors, and financiers since they were not tarnished by striving for money and didn't possess extensive land holdings.

 4. Throughout Europe the opportunity cost of time is close to zero. Queues are everywhere because free admission is given to all the attractions. One can only get into the Louvre through a back entrance as the lines at the front are 3 hours long, but when you do get in, you have to walk through 10 miles of religious paintings depicting sacrificial and revengeful scenes from the Bible. No such luck at a the Musee D'Orsay where one would have to wait 5 hours to get in, even after purchasing a ticket at the only billetiere open in Paris.

5. London is the theater capital of the world, and it's nice to see the common man at all the events, enjoying his ice cream between acts at 1/4 the price of US events. I have to walk out of Crazy for You and Matilda, two of the hits there, because the music is terrible, and the plots totally contrived and hateful to the business person. The Crazy For You plot is exactly the plot of the current Muppets movie with their depiction of the heartless business man who wishes to close down the theater and the decent poor folk who must stage a show to earn enough to buy out the theater from the evil profit mongers. I enjoyed Three Days in May which shows men as they should be with compromises between Churchill, Chamberlain, and the Hunting Saint that led to the British refusing to surrender as it becomes clear that France was going to capitulate in a week. "Neville, can I chat with you for a half hour before the meeting tomorrow. Without your support, I'll have to resign because I don't believe we should give up," Churchill said. How many times one has been in that position as every man was for himself as in this case the estimate that came back from the front was that 2000 men would be returned from the Dardanelles rather than the 250,000 that came back. Worst of all as Churchill pointed out to his cabinet dissenters, is a show of uncertainty and disharmony as the public would leap on the weakness and the whole battle would be lost. One finds the courage and diplomacy of Churchill inspiring in this case, and one did have it in his rackets career.

 6. A highlight of the trip is a visit to Ile de la Cite to see the prisons where the upper class and producers were kept before being guillotined. But instead one lands at the Sainte Chappelle where one is seated in the first row of this 14th century church, to hear a medley of Renaissance music with harpsichord, viola, various flutes and a singer. The highlight as always is a Couperin and Bach piece which is invariably ingenious and beautiful compared to the predecessors. One was mistakenly given a VIP seat here as the reservation made from a fancy hotel and I am reminded of the most valuable thing I got from Soros other than the two tennis can thing. Once I had pneumonia and the hospital mistakenly heard that I was a partner of Soros and they gave me the best room in the hospital, about 2500 square feet with a beautiful view of the park. I did meet a great Dr. there, Dr. Lou Depalo, who I would recommend to anyone with a respiratory problem of any kind, who bought me a Barrons, and I bonded with when it turned out that he had a total love of the Master and Commander canon and unlike me was a nautical personage.

Gary Rogan comments: 

I was in Paris with my wife and daughters over the week preceding and including Christmas. We didn't do much shopping since it was mostly about taking the kids to the main museums, and they all know how much I hate "shopping" but we did spend a couple of ours at Galerie Laffayette, their main shopping mall, on Christmas Eve and the level of energy seemed pretty good to me, but I don't have too many comparison points. I also didn't see any sales signs, but could that be a sign of strength?

The outdoor shopping area at the lower end of Champs Elysees was so crowded in the evening it was almost impossible to walk, and this is definitely not the height of the tourist season. The faces of people on the metro which we used a lot seemed somewhat grim, but that's also hard to interpret without recent comparison points.

Rocky Humbert comments: 

 1. Back when I lived in the UK in the 1980's, there were semi-annual sales (post-Christmas and July). This was a tradition at the likes of Selfridges, Harvey Nichols, and the other serious London department stores. Prices were generally not discounted except during these sales. No self-respecting Londoner would shop at Harrods (except at the food court) — as it was mobbed with foreign tourists, and the prices were exorbitant. Perhaps a current Londoner can share whether the semi-annual sale pattern still exists.

2. In comparing London and Paris, one recalls Adam Smith's (and Napoleon's) observation that England is a Nation of Shopkeepers.

3. The Chair asks, "Why is there so much better retailing in London than Paris?" As Perry Mason would say, "Question assumes facts not in evidence." 

Bruno Ombreux comments:

1. About the traditional semi-annual sales (post-Christmas and July), it is the same in France, but the Winter sales are starting only next Wednesday. Which explains why there were sales in London and not in Paris. Different calendars.

2. About the English nation of Shopkeepers, it can be explained by different cultures too. Sales are widely attended in both countries, but from my anecdotal experience living both in London and in Paris, they are really a sacred institution in London compared to Paris.

Steve Ellison adds:

Kathryn Schulz, in Being Wrong, one of the books on the Chair's recommended reading list, wrote:

In short, we are wrong about love routinely. There’s even a case to be made that love is error, or at least is likely to lead us there. Sherlock Holmes, that literary embodiment of our … ideal thinker, 'never spoke of the softer passions, save with a gibe and a sneer.' Love, for him, was 'grit in a sensitive instrument' that would inevitably lead into error.



 1. There is a critical point in the market, a critical decision that the market gods weigh on a scale like Zeus with his balance scale deciding whether Achilles or Hector will win, that determines the market fate, and it is key and should be the focus of all news stories and market considerations but never is.

Never trust anyone but your family and best friend because everyone is disloyal in a pinch. Peleus was left for dead by his father in law after killing his brother in law to become ruler and this led to the Trojan war. Caesar trusted his best friends but they turned on him when an opportunity for power, money, and romance reared its ugly head.

3. Deception is key. The most successful Greek was the Deceiver Odysseus, and he tricked everyone he dealt with as the market tries to trick you with Odyssean power.

4. The goal is always to come home. Odysseus went home, as does the market. The only loyal ones were the wife and son and the best servant. The market retraces and comes home to break even an inordinate number of times.

5. Never mix romance with business or the market. The Trojan was was started by Paris intervening in romance and being swept off his feet by Aphrodite, and Achilles killed tens of thousands and prolonged the war by 10 years when Menelaus stole his mistress.

6. Don't try to walk with the Gods. Peleus married a half God and married her the last time the Gods and mortals mingled at a celebration and it caused him to be the most distressful of men. Trying to emulate Soros or the other greats is the seed of destruction.

7. Okay, give me the rest. And correct and tighten the above. I'm out of my depth but wanted to get the gist across.

Ken Drees comments:

 Like using a mirror against Medusa, one must plan against the adversary and sometimes use their expected attacks to beat them. Like shielding oneself from the siren song, one must be totally prepared, seek council before the journey (the trade) about what dangers are expected.

Also, it seems every entity in mythology had a weak spot. It's probably best to note these weaknesses in your thinking and in your emotions, not how can I beat the market, but how can the market beat me today?

Bill Rafter writes:

The greatest two rules:

(1) nothing to excess and (2) know yourself.

Pete Earle writes:

One lesson from mythology which resonates with me is the oracles/prophets/predictors almost always forecast correctly, but rarely in an obvious or immediately relevant way. The predictions made are usually realized, but not before taking extremely circuitous, and usually counterintuitive ways to reach fulfillment.

In my experience, predictions regarding the direction of equities or commodities inferred from option markets so often prove accurate…but only after traveling in the most wrong, most unanticipated ways.

Alston Mabry responds: 

 Pete, I think of that as "shaking the tree", i.e., we're gonna get there, but we're gonna shake out as many weak hands as we can along the way.

Peter Earle replies: 

Absolutely. Stop-running and the like as the "gods" way of seeing who's "worthy"; who can withstand the flood, the fire, the sturm und drang.

Jim Lackey writes: 

In 2008 I learned from Ryan Carlson– Sisyphus. There is a little useless book Wit and Wisdom from Wallstreet. So many of the quotes are the exact opposite from 3 pages ago… yet for a day they are seemingly sage advice. Worse for the long term. It's all good advice, yet in the mean time we must eat, and in the long term we all end up dust in the wind.

Traders lament when we miss profits. We are miserable when we lose. If we are not careful we are never happy. I have the habit of having to work myself up into a fury to win a race, pass a test or trade. My wife calls it "business mode" everyone else calls it being a jerk. Finally this year I have the ability to take a loss and this week miss a glorious rally and profit… yet at 4:20 PM its over. I am done pushing the boulder back up the hill for the day. I will return at 1:30am or by 7am, all but two business days a year. It can be torture if you do not like to trade, but if you love it…

Here is a quote from my kids music, "This is Our Science" by Astronautalis: "Our work is never done/ We are Sisyphus".

p.s I notice that if I don't like the rap beats I miss quite a bit of new poetry. I hear my teenagers say random lines and say what! That is amazing. Then I hear the song and say no wonder I never heard that line before. Damn drum machines.

Jack Tierney adds: 

Recently I've been reading up on complexity, system dynamics, and the unpredictable consequences that occur when tinkering with non-linear systems. The markets seems subject to all and, if I'm even remotely correct in interpreting the literature, there's only one certainty: expecting linear consequences (e.g, provide banks with more liquidity, bringing about an increase in business borrowing, resulting in a resurgent economy) is rarely, if ever, realized.

Instead, the unseen effects on unimagined factors, almost always derails the logic train. A source I've referred to on occasion is "Cassandra's legacy." Appropriately enough, the custodian of that site provides an interesting historical allegory, in the form of Goth Princess/Roman Empress, Galla Placidia, and her part in the demise of the Roman Empire. It's a very lengthy read and, unless history like this interests you, tough going. So, a few highlights:

"Managing any large structure is difficult and we tend to do it badly; a whole empire may be an especially difficult case. To do it well, we would need to use a method what I mentioned before: system dynamics; which is a way to describe systems and the relation of the various elements that compose them.

"…every time that the Romans fought the Barbarians, they could win or lose, but each battle made the Empire a little poorer and a little weaker. The empire was using resources that could not be replaced; non-renewable resources, as we would say today….the solution was not more troops but less troops. It was not more imperial bureaucracy but less imperial bureaucracy, not more taxes but less taxes.

"In the end, the solution was right there and it was simple: it was Middle Ages. Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages.

"What Placidia could do as an Empress was, mainly, to enact laws….It seems that Placidia was acting according to her style; ease the unavoidable, don't fight it….Placidia forbade the coloni, the peasants bound to the land, to enlist in the army. That deprived the army of one of its sources of manpower and we may imagine that it greatly weakened it. Another law enacted by Placidia, allowed the great landowners to tax their subjects themselves. This deprived the Imperial Court of its main source of revenues."

Stefan Jovanovich comments:

As much as King George's scribbler Edmund Gibbon despised Christianity, he had the Middle Ages even more because its bureaucracies were the worst of all — local and mean and stupid.

Professor Bard should revise his history. What he wrote here — "Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages." - is nonsense.

The Roman Empire's tax collections were always "local"; that is why Roman politicians were willing to pay such enormous bribes to be appointed provincial governors. The legions were also "local"; the Empire's expansion came from granting "foreigners" - i.e. the people we would today call Spaniards, French and Syrians - the privileges of citizenship, which meant they were also qualified to serve in the local legions. This was equally true under the Republic; "crossing the Rubicon" would not persist as a bad metaphor if Rome's soldiery had been centralized.

As for economics, whatever the "terrible expenses of the imperial court", they were nothing compared to the ravages of coin clipping. The solidus of the Eastern Empire maintained an unchanged weight and measure for 4+ centuries - a record that is likely never to be broken. (It exceeds the span of sound money for the British Empire and the United States of America put together.) After Princess Placida's day coinage, under the wonderful decentralization of the Middle Ages, effectively disappeared.

"Dearth of provisions, too, increased by degrees, and the scarcity of good money was so great, from its being counterfeited, that, sometimes out of ten or more shillings, hardly a dozen pence would be received. The king himself was reported to have ordered the weight of the penny, as established in King Henry's time, to be reduced, because, having exhausted the vast treasures of his predecessor, he was unable to provide for the expense of so many soldiers. All things, then, became venal in England; and churches and abbeys were no longer secretly, but even publicly exposed to sale." - William of Malmsbury wrote this in 1140 AD - the period that Professor Bard praises so highly for its progress over the degeneracies of the Empire.

Hume deserves the last word on this and most other subjects that interested him.

"Mankind are so much the same, in all times and places, that history informs us of nothing new or strange in this particular. Its chief use is only to discover the constant and universal principles of human nature."

Easan Katir adds: 

The Greeks have fooled people since the Bronze Age. Instead of a horse, they now have Trojan bonds.

Steve Ellison comments: 

Jack, the Atlantic had an article about why projects that had successful pilots often failed when rolled out to the general population.

Why Pilot Projects Fail– Here are some excerpts:

Promising pilot projects often don't scale … Rolling something out across an existing system is substantially different from even a well run test, and often, it simply doesn't translate.
Sometimes the 'success' of the earlier project was simply a result of random chance …

Sometimes the success was due to what you might call a 'hidden parameter', something that researchers don't realize is affecting their test. Remember the New Coke debacle? …

Sometimes the success was due to the high quality, fully committed staff. …

Sometimes the program becomes unmanageable as it gets larger. You can think about all sorts of technical issues, where architectures that work for a few nodes completely break down when too many connections or users are added. …

Sometimes the results are survivor bias. This is an especially big problem with studying health care, and the poor. Health care, because compliance rates are quite low (by one estimate I heard, something like 3/4 of the blood pressure medication prescribed is not being taken 9 months in) and the poor, because their lives are chaotic and they tend to move around a lot … In the end, you've got a study of unusually compliant and stable people (who may be different in all sorts of ways) and oops! that's not what the general population looks like.



 Good afternoon everyone,

Would anyone be able to suggest any alternatives to the US dollar that I would be able to put my money into? What currencies or commodities would be worth using to reduce the risk of dollar? I must admit I know very little about this particular subject. I'm not necessarily looking at this as an investment in which I'm trying to get rich, I'm just looking for something that will hold its value better than the US Dollar. As I put money aside for various things in life, I would hope there is something I could have that would be worth the same ten years from now as it would today. Any insights or suggested reading material would be appreciated.



Tyler McClellan comments: 

If you want to buy things in dollars in the future then you'll want to hold dollars.

Gary Rogan counters: 

That's like saying, "if you want to put gasoline in your car in the future you need to own gasoline today". Given the 90%++ loss of purchasing power of dollars in the last 100 years there just could be better alternatives than holding them today. If the point is that nobody knows what they are with any degree of certainty, that's a valid point. 

Anton Johnson writes: 

Inflation protected (at least to the extent of official figures) US series I savings bonds seem to be a decent savings vehicle, especially when they are accumulated over time. Unfortunately, there are minimum ownership periods and the maximum annual purchase is limited to 10K per person.

Craig Mee advises: 

Beware of selling the low, Corban, effectively adding size in a market that's been trending south for some time.

If Euro goes to the dump, and USD goes bid a la 2008-09, then that may be a nice way to offload USD then and say buy Aussie at 60c to the USD. (We do have stuff in the ground that helps, although with interest rates cuts just coming through, it appears some goodwill that was present at the start of the year is being priced out of the market against the USD).

Good luck. Oh…beware of the Fed, or in this case FEDS, to up end things at any time…. though if history only always repeats to the letter, it would make investing a wee bit more straight forward…

Alston Mabry writes: 

With a decent time horizon, you could put some money into corporate bonds and good divvy-paying stocks. That way you get the divs and also exposure to cap gains. just happen to be researching some recently, so here is a diversified group of sample tickers:


Leo Jia adds: 


This is an age of vast changes. For that reason, we can easily lose our vision into the future in terms of what will be more valuable. Even though there are many discussions around the topic, I can't decide easily if the US dollar will be more valueless than any other currencies in the future. Many argue that it will lose more value, but I tend to think that it perhaps will be more valuable than most other sound currencies, for the very simple reason that the US has a more fundamentally solid mechanism of being a most promising country. The very fact that the people with big money are not running away from the US demonstrates it.

There is the notion (as Gary Rogan pointed out) that the dollar has lost 90% of its purchasing power over the last 100 years. While I agree that there has been a devaluation process going on, I don't think the notion should really be understood literally. Many things around any purchase (including venue, environment, safety, transportation, etc) have vastly changed from 100 years ago. All these add legitimate values to the product and hence cost for the purchaser. One can argue that the egg he buys today is not that different from that his grandfather bought 100 years ago. Yes, sure, but things in a social economy can not be taken separately. Many things in it are vastly different from 100 years ago: farmers' lives, air-condition for the chickens, refrigeration along the transportation, etc.

As to what can hold value better for the future, I would like to have agricultural commodities (hope to hear other arguments). I buy into the view that because people in China and India (accounting for nearly 40% of the world population) are getting richer, they will be demanding more higher-scale food like meat which then will demand more amount of lower-scale produces like corn or wheat (I have been actually experiencing the above view personally for the last 10 years in China). Sadly, the production of these lower-scale produces can not be increased easily, so these prices must go up. In the long term, the pressure for the price rise due to the imbalance of demand and supply will be added to the legitimate price rise (as I seasoned in the last paragraph), resulting in much higher prices in dollar's term. One note to add is that the inherent volatilities associated with these commodities along the way should be carefully considered.

Additionally if I may add as an option to where to put your money, it should be into your life, your personal and business interests, and perhaps some interests of any community you are in. My feeling is that this might be more important than anything else.

Laurel Kenner writes: 

 There are no safe havens any more. People have been remarkably complacent about the obvious rigging and zombization of financial markets, the transfer of power to lawbreaking elite firms, the restrictions on capital movement out of the country, the baldfaced lies about the nonexistence of inflation, the steady fiscal confiscation of personal assets, The fact that we still can have a meal at pleasure and joke about our plight means nothing in terms of economic freedom. Unfortunately, the one point that holds true is that the foundation of individual liberty is economic liberty. We have merely slipped back into the iron pattern of historical kleptocracies. Maybe that is why there has been so little effective resistance. Those who protest are marginalized by the mainstream propaganda machines. Case in point: Did the Fed just bail out Europe without anyone blinking an eye, and what does that mean for the global future?The only advice that I have found to make sense at all lately is "Be flexible." We are playing against a relentless statist enemy. Some Specs recommend Australian and Canadian currencies. That's merely a play on commodities. I need not remind anyone here that in the past century, the U.S. government made it illegal to own gold, and that a few upward ratchets on certain margin requirements would kill the commodities market. I don't speak from lack of experience. We are all traders; we all like the freedom that brings; and our livelihoods are in jeopardy.

Good luck to us all. The world has changed, and continues to speed with reckless blindness toward a future that I doubt will turn out well.

Alston Mabry writes:

Here is a question that might elicit some interesting answer:

Let's say you have $X (USD) that you must commit for the next five years. Where would you put it? Leave it in dollars? (Though a 5-year Treasury would make the most sense for "cash" with a 5-year lockup.) Gold? Stocks? Some other currency? Norway bonds? And why?

I don't have a good answer to that yet.

Steve Ellison writes:

My starting point on this question would be that diversification, including international diversification, reduces risk. The US economy and the Eurozone have roughly equal GDPs. Japan and the UK are smaller but still quite significant. China is tied to the US dollar. Therefore, a diversified cash portfolio might be 40% US dollars, 40% euros, and 5% each of yen, pounds, Swiss francs, and gold (in recognition of gold's historical role as a form of currency). One could fine tune this allocation to include small percentages of currencies such as the real and Canadian dollar. I would think of this allocation as the equivalent of an index fund, before considering the insights of the many on this list that know more about currencies than I do.




This is an interesting piece by Mike O'Hara that underscores the danger of grouping all algorithmic trading with HFT. One of the largest concerns regarding HFT is that it competes with legitimate market makers during normal trading, thus reducing incentives, and then leaves the market during abnormal trading, or worse taking liquidity to close positions when a market makers job is most important. This legislation, in an effort to make it impossible to side-step the responsibility of providing liquidity, would actually require a broker executing VWAPs all day to provide liquidity. Based on the below quote, one simple sidestep would be to start your algo a minute after the open and stop it a minute before the close, but doesn't this defeat the point?

Steve Ellison writes: 

I have thought for some time that high frequency traders play a similar role in the market ecosystem to stock specialists. Stock specialists can profitably trade based on their knowledge of order flow, but in return are obligated to use their capital to preserve an orderly market. This proposal seems conceptually to be trying to impose similar obligations on high frequency traders. 



 An article I read recently would seem to have significance for producers of branded products like the bottlers, and P and G, and the bond market. What's happening on the internet seems to be spilling over into all areas with price competition increasing.

Kurt Specht comments: 

Very true, but another big issue right now for all consumer goods producers is staying ahead of commodity inflation and figuring out how much to pass along to consumers in the form of price increases and package size reductions.

Steve Ellison adds: 

In his book Trends 2000, Gerald Celente said that consumers turn away from brand names periodically, but they always come back. He noted a tendency for brand names to be out of favor in the years ending in 0 to 2 each decade, which have often coincided with recessions (the Senator has noted that those years have often not been kind to the stock market). Mr. Celente attributed this regularity to a "10-year corporate spending cycle."

Pitt T. Maner II adds: 

Chlorox would seem to be one of those companies that has had to work for decades to keep market share against generics (bleach). They appear to maintain their higher price per gallon through strong branding/advertising. Perhaps the need for the services and the money spent on strong marketing and advertising companies increases when generics and cheaper alternatives threaten. Or when one is running for election.



When the second 30-minute bar of S&P 500 futures pit trading has been
an inside bar, as happened today, the rest of the day has been up 12
of the last 20 times.

Date Change 10:30 to close
12/13/2010 -0.2%
12/31/2010 0.5%
1/7/2011 -0.3%
1/31/2011 0.5%
2/4/2011 0.2%
3/3/2011 0.6%
3/11/2011 0.9%
4/19/2011 0.4%
5/12/2011 1.0%
5/25/2011 0.2%
6/2/2011 -0.1%
6/8/2011 -0.4%
6/22/2011 -0.7%
6/23/2011 1.2%
8/17/2011 -1.4%
9/9/2011 -1.2%
9/23/2011 0.8%
10/4/2011 3.7%
10/25/2011 -1.1%
10/28/2011 0.4%

Average 0.2%
Standard deviation 1.1%
N 20
t 0.91
Avg of all 10:30 to close since 12/10/2010 0.0%



The attached is a plot of log SPX vs contemporaneous yield curve (10Y-2Y), monthly 1976-August 2011. Dates are not shown, but the plot is a continuous (albeit mathematically not one-to-one) and shows various regimes between log SPX and 10Y-2Y.

The series starts in 1976 at the red dot near the bottom. Stocks (vertical axis) made little headway while 10Y-2Y varied above and below zero, making a series low about -2 in 1980. From the early 1980's to 1990's, stocks moved sharply upward, with 10Y-2Y varying between slightly negative and +1.5. From 1990 to 1992 (~Iraq I), stocks moved up while 10Y-2Y widened. From 1992-94, stocks went up while 10Y-2Y narrowed. From 1994-2000, stocks rose strongly while 10Y-2Y remained in a tight range (activist FED?), and 10Y-2Y went negative when stocks peaked in 2000. From 2000 - 2011 (green dot), 10Y-2Y varied considerably from -0.4 to +2.8 while log SPX was range-bound with considerable variation.

The recent picture - range-bound stocks with varying yield curve - resembles the late 1970's, and the overall pattern suggests no consistent relationship between stock levels and 10Y-2Y.

Steve Ellison writes: 

Attached is a regression graph of 1981-2010 S&P 500 annual returns vs. the difference between the 10-year yield and 3-month yield at the beginning of the year. N0, t=1.06, p=0.30, Rsq=0.04

The results I posted earlier that showed significance were the second year's S&P 500 returns regressed against the 10-year/3-month yield differential. That result seems suspicious–why should year-old data be more predictive than current data? 2011 so far is not going according to form.

George Zachar adds: 

Because between Volcker's rise and Lehman's fall, the main way the curve steepened was when the Fed lowered rates in the front end, stimulating the economy and stocks, months down the road.



Thumbs-up, the inverse of professor Robert Shiller's cyclically adjusted price-to-earnings ratio — or CAPE — was greater than the yield on a long-term Treasury. When Buffett wasn't crazy about stocks, the opposite was true.

Steve Ellison writes: 

Using the 12-month forward top-down earnings estimate for the S&P 500 of 93.75 published by Standard & Poors, the E/P for the S&P 500 is8.25%, 4.5 times as high as the 10-year Treasury bond yield.

Jordan Neuman comments:

Historically large stocks have an 11% ROE. The S&P's book value of 594 implies about $65 in earnings. Discount by the Baa rate of 5.2%, not the treasury yield, and you get 1250. With the S&P at 1136, the discount in this measure appears to be the widest since 1974.

Most of this list's valuation parameters are positive but I still can't stop the bleeding.



 Have you ever noticed how those who have done you the most wrong, or those who loathe you the most, when they come onto hard times will often come back to you asking for assistance. This often happens to me with former colleagues. I can't always differentiate between whether the colleagues are in such bad straights that they will go to their most unlikely and ill wanted savior, or whether they wish to take their worst enemy down with them once more before they finally go under. I believe it is a variant of rats deserting a sinking ship. The British Navy and I believe all navies have a standard order from their captain "every man for himself " when the ship is sinking. And there is doubtless maritime law about when it is legal to put the captain in chains, (albeit this is somewhat a different situation). I believe the idea has many market implications, especially when markets have gone to the nadir like last week, but more important is how to protect your life in such situations I think.

One finds that there are only 25 suicides a year at Niagara Falls these days, and The Golden Gate has much more, but one can't speculate as to whether the sight causes the suicides or whether people with suicide on their mind tend to go there to do the deed. As for market moves, they must cause many more such catastrophes but again whether the person seeks out the opportunity or the opportunity causes the action, or both, it would be hard to unravel and a quantitative study of the types of moves that induce same would be helpful for saving lives and profits. 

Russ Herrold writes:

I've had this happen a few times. I think the reason is that the former colleague or friend is sufficiently 'intimate' with the weak spot that their former friend had, and so can 'get past your guard' more easily.

Factor in some perverse pathological character trait, and they may even feel justifies in taking advantage of someone they feel has 'done them wrong' in the past. Indeed, it may be that there was an intent to deceive (conscious, or latent) from the onset of them approaching you, 'the mark'.

The best approach is to probably to buy the lunch, but to keep one's checkbook firmly locked up.

Polonius: (to his son)

Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75.77

and later


This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man. Farewell, my blessing season this in thee!

Laertes: Most humbly do I take my leave, my lord.

Hamlet Act 1, scene 3, 78.82

The thought expressed by Vic is that there should be some heightened sense of gratitude if one is dealing with a moral person and 'offering the hand up' and a hand-out. But Twain echoed the Bard on this topic as well:

If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man.

- Pudd'nhead Wilson

Steve Ellison writes:

 When my children were 5 and 3, we hiked across the Golden Gate Bridge. There had recently been a freak accident in which a small child had somehow fallen through the small gap between the bottom of the railing and the sidewalk to her death. There were plans to replace the railing with one that went all the way down to the sidewalk, but the work had not been done yet, so I was keeping a close eye to make sure the children did not go too close to the railing. While my attention was diverted in this direction, I was almost caught off guard when the 3-year-old climbed on top of the one-foot high barrier between the sidewalk and the speeding traffic.

T.K Marks writes:

I, too, have walked across that bridge on numerous occasions. I'd walk over to Sausalito and take the ferry back. A spectacular stroll. One is still struck mid-span by the ease at which a despondent person could reach their goal. The curiously low railings prompt one to macabre thoughts. Who was the civil engineer involved with this project, Derek Humphry?

Stefan Jovanovich answers:

 The answer is Charles A. Ellis. Joseph B. Strauss did everything he could to claim credit for it (Strauss was to architects and engineers what Douglas MacArthur was to the Army and Navy - even when he was wrong, he was right - just ask him). Ellis reworked Strauss' initial proposal for a cantilevered suspension bridge - which would have been the mating of the Forth bridge with a ropewalk - and produced the design one sees today. Ellis did almost all the actual work - the calculations required for the computation of stresses, the specifications, contracts and proposal forms - singlehandedly, working non-stop for 2 years. After Ellis completed the work but before the final designs were submitted to the Bridge District's Board for its review and final approval, Strauss fired Ellis. There was no mention of Ellis in any report by Strauss, including the final report upon the bridge's completion in 1938. Ellis was the equal of Louis Sullivan, and like Sullivan he spent half his working life in total obscurity, unable to get any further commissions. Moisseiff gets credit for the development of deflection theory; but, as events proved (see "original bridge" section of Tacoma Narrows bridge), Ellis was the person who fully understood the necessary relationship between span length and flexibility. He is literally the father of the modern suspension bridge and the engineering theory behind it.

Bill Rafter comments: 

There was a psychology professor that published a study showing that the vast majority of Golden Gate jumpers took the leap on the side facing the city (facing East) rather than the ocean (West) side. The article then attempted to theorize why this might be the case, and he concluded that it was an attempt by the jumper to say goodbye one last time. Nice thought, but it totally ignores the reality that it would be damned hard to jump on the ocean side as that pedestrian walkway is almost always closed.

It must be particularly interesting to be on the bridge when one of the big carriers goes under, as they have to time it with low tide to clear.



The scientific method has two parts. There is theory, which requires knowledge and intuition to posit a cause and effect, and there is testing, collecting data to determine whether the observations refute the theory. If I understand your point correctly, empiricism is necessary but not sufficient. There should be a theory that is not entirely based on the observed data. As an imaginary example, “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” is better than “The S&P 500 was down on 19 of the past 30 Friday afternoons”.

Ralph Vince responds: 

Steve, yes, but the premise, the cause, needs to be proven. “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” needs to be proven as causal, not merely posited as a possible cause.

Frankie Chui writes:

Yes, I always end up asking myself “why does it not work anymore after it has worked for so long?” when the moment I trade it the system stops working. It has also happened to me quite often where I backtest a strategy, everything seems ok, trade it for 2-3weeks and that’s the end of that system. Therefore, I am now experimenting with optimizing parameters in systems more frequently, perhaps once every two weeks on a rolling basis. Optimize two weeks of data, trade it for a week, optimize the past 2 weeks again, trade it for another week. Of course the 2 week/1 week time frame may not be the best (I just randomly chose it), but has anyone ever done anything with this kind if approach? I’m curious to see if this will work for day trading. I am new in mechanical trading, but I’m very curious to know if optimizing data fast enough will allow a trading system to work better and longer (for day trading).

Jeff Watson writes: 

Frankie, you’re running up against Bacon’s ever changing cycles, which tend to render systems obsolete.

Phil McDonnell adds: 

There is an insidious danger when you use optimization. The optimizer will fit the system to the data too well. It will never perform as well out of sample as in sample. It becomes especially important to use tests of statistical significance when you do optimizations.

The optimizer can actually create a multiple comparison problem in some cases. For example if you tested, looking for seasonality and wanted to find which month was the best to buy it would create a multiple comparison bias and any test for significance would have to have a much higher threshold than if you just tested September.

One way to judge a system and evaluate whether it will continue to work is to plot out the equity curve. If your testing assumes an equal sized investment each time then the system can be plotted on an ordinary arithmetic scale. If you compound it should be plotted on a log scale. Either way the most desirable system would be a system that looks like a smooth line going monotonically up to the right as time passes. If it starts to roll over then it may be a system about to fail.

Paolo Pezzutti writes: 

The system should be quite robust. It should work pretty well with a sufficiently wide range of values of parameters. There should also be few parameters avoiding curve fitting.




The last push down on the S&P 500 futures contract [at approximately 10:30 am EDT on 2011 August 3] ]was turned back almost exactly 10% below the adjusted May 2 high.



In the two and a half months from the end of the intense reporting period for first quarter earnings (April 30) to the beginning of the reporting period for second quarter earnings (July 15), the S&P 500 futures declined 2.9%. During the intense reporting period for second quarter earnings (July 18-29), the S&P 500 declined 2.0%.

Declines in both the earnings reporting period and the preceding 2 1/2 months have occurred only 9 times in the last 22 years. The following 2 1/2 months were up in 4 of the 9 instances, with an average loss of1.7%.

Earnings End    Change to next
Date            earnings begin date
  1/31/1990          4.1%
  7/31/2001        -10.4%
 10/31/2001          8.2%
  4/30/2002        -14.6%
  7/31/2002         -3.2%
  4/30/2004         -0.2%
  7/30/2004          0.6%
  1/31/2008         -3.3%
  1/30/2009          3.6%



 From Wikipedia:

Panic attacks are periods of intense fear or apprehension that are of sudden onset and of relatively brief duration. Panic attacks usually begin abruptly, reach a peak within 10 minutes, and subside over the next several hours.

It looks like the part about occuring sharply and subsiding over the next several hours is the key, to determining whether a market is having a panic attack, or a more controlled situation. What was today? Well the market was sold heavily on the open in Asia, and got hit all day, with volatility not essentially picking up until the last hour (this may be a crucial element, as it does appear that the attacks end with lower volatility then higher and this may signal whether another one is in the offering)

No doubt some of the causes in the wiki article on panic attacks can be directly compared to economics.

Steve Ellison writes:

Much may depend on one's choice of time frame, but I doubt the original Specialist in Panics would have been excited by a 1.7% decline that started 1% off the 20-day high and 2% off the 2-year high.



 Phillies general manager Ruben Amaro is quoted in Sports Illustrated saying, "Baseball has made a U-turn. We've gone back to pitching and defense and speed. You don't see the power numbers of 15, 20 years ago. There's a change in how games are won."

Tom Verducci writes in the same article, "National League teams are averaging the fewest runs per game (4.09) since 1982. American League teams (4.29) haven't scored at a worse clip since 1973, and the league's batting average (.254) is the worst in the 38-year history of the designated hitter."

David Hillman writes: 

Well worth a look-see. A thought…..perhaps the home run indicator should have, as should the home run records have, an asterisk for those years.

On a related note, here's a nice piece on a genuine player. The mention of another 3000 hit club member who played his entire career with one team and lived an honorable life is appropriate, and is also, for many of us who were around then to see him play, heartwarmingly nostalgic.

Another thought…..In the spirit of 'asking the right question', it seems I feel differently about the game now than I did in my youth, but I wonder if it's the game that's changed so much, or if, instead, I've done the changing?

Stefan Jovanovich writes:

The "old guys" on the Giants - Aubrey Huff, Pat Burrell, Miguel Tejada - see things this way.

The young pitchers now know how to change speeds without tipping their pitches and they only throw to corners. "The kids maintain the same arm angles, body turns and strides for all the stuff they throw. You can't read them." Madison Bumgarner, who helped the Giants win the Series last year at the age of 21, is representative; he throws everything on the black. When he doesn't, he gets lit up just the way pitchers always have if they can't throw 98+. Against the Twins recently he tied the Major League record for futility by a pitcher at the beginning of a game. "Bumgarner faced 10 batters and retired only pitcher Carl Pavano, becoming the first player in baseball's modern era to allow as many as nine hits while recording fewer than two outs in a 9-2 loss to the Twins at AT&T Park. The Twins' stunning, eight-run first inning went like so: Single, double, single, double, single, double, single, double, strikeout, double." In his next start against Cleveland he went 7 innings, struck out 11 (his career best) and gave up 1 run.

When either the plate umpires or the batters take away the corners, the home runs will come back. They always do. What we will then see is a return of knock-down pitches and fights. We had a preview yesterday in the Baltimore-Red Sox game.



There are pictures of migrations in the current National Geographic and group think in movies in the NY Times. Part of the idea that has captured the world in current days? Relation to markets? How to predict the stages of migration and big moves in markets and individual stocks?

Vincent Andres writes:

Read this interesting article which may relate:

America, at its best, is a glittering symbol of promise to would-be immigrants. But where do they actually want to live in the United States? Trulia, the real-estate listings site, has come up with the only data set we've seen that actually breaks that question down to the city level. Their infographic, Global Pursuits of the American Dream, was built using incoming real-estate searches on Trulia's website . These were then broken down by country of origin, and the city being searched. Here's what the data looks like for two relatively wealth countries, Germany and Italy.

Steve Ellison writes:

While California was one of the top U.S. destinations for immigrants in the 1990s and 2000s, during the same years many more native citizens moved out than moved in.

Bo Keely writes:

 The most dramatic human migration in modern history is the Central Americans atop Mexican freight trains the length of Mexico to the USA border. The quest is freedom and financial independence, with the dream of staking a new individual life and sending sponsor money to their thousands of Central American villages to get the next person on the freight. Each day about one hundred wade cross the river border between Guatemala and southern Mexico, hop on a daily freight- up to 100 per train recalling the USA Great Depression- and jiggle north to Mexico City where they fan out on RR lines to the Texas, New Mexico, Arizona and California borders. I've ridden with the young men and a handful of women in three years, once getting caught in mid-stream of the Rio Grande river by US border patrol that took some explaining. A breath-taking though small sample of the month long ride is detailed in Nazario's 2003 Pulitzer Enrique's Journey. The journey for Central Americans is a tale of hardship, although this is the first time I've ever been collared by a RR bull who took me home and introduced me to her mother.



 I think this essay is worth reading:

"primitive agricultural communities are `dynamic'. They are subject to continuing change in agricultural technology, induced by population pressure…"

And also this article by Grantham: "We're Heading Toward a Disaster of Biblical Proportions".

Victor Niederhoffer asks Alex Castaldo to explain to him what this is all about.  Alex Castaldo writes: 

The first link is a 108 page essay written in the early 1960s by Ester Boserup , a European agricultural economist I have heard about before but don't really know. At this time many people were concerned that overpopulation was a big problem for the world. In this essay she argues that actually in some cases a surge in population forced people in an area of the world to improve their agricultural technology and make other changes that were beneficial. So (local) population increase was actually a spur to innovation and economic progress.

Jeremy Grantham on the other hand is a contemporary money manager from Boston (born in England) who is always somewhat bearish (except in March 2009 when he briefly and correctly turned bullish). He is very environmentally concerned and always worries that humankind is using too many resources or using them unwisely. Quote: "Grantham [believes] that the world has undergone a permanent "paradigm shift" in which the number of people on planet Earth has finally and permanently outstripped the planet's ability to support us."

So the Boserup thesis and the Grantham thesis contradict each other, and Mr. Depew is quoting Boserup to counter Grantham.

Victor Niederhoffer writes:

Julian Simon would turn in his grave, as would the author of The Improving State of Humanity.

Vincent Andres writes: 

If on the other hand, the most valuable resource is the human brain, a larger population is better.

Steve Ellison writes: 

I would rephrase, "if on the other hand, the most valuable resource is the human independent brain,"(Because globally, what's the use of similar brains ?).

The ratio in the brain distribution between the tails and the body probably matters. And the bigger the body, the bigger its reinforcement, and maybe (?) the bigger the crushing of independant brains.

… hopefully, this line of reasoning is wrong.



 After 5 years or so, I finally got to the point of confidence in conducting basic quantitative studies. (Very basic…)

While reading again Philip's book "Optimal Portfolio Modeling", I got stuck in the following sentences:

"Professor Niederhoffer was just such a divergent thinker.

His help and guidance taught me to see things at their simplest. That is the essence of his approach. His enlightenment also helped me to learn how to avoid the numerous pitfalls that can arise in quantitative studies. *In fact, one of the things he taught me was what not to do on a quantitative study*."

I couldn't help to think what such advice would be…

And what the Specs thinks of what one should avoid while performing any counting studies.

Steve Ellison writes: 

Be very careful to consider only information that was known at the time. For example, when doing a study that uses the high price of the day, you cannot know that any price will be the high of the day until after the close. Similarly, you cannot act on the closing price or anything based on the closing price, such as a moving average, until the next day.

Beware of data mining bias. If you test the same set of data enough times, you will find some results that appear to have statistical significance, but occurred just by chance. For example, I analyzed the most favorable trading days of the year. There are an average of 252 trading days per year, so one would expect 12 days to have results with p<0.05 just by chance. You need to control for data mining bias either by setting a more stringent p threshold or testing out of sample. Any time you have considered multiple strategies and selected the one with the best results, you should assume that part of the good result was by luck and expect worse results going forward.

Statistical significance is not necessarily predictive. In an era of much quantitative analysis, a regularity may not last long. It has happened more often than I would expect by chance that I found a pattern that was bullish or bearish with statistical significance, and the out of sample results were statistically significant in the opposite direction.

Bruno Ombreux writes:

Data mining bias can be experienced in the most vivid manner with the new Google correlation engine. It can come up with some of the weirdest, actually impossible, correlations. Google correlation results are more illustrative and striking than any theoretical academic stuff about multiple comparisons.

Phil McDonnell writes:

An incomplete list of things NOT to do on a quantitative study:

1. Avoid retrospective data. Many fundamental data bases have retrospectively adjusted data. sometimes the data is adjusted years after the fact and could not possibly be known at the time.

2. Avoid retrospective price data. Many so called quants pat themselves in the back for 'correcting' their data after the fact. Any valid study must include the data as it was known at the time.

3. Avoid the part whole fallacy. There is more on this in the Chair and collab's book Practical Speculation.

4. Use non-parametric/robust statistics to avoid fat tail issues.

5. Simplify your studies to a very small number of variables.

6. Avoid looking at simultaneous relationships. They are descriptive and not tradeable. Instead concentrate on predictive relationships.

7. Avoid indexes, rather use prices that actually trade.

This list is only some of the pitfalls and traps to avoid in doing a proper quantitative study.

Newton Linchen writes:

It has happened more often than I would expect by chance that I found a pattern that was bullish or bearish with statistical significance, and the out of sample results were statistically significant in the opposite direction.

Isn't that annoying?

Doesn't it pushes us to the other side of the coin, of pure "tape reading", etc?



 This is a very interesting article with applications to our field.

On Chomsky and the Two Cultures of Statistical Learning:

"Prof Noam Chomsky derided researchers in machine learning who use purely statistical methods to produce behavior that mimics something in the world, but who don't try to understand the meaning of that behavior. Chomsky compared such researchers to scientists who might study the dance made by a bee returning to the hive, and who could produce a statistically based simulation of such a dance without attempting to understand why the bee behaved that way. 'That's a notion of [scientific] success that's very novel. I don't know of anything like it in the history of science,' said Chomsky."

"… while it may seem crass and anti-intellectual to consider a financial measure of success, it is worth noting that the intellectual offspring of [Claude] Shannon's theory create several trillion dollars of revenue each year, while the offspring of Chomsky's theories generate well under a billion."



 What % of NBA games these days are won by the team that puts in the first point, and can this be generalized to markets?

Jeff Watson writes: 

My grandfather used to tell me that a fist fight among boys was usually won by the kid who got in (not threw) the first punch. As an aside, I wonder if markets are susceptible to rhetorical sucker punches? 

Russ Sears writes:

In distance racing it is the opposite. You do not want to be out front at the start. This is especially true at High School races and at the big road races. Too much adrenalin spent at the beginning will waste it. The amount of aggression used at the start, may vary from sport to sport. But might I suggest that one on one sports or team against teams are different than sports like running or poker and trading where it is not just about beating the guy closest too you. You don't want to crush your opponent but use them or propel you to the front.

 On the other hand you must be watching for signs they can hold the pace. Exhaustion can be contagious if the pacer slows, all follow. Plus you must have confidence in your plan and stick to it. Do you beat all with a kick or do you win with a blistering last mile?

Having thousands chasing you can be a rush, but it is also very draining to wear the target on your back. You take the wind hardest without any wind blocks and you are also wasting mental energy setting the pace.

What I think all the comments below suggest is there are really 2 questions you need to ask yourself…How aggressive do you want to be at the start? And the second one is how intimidating should you be?

As Scott implies below, thugs will nip at you until they know you are or are not armed. But to answer these 2 questions in most civilized matter, you have to know yourself; be confident in your capabilities and and equally realistic about your limitations.

In racing, poker and trading, patience is the key. Be aggressive when you truly have the edge. Believe in yourself enough to wait for that edge.

What may be more fruitful questions are: what are the signs that the opponent has started too fast? And what are the signs that they are exhausted? 

A Mr. T.C responds: 

I spent years running, and I choose to disagree a bit. I don't know what type of resume is required, but I did manage two state championships and posted a 4:12 mile time in college.

Going out first doesn't always mean having to go out fast. Runners settle in as soon as someone takes the lead, whether it be track or cross country. If you can use just a quick burst at the beginning to get the lead, you can then set the pace you need in order to win. If it buries others, then great, but if you not, then you know what you have in terms of a kick when it comes to the finish because you set the pace.

Losing stinks, but there is nothing worse than losing and still having something left in the tank. That can happen if you let someone else set the pace, and you can't outkick them. Why? Because they set a pace knowing they could still have a strong finish. Yes, there are rabbits, but they are pretty easy to ferret out. They sprint out too far, too far, plus in any race you should have a pretty good idea of who your competition is not just who are the participants are. The wind is a factor, but only when the wind is actually a factor. Giving yourself some distance gives those behind you no benefit. They will hit the same wind. The idea of having to chase someone down can be tiring, and mentally it can crush you if you catch them, then they pull away.

The real key is any race with hills. A leader can really stretch a lead on the hills. It is where races are won and lost. I can tell you from experience, you do not want to be chasing on a hill nor do you want someone else to set your pace on a hill. If you have the discipline then being in front means you do not have to catch anyone else, and you merely only have to run the race. The same race you've trained for day in and day out. The same race you've run in your head so many times.

When I was good (and believe me when I say I am not good anymore), there was a span of 12 races that I did not lose (it was the 800m for those that care). In that time, I did not even trail a single lap. My first loss came when I altered strategy and ran with the pack. Through a combination of injury and mental roadblocks, I didn't win again after that…until the 4:12 road mile in which I never trailed. It is rarely about adrenalin. It is about preparation, planning, and running your race. And no, for some, it isn't from the front, but for others, they become almost unbeatable if you give them even an inch.

Russ Sears responds:

 Yes, there definitely are times to be the front runner. If you are better than everyone in the field and know it, taking the lead, pushing the pace is the way to go. Winning 8 races in a row shows that you had out grown your competition which does happen in high school and college. But as you imply, if a rabbit sprints to the lead let them go. The goal is not to win the first 100 meter, but the race.

A 4:12 mile would never have happened without preparation, planning and running your race, but also a personal record also never happens without digging deeper and find something extra within yourself at the end. As a 2:58 1200 meter runner, but only a 4:05 miler; I did not have a kick. So I understand that often you do not want to leave it down to the last 100 meter and you beat them when you can. But having to lead from start to finish sets yourself up for mental roadblocks in tough races.

Finally, I must disagree somewhat about the hills. If you are clearly better than your competition then the hills may further show this. But if your competition is equal or slightly better than you, extra resistance of the hills prevent you from putting too much distance between you.

On my hill workouts, I would practice relaxing at the punishing pace up a hill. In a race I would let my equal push trying to get away but near the top when the heart rates are at the highest, I take the lead. After the peak I then tried to stretch the lead on the level or down hill parts.

As a high school coach, kids would often think that we did hill work so we could beat the competition on the hills. So they would try to demolish the competition on the hills. But I would tell them it was to withstand the hills, and learn to relax while still giving the most effort, so that you can beat them when they are hurting the most. It is like buying the dips or taking out the cane.

Sam Marx writes:

4:05 is very impressive.

The greatest mile race I ever saw was Roger Bannister defeating John Landy at the Empire Games in the early 50s. For those of you unfamiliar with these names, etc., Bannister, of England, was the first one to run the mile in under 4 minutes, a major athletic feat at the time. John Landy, an Australian, broke Bannister's record shortly thereafter.

The two greatest milers in the world, both of English background, by a strange quirk of scheduling would then shortly meet thereafter and compete at the Empire Games.

In their race, Landy had the lead on the 4th lap going around the turn and looked over his left shoulder for Bannister. As Landy was looking, Bannister darted past him on the right took the lead for the last 100 yds and won.

It was the first time two men ran the mile in the same race in under 4 minutes or the first time anyone ran the mile in under 4 minutes and lost.

Maybe the film clip is on the net. An exciting race to watch and historic.

Russ Sears adds:

The distance runners are posting some incredible times. Granted the Boston marathon was wind aided point to point course, but simply amazing.

Thimes remained flat and perhaps a bit slower from 1985-1994 then times started dropping again.

Some of it is in the new training methods, some is due to the coaching available to most that show a promise, some is due to more ways to make a living while still coming up the ranks, and some may be due to the drugs available, but I suspect many of the best are clean, and those that aren't add motivation.

Jay Pasch writes:

Jeff, quite the interesting post as my father coached the same thing, and being small in stature, that it's not the size of the dog in the fight but the fight in the dog, and to work in tight, inside, where you have the advantage.

Scott Brooks writes:

Having grown up in a "rough" neighborhood and in light of the fact that I've been stabbed 3 times, I have always found that the best course of action was to avoid the fight at almost any cost.

I learned early on in life that there are "guys" out there who don't see the world the way 99% of the people do. They don't feel pain or fear like like 99% of the world. They are capable of a level of brutality and violence that is, quite simply, mind boggling. The way they fight and the things they are willing to do to their opponent in a fight is truly scary. They win fights because they are willing to go to a level of violence that 99% of the people in the world are not willing to escalate too.

My brother and three of uncles were "those guys". I witnessed them do things in fights that was truly stunning. My uncles grew up in one of the worst toughest neighborhoods in St. Louis. They were, hands down, the toughest guys in that neighborhood….no one was a close second to them. Two of these uncles were only a 2 - 5 years older than me.

 I remember one time when I was around 12 years old, I was over at my grandmothers house visiting. I was playing down the street from her house when these 4 guys came up to me and started to "accost" me. They surrounded me, started shoving me around and telling me to give them my money, and that they were going to beat the $#!% out of me. Basically, I think they picked on me because they didn't recognize me (they left the rest of the guys I was playing with alone….all of whom were from the neighborhood). One of the thugs asked me what I was doing in their neighborhood and I told them I was visiting my grandma. They kept picking on me. I was really scared and my mind was racing as they were starting "the process" of beating me up. It was then that a possible way out of this situation occurred to me. I asked the guys if they knew my uncles. They, of course, didn't care about knowing my uncles. So I said, you don't know my uncles, Mark and Kerry?

The next moment became frozen in time. You could have heard a pin drop. They immediately stopped shoving me around and all they stood perfectly still, first staring at me with a shocked look on their face, then their eyes began to dart from side to side looking at each other with the same stunned look on their face.

They immediately began to back peddle. They became my best friends and let me know that they were just joking around and were just messing with me. They said they were good friends with Mark and Kerry and that there was no reason to tell either of them. The "fear" in their eyes and their body language was as visible as lava pouring out of an erupting volcano. The mere mention of the names "Mark and Kerry" was like flipping on a light switch in a dark room. These guys who were just getting ready to steal my money and beat me up, who quickly became my friends, were now really anxious to leave the area as quickly as possible.

What happened next was really interesting.

When I saw my uncle Mark later in the day, I told him what had happened. He asked me to describe the guys who tried to mug me. Mark knew exactly who the guys were. Mark told me to stay at the house and he left. He returned some time later with bloody knuckles. He said he took care of the problem and that no one in the neighborhood would ever bother me again.

He was right. I was never bothered again. I saw those guys a few times after that. They not only never bothered me, they were semi-pleasant, while at the same time trying to get away from me as quickly as possible.

Between the level of violence that my uncles, my brother were capable of administering, I have decided that avoiding a fight is always the best policy….why take a chance on running into someone like my brother or uncles.

And anyway, even if you get into a fight and whip the other guys butt, if lands one good punch, you'll be laying in bed for the next week saying to yourself, "yeah, I won that fight, but man oh man, does my broken nose really hurt".

Call me a wuss if you want, but know this: I've been in more fights than most and had my butt WHUPPED by numerous people……and I never enjoyed any of them. I'll take "avoid" over fight any day of the week.

Sam Marx writes:

I grew up in the Weequahic section of Newark NJ, in the '40's (popularized in Phillip Roth's books).

We didn't fight we sued.

Steve Ellison writes:

I find it nearly impossible to literally score the first point in the market because of the bid-ask spread. If I hit the ask, chances are the next transaction will hit the bid. If I have a limit order to buy, it will not be filled unless the price is going lower. The best I can hope for is the analogy Mr. Sogi once made to a football play: the quarterback always has to retreat a few steps from the line of scrimmage to start the play. Similarly, the strategy on a hockey face-off is to draw the puck back to the defensemen so they can establish puck control and start a play.

Vince Fulco writes:

I often dream of being in the inner circle particularly under the scenarios of a nice outsized move off the O/N lows before the cash session. Then cash opens, declines all of 1/2 pt quickly, stops on a dime then zooms higher doubling the overall move.

Steve Ellison writes:

There are interesting parallels to the three choices for commerce posited by William J. Bernstein in his book A Splendid Exchange: trade, raid, or protect.



 Bacon said:

DON'T look at anybody else's selections of prices or handicaps before making your own selections and prices. That is a rule with no exceptions.

If you look at some other prices or selections first, the line you will come up with will be a sort of scrambling of his line and your line. Almost invariably, it will combine the weakest features of both. You'll have the mistakes and trite opinions of his line and yours. But the possible 'bright work' and getting-away-from-the-public part of his figures and yours, will be discarded.

A recent study provides evidence of the wisdom of Bacon's advice:


"When people can learn what others think, the wisdom of crowds may veer towards ignorance.

In a new study of crowd wisdom — the statistical phenomenon by which individual biases cancel each other out, distilling hundreds or thousands of individual guesses into uncannily accurate average answers — researchers told test participants about their peers' guesses. As a result, their group insight went awry. …"



There have been many green days (bonds and stocks both up). About the highest since Nov 2009 and March.

# of green days

    2009  2010    2011

Jan  2       3        3

Feb  3      5         6

Mar  6      8        0

Apr  5      5         6 to date

May  5     2

June  5    2

July  5     5

Aug  6     2

Sep  3     4

Oct  4     6

Nov  10   5

Dec  2     7

What do you think it portends, and less interestingly, how come there are so many positive comovements?

Steve Ellison comments:

In the mid-1990s, stocks and US Treasury bonds moved in the same direction on over 65% of all days. In the last four years, stocks and bonds have moved in the same direction on less than 40% of all days. Even after the recent green days, stocks and bonds have moved in the same direction on only 27 of the 77 trading days (35%) in 2011.

Year         Percentage
1993         0.647
1994         0.739
1995         0.663
1996         0.706
1997         0.652
1998         0.418
1999         0.560
2000         0.482
2001         0.512
2002         0.348
2003         0.400
2004         0.536
2005         0.532
2006         0.512
2007         0.410
2008         0.351
2009         0.413
2010         0.368

The hypothetical value of a stock is the net present value of all future income, discounted by the risk-free interest rate. All other things being equal, then, an increase in bond prices should be bullish for stock prices. However, this relationship might break down for several reasons, including:

- Bond prices might rise (fall) in response to deteriorating (improving) economic fundamentals that reduce (increase) expected future corporate income
- Asset allocation changes between stocks and bonds might drive price movements more than fundamentals
- Variations in very low interest rates might have little or no effect on the net present value of future income (because models might assume more normal rates in the future)

Regarding the last point, there appears to be a correlation between the level of interest rates and the degree of comovement of stocks and bonds:

10-year bond yield
greater     less than               Comovement
than        or equal to     N       Percentage
2%           3%            203          0.374
3%           4%            822          0.370
4%           5%           1353         0.466
5%           6%           1124         0.560
6%           7%            862          0.643
7%           8%            246          0.687
8%           9%               4           0.750



 The enclosed list of best selling books of all time  is an excellent indicator of popular culture I think, and should have interesting market applications. How would one dig down into that, and do you think or do you think it's not applicable?

Steve Ellison writes:

The first thing I notice is what a diverse list it is. The Lord of the Rings is a fantasy book. Think and Grow Rich is a self help book. There are conventional novels, children's books, religious books, and even a book about science by Stephen Hawking.

Charles Pennington comments: 

Who'd have guessed that A Tale of Two Cities is the best seller (single volume) of all time? I didn't even know it was the best-selling Dickens novel, which apparently it is by a factor of 20, since no other Dickens novels appear in the list. That's very surprising; am I misinterpreting?

Stefan Jovanovich writes:

 No misinterpretation here. ATOTC was so wildly popular in the U.S. - like all Dickens' writings - that people in New York and Boston and Baltimore (? not absolutely certain about that one) literally waited at the dock for the packet to arrive from England with the latest installment. One reason Dickens disliked America and Americans is that some of our enterprising ancestors are known to have bought a copy of the latest serial, set it in type over night and had reprints out on the street the following morning for sale - at, of course, a suitable discount from the price of the legitimate copies.

Tale of Two Cities was also the last book that "Phiz" illustrated. Starting with The Pickwick Papers, Dickens has written "monthly parts" that were sold as part of a serial publication. (It literally revolutionized British publishing.) The serials were close to being graphic novels. Robert Seymour, George Cruikshank, and George Cattermole all did illustrations. Hablot Knight Browne (1815-1882) — "Phiz" — did the ones that are best remembered. When Dickens began self-publishing in his own weekly periodicals, Household Words and All the Year Round, Dickens fired his friend as chief illustrator. The parallels with Walt Disney are interesting.

Pitt T. Maner III writes:

In digging down a bit one sees that 3 of the authors, with over 100 million copies sold, are buried within a couple of hundred miles of each other in England (within a shared cultural environment) and that some of their literary themes had connections with class or race distinctions and warfare /murder (Dickens–French Revolution, Tolkien–races of mythological creatures, Christie– see wiki article on And Then There Were None (which originally had a different title and is about murderers from different classes being tricked into meeting on an island and being tricked in some cases into bumping each other off).

There is a whole series of study devoted to the Chinese book Redology and (having not read it), " Dream of the Red Chamber" appears to involve issues of class mobility.

Tsao Hsueh-chin, the author of A Dream of Red Mansions, lived between 1715 and 1763. His ancestral family once held great power. As such, he led a wealthy noble life in Nanjing as a child. When he was 13 or 14, the family was declining and moved to Beijing, where life took a turn for the worse. In his later years, he even led a poor life.Drawing on his own experience, Tsao Hsueh-chin put all his life experiences, poeticized feelings, exploratory spirit and creativity into the greatest work of all time - A Dream of Red Mansions. Drawing its materials from real life, the novel is full of the author's personal feelings filled with blood and tears.

A Dream of Red Mansions is a novel with great cultural richness. It depicts a multi-layered yet inter-fusing tragic human world through the eye of a talentless stone the Goddess used for sky mending. Jia Baoyu, the incarnation of the stone, witnessed the tragic lives of "the Twelve Beauties of Nanjing", experienced the great changes from flourishing to decline of a noble family and thus gained unique perception of life and the mortal world. Revolving around Jia Baoyu and focusing on the tragic love between Jia Baoyu and Lin Daiyu and Xue Baochai against the backdrop of the Great View Garden, the novel portrays a tragedy in which love, youth and life are ruined as well as exposes and profoundly reflects the root of the tragedy – the feudal system and culture.

Found here.

Terrible things can happen if you leave the rich and powerful unchecked and unpunished… is that close to the themes that may be partially beneath the success and appeal of the above best sellers of all time.

The meme being that it will be back to the dark ages of murder and mayhem on earth if government social services are the least bit underfunded and the rich continue to not pay their fair share.

Dylan Distasio writes:

I thought it might also be worthwhile to look at bestsellers by decade. There is a course on 20th century American literature that has been kind enough to share their materials with the interwebs. The full list by decade for the 20th century is at the below link and is worth checking out.

Pitt T. Maner III comments:

In my first paid job as a 12-year old library aide, Agatha Christie made shelving a pile of returned books easy– her works constituted 10% of the pile and were quickly put back with little effort to the same spacious shelf location. I remember reading "Jaws" then, a book hugely popular at the time.

It is doubtful, however, that the Palm Beach socialites checking out multiple Christie books each week would ascribe her popularity to the "Burkean paradigm".

The following is a piece on Christie from a self-described "Wilsonian". Perhaps an example of reading into things a bit too much…the retrospective reasons for success when starting with a point of view.

Her work conforms to Burkean conservatism in every respect: justice rarely comes from the state. Rather, it arises from within civil society – a private detective, a clever old spinster. Indeed, what is Miss Marple but the perfect embodiment of Burke's thought? She has almost infinite wisdom because she has lived so very long (by the later novels, she is barely able to move and, by some calculations, over 100). She has slowly – like parliament and all traditional bodies, according to Burke – accrued "the wisdom of the ages", and this is the key to her success. From her solitary spot in a small English village, she has learned everything about human nature. Wisdom resides, in Christie and Burke's worlds, in the very old and the very ordinary.



 A note that "one of the first investors in the world to be bearish on mortgage back" has come across the horn. I have seen many such statements made about someone who was right the previous time. Often, as Harry Browne points out, when you read their things, it is not quite as clear cut as that as they make many statements and often their positions are different if they trade or not. But, But, But. Here's the rub. Why should the fact that someone was right or prescient at some time have anything to do with ones prescience in the future. I would posit an opposite relation.

Studies of the persistence of mutual fund performance support this. A person is not good for all seasons. My former good friend, the fencer was very bearish throughout the 2000s. He saw a 50% chance of a terrible debacle at all times. It happened in 2008. He made money. What does that mean for the future? He still sees a 50% chance of total ruination and like 99% of the bears he missed the bull market but is very happy he's only down 10% or so because he was positioned for the big one.

The same is true for the worst naivete that comes out of the route 125 boys. They noted that 1929 the months were similar to 1987. So they became very bearish and the drunken grain thresher knew that on Oct 19, it had to be a crash like Black Friday in 1929.

Such reasoning. Have conditions changed? Is there any relation between what happened 50 years ago and today. Do things repeat in a predictive way or reverse as they go the way of least effort.

Such considerations enable one to reduce the vig and grind at least by not being influenced. Hopefully those on this list will not add overly to the vig or grind. That would be a blow to the muse of not succumbing to the evil houses and their NGO consultants et al.

Steve Ellison writes:

I once worked with people whose jobs were to forecast sales. One posted a humorous list of rules for forecasters. The #1 rule was: If by some chance you are ever right, never let anyone forget it.



 The talk recently about evil men, the Titanic Thompsons, the Barnies, the Madoff's, the flexions et al…. the …., has led me to consider that it might be interesting to consider what is an evil and benevolent market. As a start, consider that when a market creates a bust, and then goes back to where it was, many weak players loses everything at the expense of the strong, and had they held out for just a little longer, they would have been whole. How would you gain footing on such a quest, and what predictive, and insightful ideas might derive from such a quest?

Sam Marx adds:

What I find interesting and somewhat overlooked is that getting into a stock after a crash and near the bottom can result in profits of 200%, 300%, 700%, or more and that trivializes the attempt at 18% returns which seems to be today's holy grail as attained by Harvard, Yale, etc.

The formula seems to be get out of a bull market when it becomes fully priced, even if it has more to run as Jos. Kennedy Sr. did in 1928, a year before the crash, and then bargain hunt (vulture invest) strong undervalued companies or in Kennedy Sr.'s case NYC real estate.

Timing and valuation are the keystones. But who are the good timers?

Steve Ellison writes:

Robert Drach, a commentator who has appeared on Nightly Business Report, has said that the stock market is an evil mechanism that transfers wealth from individuals to wealthy institutions during panics.

Jeff Watson writes:

But the fact that the public rushes in means nothing to me. Without any judgment on my part, it does not matter to me if the public makes money in the game, it only matters if "I" make money in the game. The professional spectator has no interest in whether the public will make money, or if society will benefit from his speculations, he has a personal interest in that he will make money. Society will benefit from that man's speculations by increased supplies, better availability of product, and all the other good things that result from speculation. The public is just betting that there will be a greater fool to come along in the future to ensure that the public makes a profit. (see Greater Fool Theory). Those evil hands earlier described are just running up the market and ensuring their profit now. Really, the difference is just in the time frame, "Will I make my profit now by running up the market and catching the public, or will I buy the market now and hope that a greater fool will come in and bail me out at a later date." Gaming the market, running the market, goosing bids, camouflaging positions, and fading offers, protecting bids, protecting positions…….none of this is evil or larcenous unless there is dishonesty or fraud involved. The market is just a huge game with many different smaller games being played simultaneously. The public is playing one game, the small spec is playing another, the spreader has his game going, while the broker dealer might be playing an entirely different game. Sometimes, the players don't even know which game is being played, and they are the ones that have no business being in the game. But unless dishonesty, fraud, or cheating is involved, none of the game is evil. 

Stefan Jovanovich writes: 

 Our esteemed surfer could have been a railroad man.

After William H. Vanderbilt, president of the New York Central Railroad, arrived in in his private railroad car in the yards of the Michigan Central Railroad in Chicago on Sunday October 8, 1882, a freelance reporter, Clarence Dresser, entered the private car and asked to speak to Vanderbilt. (In his memoir, Melville E. Stone, who had been the head of the Associated Press, described Dresser as "one of the offensively aggressive types—one of those wrens who make prey where eagles dare not tread. Always importunate and usually impudent.") Vanderbilt's interview with Dresser began by Vanderbilt's saying that he was in the middle of eating dinner but, if Dresser would wait until he had finished, he would give him a minute. According to Stone, the interview continued as follows:

"But it is late," Dresser said, "and I will not reach the office in time. The public—"

"The public be damned," Vanderbilt burst out. "You get out of here!"

John Steele Gordon says that Dresser tried to sell the story to the Chicago Daily News, where Stone was then editor. When the night editor refused to print the story, Dresser went to the Chicago Tribune, who ran the story the next morning. It was reprinted throughout the country and became the scandal of the year; and to this day, the only quotation for which Vanderbilt is remembered in Bartlett's. Here is the version of the interview Dresser sold to the Tribune:

"Does your limited express [between New York and Chicago] pay?"

"No, not a bit of it. We only run it because we are forced to do so by the action of the Pennsylvania Road. It doesn't pay expenses. We would abandon it if it was not for our competitor keeping its train on."

"But don't you run it for the public benefit?"

"The public be damned. What does the public care for the railroads except to get as much out of them for as small a consideration as possible. I don't take any stock in this silly nonsense about working for anybody's good, but our own because we are not. When we make a move we do it because it is our interest to do so, not because we expect to do somebody else some good. Of course we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves. Railroads are not run on sentiment, but on business principles and to pay, and I don't mean to be egotistic when I say that the roads which I have had anything to do with have generally paid pretty well."

Vanderbilt's nephew, Samuel Barton, was traveling with his uncle that day. His version of the interview, as told to William A. Croffut, who published a biography of Vanderbilt in 1886, went like this:

"Why are you going to stop this fast mail-train?"

"Because it doesn't pay. I can't run a train as far as this permanently at a loss."

"But the public find it very convenient and useful. You ought to accommodate them."

"The public? How do you know they find it useful? How do you know, or how can I know, that they want it? If they want it, why don't they patronize it and make it pay? That's the only test I have of whether a thing is wanted—does it pay? If it doesn't pay, I suppose it isn't wanted."

"Mr. Vanderbilt, are you working for the public or for your stockholders?"

"The public be damned! I am working for my stockholders! If the public want the train, why don't they support it?"

in his article for American Heritage magazine (September/October 1989) John Steele Gordon notes that Vanderbilt had said things that matched much of what was printed in each of the versions of the Dresser interview. When Vanderbilt gave testimony to a committee of the New York State Assembly in the 1860s, he gave the following testimony:

"I have always served the public to the best of my ability. Why? Because, like every other man, it is my interest to do so, and to put them to as little inconvenience as possible. I don't think there is a man in the world who would go further to serve the public than I."

"My system of railroading is … to take care of it just as careful as I would of my own household affairs, handle it just as though it was all mine; … and take good care of its income; that is my aim, you know, and give that to the stockholders."

Vanderbilt, controlled the largest railroad company in the world. He never took a salary as president of three railroads; he paid himself solely out of the dividends on his shareholdings. By the time of his death he was, by his own calculation, the richest man in the world and, as he told a friend, "I would not cross the street to make another million." Harper's Weekly estimated that Vanderbilt's fortune exceeded the total value of all assessed property in Nebraska, Colorado, Nevada, and Oregon combined. In his own calculations Vanderbilt did concede that the Duke of Westminster might have a slightly larger fortune ($200,000,000 vs. his $194,000,000); but Vanderbilt thought his was the greater actual wealth because the Duke's landholdings paid less than 2 percent while his own portfolio of government bonds and railroad securities paid 6 percent, Vanderbilt's investment income was roughly a million dollars a month at a time when a middle class salary was $80-90 a month. When he suddenly died in 1885, the report of his death was the only story on the front page of The New York Times.



The chart of the S&P 500 this week looked very much like what an uninformed member of the public would think a random walk looked like, but was actually a highly nonrandom pattern of repeated reversals, at least until late Friday afternoon.

The biggest move all week occurred when an easily predictable aftershock, that should by the theory have already been priced in, occurred in Japan.

Bruno Ombreux writes:

On monthly returns for sure.

I remember when I was a MBA student in finance class the teacher wanted to show us that the market was random. He displayed a chart of the real DJIA side by side with a chart of a random walk, then asked the class to pick the real stock market. 150 people choose the random walk and 2 of us, that includes me, picked the real stock market.

By the way, you need balls to go 2 against 150 in an MBA classroom.

I think there are other things at play here. 150 people getting wrong get be attributed to the guys being lemmings, and 2 right guys can be attributed to us knowing the chart in advance (we were among a few with previous trading experience).



 If someone could relate the 10 most important ways to be a successful beggar and somehow rate the big CEO's on how they fare on this, perhaps it would be a good way to pick investments these days. Certainly the basketball player, and the [deleted pending resolution of offer and counteroffer] would be high up there, and the heads of the certain institution from areas that are renowned for their ability to compromise would have many lessons to teach, and juicy stocks ripe for investment. The head of a metals company renowned for its low cost elevators in my day was a butler and this would seem to be very ideal training in the absence of a school for beggars in this country. How to generalize?

Gary Rogan writes:

They can't really beg and retain any illusion of authority. They have to prostitute themselves to the regime while plausibly (somewhat) appearing highly enthusiastic and supportive.

Some of the skills:

-Be able to speak with passion and conviction about complete nonsense, generally in the collectivist/green future and similar areas.
-Be able to deny obvious truth with passion and conviction in public, such as the real motivation for any help from the government.
-Regularly show up in Davos.
-Express a great deal of concern for various oppressed constituencies, at home and abroad and describe at length how the company/CEO are helping them.
-Be excited about creating jobs, especially "good" jobs, "skilled" jobs, "green" jobs. Talk at length about how the US needs to be a country that "builds things".
-Be able to motivate a large number of employees by any means necessary to contribute the government political candidate.
-Invest heavily in a number of "relationships" in DC to create wide-spread support for bailing out the company.
-If the company is a conglomerate that owns any media properties turn those properties into the echo chamber for the regime.
-Infrequently offer mild criticism of the regime while emphasizing the silver lining.
-Get involved as advisers to the various regime commissions.
-Hire former regime members.

Steve Ellison writes: 

Maiming: In one country I visited, there were many beggars, who served an important role in their religion by giving the faithful opportunities to do good deeds. Many of the beggars had been purposely maimed by their handlers in order to attract more alms.

Spinning a yarn: When I first worked in the big city as a young man, I was stunned by how many panhandlers there were. Locals informed me that the Republican president was to blame. I saw the same panhandlers day after day, but every once in a while somebody would approach me with a sad story. One woman rode the subway telling everyone she needed to get to a hospital for a medical procedure but needed money to get there. I occasionally would be approached by someone claiming to be a stranded traveler who needed money to get home.

Performing unwanted services to create a sense of obligation: The last time I went to the Los Angeles airport, I was approached as I walked out of the terminal by a woman who asked if I needed help finding anything. I said I just needed to find the shuttle bus for rental cars. She pointed out where it was (it was right in front of me, and I would have found it myself within five seconds) and then asked for money. Squeegie men and charities that send preprinted address labels are in this category, too.

Feigning virtue: I know people who have offered jobs to people holding signs saying, "Will work for food". None of the sign holders have ever shown up to work.

John Tierney writes:

10 attributes which get the alms seeker off to a good start:

1. stresses that the company is concentrating on "giving back to the community"

2. actively involved in and/or seeking out green initiatives.

3. putting increased emphasis on organic growth, but always has an eye-out for M&A opportunities

4. working hand-in-hand with government agencies/NGOs to address hunger/AIDS/climate change

5. supports and serves on advisory boards of outfits like Breast Cancer Awareness, Habitat for Humanity, Thurgood Marshall Scholarship program, anti-vivisection league, and Sierra Club

6. never misses annual meetings at Davos & Jackson Hole; always has time for interview with CNBC and others; dresses casually, but not ostentatiously for same, addresses interviewer by first name…refers to this year's meeting as "one of the most exciting" ever

7. rarely indulges in short-term predictions, instead devotes most of his time to long term initiatives (which he'd like to discuss, but, at this time, is premature); sees things improving slowly but surely

8. believes the Fed did the right thing - might have made a few small errors but, generally, moved decisively at a critical time. Country will bounce back, always has.

9. bailouts, QE1 & QE2, though regrettable, were necessary for the preservation of the financial system.

10. insists the public will realize a "healthy return" on bailout funds

Vince Fulco writes:

Not to be forgotten, the institutions that pound their chests with pride in their ad campaigns using misinformation as JPM has been doing recently re: the X number of mortgages (400M as I recall) the company has modified in 2010. "In order to do our part and assist ordinary consumers get back on their feet…" is the approximate spirit of the ad. Needless to say, for better or worse, in early consultation with these companies, the administration & Treasury planned for a 4-5X number of alterations.

Gary Rogan adds: 

Basically, the main requirement for being a CEO today is excelling at credible hypocrisy.

Russ Sears contributes:

Here are a half dozen more.

1. Beg for federal money for your customers. This should allow your prices to double what they put in. Plus the room for undetected fraud goes up. (See higher education and Medicare, medicaid and first time buyers tax credits). This way you get the best of both worlds, customers thanking you for making it affordable and tax payers footing the bills.

2. Give away your product to third world countries with tax breaks so that the Feds will extend the favor by lengthening your patent protection in US. Again gratitude for sticking it too us.

3. Have the government make it illegal not to be insured, and then make sure your product must be paid for by insurance. (car, health, PMI etc) Again with the government involved raising the easy of defrauding insurance companies.

4. If you are captured by the unions, make the government give only union shops a chance.

5. Use your size to get tax breaks as incentives, use your popularity to have the citizens build your stadiums.

6. Make sure that court system understands that with all the lawyers you hire, you are the ones keeping the judges in a job. Bringing regulatory capture to a new level, too big to prosecute.

World traveler B.K. writes: 

I've seen countless mutilated beggars in India, enough to make you want to cry coins to them. However, the practical advice is not to give: "In India thousands of children are being mutilated annually. The joints of their bones get injected with bleach. Infection is the result and amputation follows. Eyes are stuck out as well. …"

However, the greatest beggar I ever saw was an armless man in the NYC subway with a sign around his neck, 'Please give to buy drum set.'

George Parkanyi writes:

That may well be, but I look at it this way– who am I to judge? I once gave a leg-less homeless man a ten-dollar bill. Well he just absolutely lit up into a beautiful smile, looked me straight in the eye and said "God bless you!". That blessing hit me like a sonic boom. I felt it physically, and walked away feeling like I received much more out of that exchange than he did. Make of that what you will, but it had a huge impact on my outlook on life, and how we relate to each other. 

Marion Dreyfus writes: 

I saw the same mutilations and deliberate crippling in Nepal. Hundreds of kids tottered after Westerners, begging and making mewling sounds. If once you gave you were encircled and could not advance another step until each and every child had gotten coins from one. 

Art Cooper writes:

One of my favorite Sherlock Holmes stories is "The Man With the Twisted Lip," an exceptionally successful London street beggar, who gave his benefactors psychic value for their alms.

Pitt T. Maner III writes:

Here is an article on organized phony beggars. Those who donate must be able to differentiate the individuals worthy of a helping hand:

"Certain persons posing as social leaders have been running the racket of beggary. We are busy in gathering necessary evidence to initiate criminal action against them," Ramalingappa said.

He claimed that at few places the "beggary business" was going on a "commission basis"

and whenever the officials conducted raids, the beggars escaped from the clutches of law and also alerted others over mobile phones.

"Whenever the beggars in disguise are arrested, lawyers rush to get them released," Ramalingappa said. Most of these rackets thrive in and around well known pilgrim centres and religious places where people generously offer to beggars. He said an awareness programme will be launched to impress upon people that beggary should not be encouraged.

Stating that no proper rehabilitation of "genuine beggars" has taken place anywhere in the State, Ramalingappa said a comprehensive survey on the conditions of beggars will be taken up soon. There are 914 beggars including 168 women in rehabilitation centres all over the State. Steps were being taken to set these centres in order.



Monday was an outside day for the S&P 500 futures, and the close was lower than the low of the previous day. Tuesday was another outside day, this time with the close higher than the high of the previous day. This sequence has occurred only twice in the past 6 years. The changes on the third days in those instances were -1.7% and +0.3%.

Tuesday was the 47th outside day on which the close was higher than the high of the previous day in the past 6 years. After the previous 46 instances, the next day was up 24 times and down 22 times, t=-0.12.



 "It is common to think of individuals to use genes to make more individual, but from the gene's eye view of evolution, its the other way around. Genes use individuals to make more genes. The chicken is the egg's way of making more eggs". p. 114 The Seventy Great Mysteries of the Natural World edited by Michael Benton.

Yes, and its the digits of the prices way of replicating itself to make individual market players create more of those digits. (I wrote about this before here).

The digit 0 plays a big part in the replication game, and it makes individuals sacrifice themselves to create more 0's.

One notes for example that the double digit 00 in 1300 on the sp has been broaches from below on a closing basis from Feb 03 on three times and gone from above to below on three times.

Similarly for the triple digit 000 in 12000 on the DJI. The DAX crossed the triple digit 7000 on Jan 3rd from below, went above below then above then below on Jan 07, then crossed to 7097 on Jan 13 but stayed above 7000 until March 14, then fell to 6436 on March 16, a decline of 10% for the year, and now for the first time on March 25 hit a high of 7006 but failed to close above 6981, a fact which must cause great disennu to the triple 0's in 7000 and they must be inducing much political change in Germany as we speak to achieve that level.

Similar analysis relates to the Nikkei at 10000 which crossed below 10000 on March 11 briefly, but closed at 100075 and then on the following two days declined 20% captures by the triple 000 at 8000 as its low was 7790, a decline of 25% from its mid December levels of 10300.

A similar analysis could be made with the grains especially corn which has shown a similar affinity to 700 as the Dow to 12000 and the SP to 1300.

Instead of taking closing prices for granted we should ask how the digits themselves influence our actions so that we can make them reappear over and over again.

Kim Zussman writes:

A simpler version of this is the opposite of the usual "the market did Y today because of X": We say X because it did Y and we need why.

The evidence is that for many similar X there are many dissimilar Y.

Price is selfish because its impact demands explanation.

Gay Rogan comments: 

I'm having trouble understanding any of this. Genes are selfish in the following sense: if genes don't propagate, they disappear, so the only genes that are here today are proven propagators. How can prices or digits permanently disappear? And why would 0's propagate more than other digits? How do these explanations provide more clarity than simply saying people's brains are attracted to numerical markers, and in the absence of other alternatives they chose round numbers? 

Steve Ellison comments:

One possible line of reasoning is that people are more likely to put limit orders at round numbers. People often put stops near round numbers, too, but the research I have seen suggests stops are more likely to cluster on the opposite side of a round number from the current price. Here, then, is a hypothesis: if the last two digits of the S&P 500 closing price are above 90 or below 10 (i.e., near a 00 round), the change the next day is likely to be in the opposite direction as today; if the last two digits are above 10 and below 90 (i.e., away from the 00 round), the change the next day is likely to be in the same direction as today.

Checking the last 1584 trading days of the futures,

Near 00 round:
N: 366
reversal next day: 194
unchanged next day: 3
continuation next day: 169
% continuations excl unch: 46.6%

Away from 00 round:
N: 1200
reversal next day: 592
unchanged next day: 15
continuation next day: 593
% continuations excl unch: 50.0%

The percentage of reversals was higher near rounds, but the difference was not significant.

What was significant was the number of closes near the rounds. One would expect a close within 10 points of a round about 20% of the time, but 23% of actual closes were within 10 points of a round, p=0.0006.

Victor Niederhoffer writes:

Here is an interesting paper on round numbers for individual stocks. It doesn't look at expectations, but does look at bid

Russ Sears writes:

I believe that this paper could be expanded measure this effect on high volume versus low volume stocks. Therefore its stated cost may not be as large as expected on all stocks. My guess, needing testing is the small stocks have this more frequently than the large stocks, that are often computer traded.



 A rather shocking study which shows that investors in mutual funds receive a much worse return than the actual return shown by the mutual fund through putting most of their investment in before the mutual fund goes down and least of their investments when mutual funds before the mutual fund goes up. The actual underperformance seems to be of the order of 3 percentage points of return a year, i.e, 6% versus 9%, with sector funds and specialty funds and growth funds showing much greater underperfomance. This must be a pretty good indicator of when to go against a particular sector.

Steve Ellison writes:

I read Mr. Swedroe's book Rational Investing in Irrational Times. This is very interesting data, but it undermines his main message, that the market is efficient and even professional managers can't beat it, so you should diversify and keep costs low by buying index funds. If mutual funds favored by the public underperform by a wide margin, something else must be overperforming. One might be able to beat the market by simply avoiding the hot funds and their favored stocks, like Bacon's technique of betting on all the other horses besides the overpriced favorite.

Mick St. Amour writes:

A great contrarian indicator. The retail investor is often guilty of chasing returns and as you can see this is a performance killer.

Larry Williams writes:

Aha, mutual funds are for the masses, while the elite managers of money: Cohen, PTJ, Dalio– are the winners for their clients. 

But hold on a moment here. Lots of professional managers have beat the market for many, many years. It can be done, and it is being done. But not all can do it. Just like not all teams will be in the final four, and while luck is part of the game, in the end skill carries the day. 



 So is the consensus now among us non flexions  that the radiation danger is merely exaggerated 100 fold so that technology in the US will be set back 30 years, and government intervention will be lubricated for the next 4 years to deal with the crisis which seems so much worse to the US than the Japanese and IAEA? This is not meant to diminish the magnitude of the tragedy in Japan, but merely to wonder if we believe that the subsequent dangers have been much exaggerated for flexionic profit?

Anatoly Veltman writes:

Yes, of course. One thing to be sure about is that T.Boone Pickens' funds will start getting ahead, as Natural Gas projects (like gradual highway infrastructure to facilitate filling-up vehicles, especially trucks and such) should finally be given light-of-day.

Bill Rafter comments:

"Never let a crisis go to waste."

Jay Pasch writes:

Buy the clashing of bearish cymbals, and sell the euphoric opposite…

Kim Zussman ironizes:

Buy the clashing of bearish cymbals, and sell the euphoric opposite in flat/choppy markets. If markets ain't flat or choppy, don't buy and sell 'em. 

Steve Ellison writes: 

No doubt it was my poor judgment, but from the perspective of operating a specialty line in panics, the moments of panic in the past week in the S&P 500 seemed too brief and ephemeral to go all in. The changes since the earthquake were:

3/11 +11.7
3/14 -10.7
3/15 -15.2
3/16 -21.4
3/17 +14.9

There were three moderately large down days in a row, but for perspective, the S&P 500 futures are still up 1.5% year to date. Only for the briefest of moments did they trade below the 1247.9 year-end close of 2010.



 Thanks God the panic indicator is back!

The telephone started ringing early in the morning with frantic if not fearful voices of all sexes, inquiring if it was the right moment to dump Asian, European, American, shares, Oil, Natural Gas and start investing at zero percent on Swissie and JPY. As the trading day went by, along with the Dax 30 down 5.5 percent, down went the tone of the panicky voices and up the inquiries to sell.

To say the absolute truth, one does not yet own the Magic to foretell future with unfair odds, but some gut feeling mixed with reasoning as to the speed of the sell off, yes, that we have. Thus the perfect buying moment came as the "oneandonly" came in asking in despair what I thought of the Japanese Market. Indeed, it was not a question. It waited no answer, as I tried to calm the chap down and work out some figures and logical thoughts about NIkkei, and stock markets in general.

Yet, everything to no avail. The answers were already built in by the fear of further losses, irrespective of the possibility of cane buying or economic prospects rosier than these sad times are telling us.

Probably some bottoming out process will have to take place before we can ring the "all clear" siren, but one first, small sign was visible in the depth of the fearful investor's eye.

Steve Ellison writes: 

Recently I reread "A Specialist in Panics". The author recounts:

As a constant reminder I printed a sign with my name at the top and beneath the words:

Specialist in Panics

Below I put this query with a blank space for the answer:

Question: Panic Today?

Answer:  ____________

I decided to buy only when I could truthfully write yes as the answer to the question.

For the first time in 2011, one might have answered yes during the last 24 hours.

Ken Drees writes:

This reminds me of Justin Mamis' work– paraphrasing here:

Buy only when your hand is trembling with fear as you can hardly pick up the phone to call your broke.



Today it will be another fight between the almatarians and the reversalists. Last month, it was a massacre in favor of the former.

Andrea Ravano writes: 

Doomsters on the run advising on "how fearful this market is". Surely, they will be right sooner or later, unless of course they have some leverage in their positions. 

Victor Niederhoffer writes: 

I am on the run.

Steve Ellison writes:

As I noted when I studied the almanac effect a month ago, the almanac has only worked well in 3 of the past 6 years, and it had a good year in 2010. I have a hunch the introduction of the Barclay almanac fund may be a turning point.



 Yesterday's across the board collapse of ag futures is a very serious move. Lock limit in most grains etc.

It looks like wheat and soybeans started to roll over a few days ahead of cotton. The nearby is down almost twice the daily limit, and the rest are all locked. It certainly is unusual and may be a solid confirmation.

Steve Ellison writes: 

Has the "realizing market" begun? Roy Longstreet in Viewpoints of a Commodity Trader said that some of the best profit opportunities are in realizing markets, when price is driven by the market's realization of some fact. For example, stock investors realized in 2000 that most of the Internet companies that had been valued on clicks or eyeballs would run out of cash long before they could become profitable.

Russ Sears writes:

The agri oil boom bust is a spiraling cycle. Oil goes up lowers economy growth, commods like grains go down but then grains substitute, grains go up oil countries populace go hunger/revolt oil goes up, less economy growth but …the cycle is becoming clearer.

Gary Rogan replies: 

Russ, I appreciate the explanation, this is very helpful. On the other hand, the original contention was that this is now a "realizing market". Has the market suddenly figured out this spiral, in the sense that oil going up will definitely (in the economic, not speculative sense) cause agri price to go down because the middle east is on fire? A case can be made that fertilizer prices or agri fuel costs are more important than some destitute people becoming even more destitute b/c of high oil prices and what, not eating any more? Or that raging inflation can manifest itself unpredictably in various commodities, or that transportation costs will raise import agri prices. I'm not sure this is equivalent to everybody figuring out in March 2000 that the Internet emperor was a bit on the under dressed side. 

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